FOCUS-Cannabis entrepreneurs, celebrity investors light up as legalization blooms

By Paul Lienert and Jane Lanhee Lee

DETROIT/OAKLAND, Calf., March 16 (Reuters) - Driven by a surge in cannabis use during the COVID-19 pandemic, industry entrepreneurs and investors are gearing up for even greater growth as legalization spreads and the economy reopens.

So far, 36 states and the District of Columbia have approved medical use of marijuana, according to the National Conference of State Legislatures. Of them,15 states and D.C. have approved recreational use of pot.

Cannabis technology startups, including those enabling home delivery of pot, got a big boost during the pandemic as more Americans partook, igniting investor interest in companies that provide everything from cultivation management tools to compliance and e-commerce software for an industry that still operates in a legal gray zone at the federal level.

Cannabis entrepreneurs say they have to move quickly and build their brands before full U.S. legalization levels the playing field - a process that many expect to gather steam this year.

“Why are you going to Weedmaps (for listings of cannabis retailers) if you can go to Yelp? Why do you order through this or that system if you can order through DoorDash or Uber Eats?” asks Steve Allan, chief executive of The Parent Company, which has Jay-Z as chief visionary officer and is looking to consolidate smaller players following its January listing through a special purpose acquisition company.

TPCO has built its own e-commerce technology that can handle everything from business management to retail sales, said Allan.

In one of the biggest venture capital deals in the sector to date, Oregon-based e-commerce platform Dutchie on Tuesday announced it raised $200 million in a funding round that values the company at $1.7 billion.

Dutchie’s investors include former Starbucks CEO Howard Schultz, NBA star Kevin Durant and DoorDash co-founder Stanley Tang. The company's online marketplace connects cannabis dispensaries with consumers, who can order home delivery.

Reuters has identified more than 90 private and public cannabis tech companies in North America, with total private investment in the first quarter at the highest level in 18 months, according to data compiled by PitchBook and Crunchbase.

All told, investors have poured more than $2.5 billion into cannabis tech startups since 2018.

Public investors are piling in too. Special purpose acquisition companies, or SPACs, that target the broader cannabis industry raised at least $4.3 billion through early 2021, with $1.7 billion of that still waiting to be deployed, according to cannabis researcher BDSA.

That interest comes as shares of publicly traded cannabis companies - many of which are listed in Canada because they are barred from U.S. exchanges - have begun to rebound after a brutal sell-off in 2019.

“We’re still in the very early innings” of investing, said Harrison Aaron, an investment analyst with Gotham Green Partners, a New York-based private equity firm with a cannabis-centric portfolio.

U.S. legal cannabis sales for both medicinal and recreational use last year jumped 45%, according to BDSA.

“We don’t necessarily want things to go (fully) legal today because there’s a lot of value in our companies, and we want more time to build,” said Lenore Kopko, managing partner at Gotham Green.

Others believe entry to the cannabis industry may not be quick or easy for many of the big outside players.

“Cannabis legislation, regulations and supply chain flows create complexity that is not built into software made for other industries,” said David Hua, founder and CEO of Meadow, which sells compliance and operating software for cannabis retailers.

CELEBRITIES GALORE

Cannabis startup funding in the sector has been led by a closely knit network of investors that often co-invest with one another. That network includes Liquid 2 Ventures, headed by former NFL quarterback Joe Montana, and Casa Verde Capital, founded by entertainer Snoop Dogg.

Another of those firms, Beverly Hills-based Arcadian Capital, has invested in more than a dozen cannabis tech startups. Boca Raton-based Phyto Partners has funded 10, many of them as a co-investor with Arcadian.

The network occasionally is joined by other high-profile individual investors. DoorDash’s Tang and Twitch co-founder Justin Kan were among those backing Oakland-based Nabis, a cannabis online marketplace for dispensaries that also has a warehouse, delivery service and online financing for retailers.

There is another draw for investors beyond the immediate business opportunity: data on a brand-new industry.

For Arcadian, the torrent of data that is being generated by cannabis tech startups provides “a great mechanism to learn more about the industry,” said Matthew Nordgren, the company’s founder and managing partner.

Industry boosters say technology developed and incubated by the cannabis industry could open new pathways for retail trade in other sectors.

Socrates Rosenfeld, co-founder and CEO of Jane Technologies, the Santa Cruz creator of an e-commerce platform that has been funded by Arcadian and Gotham Green, called it "a once-in-a-lifetime opportunity for a tech company to work in partnership with the operators in this space to build and redefine how tech and analog retail work together.”

(Reporting by Paul Lienert and Jane Lanhee Lee; Editing by Jonathan Weber and Dan Grebler)

((Paul.lienert@thomsonreuters.com; mobile +1 313 670 2452))