Silicon Valley Investors Are Finally Getting Marijuana Religion

(Bloomberg) -- When three Colorado marijuana entrepreneurs made a presentation to 40 Silicon Valley investors last year, it was as though they were discussing something dirty.

“There was an uncomfortable chuckle in the room, kind of like you're talking about porn,” says Fulton Connor, the Sand Hill Angels Inc. member who arranged the meeting. His fellow venture capitalists just couldn't get past the fact that marijuana remains prohibited under federal law.

They're way more chill now, he says. In May, Connor's firm, which typically invests in mainstream startups like the taxi-hailing app Flywheel, steered $200,000 to Tradiv, an online marketplace for wholesale cannabis. “They understand it more as a business and the direction of the market,” Connor says. “And they see where it's becoming more acceptable.”

The stigma surrounding the $7.2 billion marijuana industry is evaporating as Americans grow increasingly comfortable with the concept, more states allow medical and recreational use, and pot businesses start generating healthy profits. You know sentiment has shifted when the establishment moves in, as Microsoft Corp. did last month when it announced a partnership to track marijuana for local and state governments.

Silicon Valley VCs and entrepreneurs present themselves as daring risk-takers, willing to go where more conservative investors won't. Yet early backers of the nascent marijuana business hailed from the real estate and oil-and-gas industries, not Sand Hill Road. VC firms were often hamstrung by their investors, including universities, who didn't want to back the industry, says Keith McCarty, who runs Eaze, which helps arrange deliveries from medical marijuana dispensaries in California. He says such restrictions have relaxed in the last couple of years.

“The types of investors that couldn't pursue the opportunity to invest when we initially started are now contacting us,” McCarty says. “They're coming in and they have a lot of knowledge around the cannabis industry, almost as though they've been watching it and they see the light at the end of the tunnel approaching quickly and they don't want to miss out on the opportunity.”

In large part, the growing confidence mirrors accelerating legalization efforts, which are reaching critical mass. Half of all states already allow pot for medical use and four permit possession of small amounts for recreational use. In November, California and its huge market will be among three states to vote on recreational-use measures. A majority of Americans said marijuana should be legal in a Gallup poll released in October.

“Certain investors are trying to get into the market ahead of the initiatives in November and position themselves where they can as participants for when broader legalization occurs,” says Evan Eneman, managing director at Snoop Dogg's Casa Verde Capital, a Los Angeles VC firm that specializes in early-stage companies in the ancillary side of the cannabis industry, including Eaze.

Legalization propositions are on ballots in Nevada and Maine, while supporters in Arizona and Massachusetts have submitted signatures to qualify, according to the Marijuana Policy Project. Since 2012, Washington, Oregon, Colorado and Alaska voters have approved recreational use. Floridians will vote on legalizing medical use in November, while Missouri and Arkansas have submitted signatures to qualify.

“If we do well in November, there will be a massive increase in the amount of investment, the quality of the teams and the sophistication of the business models going forward,” says Troy Dayton, chief executive officer of Arcview Group, an Oakland-based firm whose 550 investor members have poured $76 million into 121 cannabis companies. “It's not every day a multi-billion dollar industry gets started.”

With Arcview projecting a tripling of medical and recreational marijuana sales to $22.8 billion by 2020, it's easy to see why Microsoft and other corporations are piling in. In a deal with Los Angeles startup Kind Financial, the tech giant is using cloud-based software to help state and local governments track marijuana from seed to sale. New York's Department of Health is using Oracle Corp. software to monitor its medical marijuana program, according to the state's website. Oracle spokeswoman Jessica Moore declined to comment on the partnership.

“When Microsoft allows its name on a press release about being involved in the cannabis industry, you know it's going to be a good time for others to get in,” Dayton says.

Meanwhile, VC firms have announced a flurry of deals. Founders Fund, a VC co-founded by billionaire Peter Thiel whose portfolio includes Airbnb Inc., Facebook Inc. and SpaceX, last year contributed an undisclosed amount to a $75 million investment round in Privateer Holdings, a Seattle-based private-equity firm focused on marijuana.

Y Combinator Inc., the incubator that helped seed Airbnb and Dropbox Inc., last year poured $120,000 apiece into Confident Cannabis, which builds software for pot-testing labs, and Meadow, which creates software for dispensaries and delivery services. “There's a lot of tech opportunity in cannabis because every industry requires software,” says Justin Kan, a Y Combinator partner.

Meadow CEO David Hua says he met last year with an executive from a prominent VC firm who refused to invest in his company or any cannabis-related businesses because he viewed pot as a negative influence on society. Hua later secured funding through angel investors he met through Y Combinator. He says: “Our presentation appealed to people who see the stigma going away.”

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net. To contact the editors responsible for this story: Stephen Merelman at smerelman@bloomberg.net, Robin Ajello, Alistair Barr