Joint ventures take off with legal cannabis, but risks remain

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Angela Moon and Chris Prentice

December 08 2017 02:30 AM

Two years ago, Alan Gertner was head of Google's Asia-Pacific sales team in Singapore, handling more than $100m (€84.8m) in business.

Now, he begins his day in a small Toronto office, building a cannabis brand that sells fancy smoking accessories such as vaporisers and bongs that cost up to CAD$335.

Gertner is among a growing group of entrepreneurs and investors who are trading in high-paid corporate jobs in the technology and finance sectors to launch startups focused on the fast-growing marijuana industry.

Two decades after the first legalisation of medical marijuana by a US state, pot-based businesses are professionalising their operations by luring top talent and billions in investments from Wall Street firms. A new commodity index even offers data on the going rates for greenhouse and field-grown weed.

Gertner still gets surprised reactions to his career change, as when his mother asked: "Can't you just get another job at Google?" And yet he's raised $10m in capital in ten months as the chief executive of Toyko Smoke, despite the continuing taboos and legal risks in the industry.

The legal market, worth about $8bn, is predicted to triple by 2021, according to industry tracker Arcview Market Research. That could make it bigger than the America's most profitable sports organisation, the National Football League, which saw about $13bn in revenue last year and aims to reach $25bn by 2027. So far in 2017, there have been at least 27 investments by venture capital funds in cannabis companies, compared with just 10 deals in 2016 and nine in 2015, said venture capital data provider CB Insights.

The influx of capital helps finance the salaries of 150,000 workers in the legal US pot industry, representing job growth of 20pc from a year ago, according to an estimate from the cannabis website Leafly, a marketing firm for dispensaries and other cannabis firms.

Eric Eslao, founder of Defonce Chocolatier - which makes artisanal cannabis-infused chocolates costing $20 a bar - was a senior production manager at Apple just over a year ago. He feared the stigma of joining the weed industry, but it didn't stop him. "The opportunity was too good not to make the jump," he said.

Thirty US states have legalised marijuana for recreational or medical use, but possession and sale is still banned at the federal level.

The White House has sent mixed signals on its enforcement policy. Attorney General Jeff Sessions has vowed to crack down on the trade, but President Trump has extended a ban on using federal funds to interfere with the industry through the end of this year. Americans increasingly back marijuana legalisation. Still, the spectre of federal enforcement makes it difficult for cannabis-related firms to get banking services. Many continue to deal in cash or pay hefty fees for accounts.

The banks that work with cannabis-related firms are mostly community institutions in states where the industry is legalised, and their service is limited to accepting cash deposits. Some investors have steered toward tech and support services, which carry less legal risk than cultivating or selling the weed itself.

Among signs the market is maturing is the development of information services that collect data on trading of cannabis and publish guideline prices. Similar services are common across commodity markets and used by industry participants as price benchmarks. (Reuters)