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REBRANDING POT - HOW SQUARES ARE SPARKING THE NEXT MASSIVE INDUSTRY
THE BILLION-DOLLAR GREEN RUSH IS ACCELERATING EVERY DAY. BUT THAT DOESN'T MEAN IT'LL BE A MELLOW RIDE.
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Five years ago, Brendan Kennedy had to psych himself for a tough conversation with his wife, Maria. Until that point, Kennedy had taken a pretty straightforward path for a tech entrepreneur. He’d launched two successful companies. He’d earned an MBA from Yale. He’d been the COO of Silicon Valley Bank Analytics, which provides research to venture-backed companies.
But one day, Kennedy found himself in the awkward position of sitting down with Maria to tell her he was ditching the tech industry to start selling weed. More specifically, he wanted to start Privateer Holdings, a private equity firm that would acquire and create cannabis brands. It wasn’t a career change that Kennedy and his two co-founders, close friends from Silicon Valley Bank Analytics and Yale, took lightly.
Yet the possibilities ahead were irresistible. The laws against marijuana in the United States seemed to be toppling one state at a time. Marijuana was increasingly accepted by the medical community as a treatment option. Kennedy and his partners believed it was only a matter of time before recreational marijuana would also be widely legalized. A brand new market was opening before their eyes, currently valued by some counts at $2.7 billion (though others have pegged it much higher) and expected to reach $8.2 billion by 2018. And they would not even need to build the consumer base, since nearly half of Americans consume the product, including 6.5% of high school seniors, who smoke it daily. It was a flawless business plan, except for one little thing: the drug still carried stigma. Their challenge would be to bring cannabis out of the shadows and transform it into an everyday product, like wine or coffee. Their mission was to rebrand pot.
WE ASSUME THE END OF MARIJUANA PROHIBITION IS INEVITABLE AND THAT THE PRODUCT IS ALREADY MAINSTREAM.
The first people they pitched were their families who, to their great surprise, quickly saw their vision and offered their support. But they found that lawyers and bankers were a harder sell. To the average professional services firm, the weed business carried way too much risk. "We started a lot of fights in law firms where half the partners wanted to work with us and the other half said there was no way they would be associated with us," Kennedy says. "It took months to find the right firms to do marketing, branding, account, PR, and payroll. I had 25 different conversations with banks and the vast majority turned us down."
Their hesitations are understandable. Marijuana is still a dangerous business from a legal perspective. Today, state and federal laws surrounding the drug are literally all over the map. In Alaska, Colorado, Oregon and Washington, both recreational and medicinal marijuana are already legal, or will be in the next few months; this is also true in the cities of Portland and South Portland in Maine. There are 23 states, plus the District of Columbia, where medical marijuana is effectively decriminalized. But in each state, laws have their own nuances and inconsistencies. In Washington, for instance, employers have the right to fire workers who test positive for marijuana on a drug test, even with a doctor’s note. Or if you wanted to set up a medical marijuana dispensary in New York, that might involve importing marijuana plants through states where they are not legal. And since the federal government considers marijuana illegal, it is almost impossible for marijuana businesses to get a traditional bank account in any state, since banks fear being prosecuted for aiding and abetting illegal drug dealers.
Privateer has set up headquarters in Seattle, which legalized cannabis in 2012. But employees at the company are constantly moving between legal and illegal spaces as they gather information about the supply chain, visit cannabis growers and develop products. Since laws are constantly in flux, what is above board one week might be a criminal offense the next. "It’s not a comfortable feeling," says Kennedy, who is now Privateer’s CEO. "As we did research, we had to walk a lot of illegal cannabis rows: when I say illegal, sometimes that is at a state and federal level, while in other places, it is just at a federal level."
For three veterans of the tech industry who were used to spending their days in plush Silicon Valley offices, walking dirty, unpaved marijuana groves took a little getting used to.
But Privateer has a roadmap in place to remove the negative stereotypes associated with the plant. It starts with simple things like dressing like entrepreneurs, in suits and preppy-smart casual outfits. It involves picking the right words. Cannabis is the only term for the drug in the Privateer lexicon, since its synonyms—weed, ganja, dope, hash, reefer, among many, many others—have less savory, and less business-minded connotations. The Privateer strategy is also about changing the overall conversation. "We have created a language that would allow us to speak about the industry maturely and professionally," Kennedy explains. "We assume the end of prohibition is inevitable and that the product is already mainstream."
This rebranding effort has been working so far. Privateer already has three companies under it’s belt: Tilray, a medical cannabis company in British Columbia catering to Canadian patients; Leafly, an online resource to help people find the right marijuana strain, among other utilitarian tools; and Marley Natural, a high-end product line launching later this year, and operated in part by the estate of the late reggae superstar Bob Marley. Privateer has attracted over 200 employees who all come from blue-chip companies like Microsoft, T-Mobile, Starbucks and Amazon. Over time, even lawyers and bankers wanted to work with Privateer. Kennedy has discovered that it takes a particular personality to join forces with him: these people are visionaries, who can see the possibilities ahead even though they are not fully realized. Many are drawn to the opportunity to change history by helping to decriminalize the drug.
Take Founder’s Fund, Peter Thiel’s investment firm, for example, which participated in Privateer’s $75 million Series B investment round. According to Geoff Lewis, a partner at Founder’s Fund, the murky legal status of cannabis actually made the venture more attractive. After all, Founder’s Fund has a history of investing in companies trapped in a regulatory grey area, such as SpaceX, Airbnb, and Lyft. "We invest in industries where we have a clear conviction that the regulatory issues are going to be sorted out in the mid-term," Lewis explains. "Cannabis fits that bill."
The Cannabis Market Rush
Founder’s Fund believes that now is the right time to be investing in cannabis, given that the end of prohibition appears to be in sight. According to projections by the Marijuana Policy Project, an organization lobbying legal reform, the majority of states will have legalized marijuana by 2020. While Privateer is hoping to capture the very top of the market, by creating premium cannabis brands, thousands of other entrepreneurs around the country are hoping to get in while they can. There’s a gold rush taking place—or green rush, if you will—as new companies pop up every day, developing a wide range of products for every possible cannabis consumer. "The explosion of this market is happening sooner than I would have guessed," Lewis says. "When we first started looking at this space, we didn’t think it would blow up until there was some sort of federal legalization in place. But it’s happening right now."
THERE’S A MISPERCEPTION THAT THE ONLY PEOPLE AT THIS EVENT ARE HIPPIES AND STONERS
The best place to catch a glimpse of this booming industry is at the Marijuana Business Conference, the country’s largest cannabis conference, which has been organized by the publishers of the Marijuana Business Daily since 2012. Perhaps the strangest thing about this bustling event, which convenes over 3,000 marijuana professionals, is how similar it is to any other trade show. "There’s a misperception that the only people at this event are hippies and stoners," says George Jage, president and publisher of Marijuana Business Daily. "But there is a move towards sophistication and professionalization that is happening very rapidly in this industry." People show up in suits wearing conference lanyards; they hand out their business cards at networking events; they check out the booths on the expo floor selling smoking accessories, cannabis bubble gum or new strains of the plant.
"The interesting thing about the marijuana industry is that you are not creating a new market," says Jage. "But now that it is available through legalized channels, it is possible to control and quantify the product much better than when people were buying it from the proverbial drug dealer selling a bag of weed on the street corner. By taking it into a white market, you’re redirecting the money flowing out of the country into violent drug cartels and into legitimate businesses."
Given the challenges of securing bank loans for a marijuana business, private equity is stepping in to fill the gap. While Privateer is a notable example of this, there are others too. Dutchess Capital Management in Boston has invested $2 billion in transactional value in over 400 companies in the last two decades, including MassRoots, a social media platform for cannabis users. High Times, the New York-based marijuana lifestyle magazine announced last year that it was launching High Times Growth Fund and was in the process of raising $300 million for the fund. Emerald Ocean Capital was founded in 2013 by Justin Hartfield, the creator of the marijuana review and discussion site WeedMaps, and is currently raising up to $25 million to invest in other companies.
While we are seeing money flowing into the cannabis industry, even experts are unsure how large the market really is. Publications like Marijuana Business Daily and analyst outfits like ArcView Group have tried to assign figures to the industry based on their industry knowledge, but their estimates vary widely from $10 billion to $120 billion a year. Since the industry still operates largely as a black market, it is impossible to come up with more accurate numbers. "I truly believe no one knows how much revenue takes place in this industry," says David Dinenberg, founder and CEO of Kind Financial, a West Hollywood financial services and payment company. "All we have are vague projections and estimates from analyst firms and industry publications, but I’m not sold on the current valuation of the market."
Whatever the current size of the market, Dinenberg is convinced that it will continue growing. He launched Kind Financial to go beyond equity investments and to roll out an array of financial solutions for the cannabis industry, like debt and payment systems. He has already raised $2.5 million to get started on this project and has hired a team of highly skilled lawyers to help circumvent the many legal pitfalls of the industry. "It’s very difficult to get a loan as a cannabis entrepreneur," Dinenberg explains. "You actually have to be liquid, bring in friends and family, or raise money from private equity."
Over the last few years, as legalization has taken place on the state level, cannabis retailers and dispensaries have slowly come out of the shadows and listed themselves in official directories, such as the one in Leafly or the Marijuana Business Daily. Entrepreneurs also appear to be investing heavily in innovation by building large indoor operations where they can experiment with creating new strains, maximizing yields and increasing the THC content to make cannabis more potent. (Or, conversely, upping the CBD for medical pot.) "At this early stage of the industry’s development, we’re seeing a lot of collaboration," Jage says. "People want to share with one another what they’re discovering, even if they are speaking to potential competitors."
The Fired-Up Activists
Another reason that cannabis entrepreneurs feel so much camaraderie is that many believe that the legalization of the substance is not just a business issue, but also one involving social justice. Virtually every person I spoke with for this story mentioned the social impact of criminalizing a substance that is so widely consumed. "There are activists and political campaigners who show up to work everyday, trying to end prohibition," Kennedy says. "Our approach is to end it through professional business conversations. We see it as just another form of activism."
In the U.S. there are more arrests for marijuana possession each year than for all violent crimes combined, which is equivalent to an arrest every 48 seconds. A total of 20 million Americans have been arrested on charges of marijuana possession since 1965 and African Americans are nearly four times as likely as whites to be charged, even though the two groups use the drug at similar rates. "The war on drugs, was essentially a war on people who use marijuana," says Paul Armentano, deputy director of NORML, an organization founded in 1970 to protect the rights of the marijuana consumer.
"The question is whether it is worth using the full force of the state and law enforcement to target someone who chooses to consume a product that is objectively safer than many other legal intoxicants. It’s about whether prohibition does more harm than good."
But activists like Armentano don’t believe that their goals are always fully aligned with those of the marijuana business community. He believes that the investment pouring into this nascent industry would be better spent on actually trying to change the marijuana policy. His view is shaped by the sheer number of people he sees on a daily basis who are arrested and sentenced to prison time for marijuana possession charges. "I think it is highly premature to focus capital on the cannabis industry when it is still impossible to get a bank account to operate a cannabis business," Armentano says.
"That capital should be going towards the reform organizations that are trying to change the landscape so that this industry will eventually be allowed to flourish." He also points out that the Obama administration has been largely progressive as far as marijuana legislation is concerned, but that could change in 2016 when a new president comes into office. "Without changes in federal law, everything is still very tenuous," he says.
On the medical front, doctors are still fairly divided about whether cannabis should be prescribed therapeutically. In a recent poll of 2,278 doctors from around the United States conducted by SERMO, a social network for doctors, only 31% supported the legalization of cannabis for medical purposes. And just a sliver—3%—supported the recreational use of cannabis. Dr. Richard Karsh, a radiologist and pediatrician in Colorado Springs, happens to be among those who support the complete end of prohibition. In Colorado, marijuana has been legal since 2012 and Karsh has seen has seen many families relocate to the state so their loved ones can use medical marijuana without fear of negative consequences. He has observed children facing harsh cancer-fighting treatments or seizures see a marked improvement in their symptoms by consuming marijuana. "Children who couldn’t eat anything at all were able to start eating a bit when they were prescribed marijuana," he says.
While the therapeutic benefits of marijuana have been observed for a long time, they have not been studied carefully largely because of its legal status. Several month ago, the American Psychological Association reported that regular marijuana use was bad for teenagers’ cognitive abilities, including declines in attention, memory, and IQ. But Karsh believes there haven’t been enough longitudinal studies on the effects of cannabis on the body and the brain to offer definitive conclusions. "Scientists and physicians who have wanted to do such studies have found it very difficult to get them off the ground," he says. Besides being able to gather knowledge about the drug, Karsh believes that legalization will allow doctors to regulate the strains and the quantity of marijuana that patients consume.
The Starbucks of Weed
Even though there are still regulatory hurdles that lie ahead, many businesses are operating as if legalization is inevitable. They’re also carrying out research of their own, to better understand cannabis and its effect on users. Cy Scott launched Leafly in 2010 to gather as much data as possible for medical and recreational cannabis consumers through the website and through an app. (Leafly was acquired by Privateer in 2012.) Scott tells me the the site currently receives 5 million monthly visitors and many come from states where cannabis is still illegal. The platform serves as a resource for helping cannabis consumers explore different strains of the plant and locate dispensaries. For instance, patients can identify strains that specifically alleviate nausea or anxiety, then find someone who is selling it in their area.
Companies currently manufacturing recreational cannabis are working hard to classify strains and impose quality controls on the industry, so that consumers have a rubric for navigating the wide array of products available. Since cannabis is a natural product, there are many different varieties to choose from, which can be confusing for the average user. As the industry matures, it will evolve along the same lines as wine or coffee, where connoisseurs will be able to identify subtleties in quality and flavor.
Right now, several companies are vying to become the Starbucks of the cannabis world. Last month, a spokesperson for Willie Nelson announced that the country legend was going to launch a cannabis brand called Willie’s Reserve. When I reached out to his publicist, she told me that he could not speak about it at this time.
But we do know that Marley Natural, the premium cannabis brand inspired by Bob Marley, will be releasing products later this year. The brand has the full weight of Bob Marley’s family behind it; they were the ones, in fact, who first brought the idea of starting a company to Privateer two years ago.
Based in New York, the Marley Natural team is identifying cannabis of the highest quality and bringing it to market. "We are creating a brand that is premium, but also mainstream," explains Tahira Rehmatullah, the company’s general manager. "We’re focusing on consistency, quality, really great design, and making sure the consumer can rely on us to know what they are getting each time they purchase." As it currently exists, the cannabis market is very fragmented and consumers often struggle to find retailers who can regularly offer them products of high quality. Marley Natural is developing internal systems to test the cannabis and ensure that it is free of contaminants like mildew.
Of course, Marley Natural is also investing heavily in branding. They are telling a larger story about Bob Marley and his values, emphasizing positivity, nature, and the power to heal. Marley Natural is about giving consumers a luxurious experience when it comes to cannabis and allowing them to have an unadulterated, positive feeling about buying the product. And ultimately, it is part of a larger rebranding project that the cannabis industry is undertaking.
"This is a once in a lifetime opportunity," Privateer’s Kennedy tells me. "To create a brand for an industry that is brandless. To make the transition from an illicit market to a legal, transparent market as elegant as possible. It’s beautiful isn’t it?"
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