David Dayen is a Los Angeles-based freelance writer and a contributor to Salon.

When stocks in marijuana-related businesses soared as much as 1,700 percent one week after Colorado’s legalized shops opened, the exuberance reminded some observers of the heady days of the dot-com boom. And, indeed, industry insiders seem swept up in a sky's-the-limit optimism that's reminscient of the late 1990s, with ArcView Market Research—"the definitive source for cannabis industry analysis, trends, and statistics"—forecasting that legal marijuana could expand into a $10.2 billion market by 2018, with 64 percent growth expected just this calendar year, a rate higher than the global smartphone market.

“When we decided to come into this industry, a lot of people thought we were crazy,” says Brendan Kennedy, CEO of Privateer Holdings, the nation’s first private equity firm to focus on the legal marijuana market. But Privateer raised $7 million in a round of funding last summer and now has 35 employees—including a former Drug Enforcement Administration agent—in a downtown Seattle high-rise.


Kennedy started out as an investment banker and then became a venture capitalist in Silicon Valley. His firm broke into what he calls the “cannabis space” in 2010, when there were few players on the investment side—“we don’t compete with anyone for deals,” he says. That’s starting to change. ArcView, which has long tried to connect angel investors with pot-related businesses, saw a surge of interest when it hosted pitch meetings with dozens of marijuana entrepreneurs last fall, and other businesses have found private funding themselves.

At the same time, entirely new businesses have emerged, hawking insurance, advertising support, software, even pot vending machines. And with Colorado’s legal cannabis shops hitting $1 million in revenue on the first day of legal use, the stampede of capitalists into this new market should only accelerate. “There’s no desk of analysts at Goldman Sachs vetting this industry,” Kenndy says, “but there will be.”

Yet if this is a gold rush, it’s one where the gold has, for 80 years, been either dismissed as fodder for hippies or demonized as actively harmful—a legacy that creates growing pains no other business sector has to tolerate, as marijuana entrepreneurs struggle to be taken seriously and get around a host of roadblocks arising from the fact that the federal Controlled Substances Act still lists marijuana as a prohibited Schedule I drug.

Lawmakers from the states where pot just became legal have stepped in to push for regulatory relief. Reps. Denny Heck (D-Wash.) and Ed Perlmutter (D-Colo.) have introduced legislation that would give legal clearance for financial transactions with marijuana-related businesses—you could call it a form of constituent service to the small business community. And when Attorney General Eric Holder said last week that the Obama administration would soon roll out guidance to allow banks to work with pot sellers, Heck and Perlmutter's efforts got a notable boost. But “Congress doesn’t lead on this stuff,” Heck says. “It’s going to take Colorado and Washington having a successful regulatory environment to make everyone comfortable.”

Marijuana's Man in Washington To most members of Congress, pot dealers are one thing: criminals. But to lawmakers from Colorado and Washington, people growing and selling weed—at least those who do so within the states’ tightly regulated legal markets—are a new constituency whose interests they now represent on Capitol Hill. And the new marijuana entrepreneurs have already started turning to their members of Congress for help navigating contradictory state and federal laws. Among the first items on the agenda: the Perlmutter/Heck bill, which would allow legal marijuana businesses to access banking services. Senior Editor Denise Wills spoke with Rep. Denny Heck (D-Wash.) about representing Weed, Inc. Why did you and Ed Perlmutter (D-Colo.) introduce this bill? Right now it is not legal for a credit union or a bank to take the business of a marijuana grower or retailer. Everything’s done in cash until the federal regulars can issue some guidelines or guidance. That means they must operate as pure cash-only businesses—they can’t even pay their employees with checks. And that is a sure-fire formula for tax evasion and crime in all its forms. This is a very real problem in both Washington and Colorado. But it also applies to medical marijuana dispensaries, which are legal in 21 states and the District of Columbia. Did marijuana business owners come to you for help? It was really the banks and credit unions. They cannot provide services to customers who need them. They want to meet the need in the market. I think there’s some winking and nodding going on but people are very insecure about it. If banks knowingly accept the business of a medical marijuana dispensary the regulators would have a problem with it. What are the odds it’ll pass? Sooner or later, it’ll pass. What kind of reaction has it gotten from your colleagues in the House? It’s a big sales job. It’s the perfect example of an issue where the reaction of a member of Congress is skeptical if not resistant at first, and then you wear them down with logic. Every day we find more and more people who get it. Who’s for more organized crime? Who’s for tax evasion? Any predictions for the future of legalization? Do you think it will spread to more states? I suspect it will, but frankly I don’t know. Time will tell. I believe that how well Washington and Colorado are able to stand up a well-regulated market will have something to do with that. If it is a successful post-prohibition, then I expect other states will join. What was your reaction to President Obama’s recent statement that pot is no worse than alcohol? From a scientific standpoint, it seems to be a statement of the obvious.

Kennedy says that he now hears roughly five pitches a day from budding ganja tycoons, but he spends much of his time tamping down the hype from giddy potential clients seeking funding. There’s plenty of money to be made, he says, but “everything in this industry is harder than people imagine.”

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“We’re very much about demonstrating that we are legitimate businessmen serving a need in the community,” says Alex Cooley, owner of Solstice Grown, the first legally permitted cannabis production facility in Washington State. “If the regulators say to jump six feet, we jump eight feet.”

But this need to convince skeptics, along with the residue of selling what the federal government still considers an illegal drug, has led to barriers that can appear almost insurmountable. “Some check-the-box items that should take a couple of hours take a month,” Kennedy says. Lining up payroll services or security or lawyers or even a bank can be arduous, as many of those companies fear legal ramifications. The Colorado Bar Association recently prohibited attorneys from working with marijuana-related businesses for just this reason—which means that, for now at least, pot businesses can’t hire a lawyer to draw up a contract or close a deal. And even Privateer, with its multimillion-dollar investment deals, was turned down by 16 different banks for a simple checking account.

So far, Privateer has used the money it’s raised to invest in or set up ancillary businesses on the edges of the marijuana supply chain that do not handle the leaf, reducing the firm’s legal risk and regulatory requirements. The company established a Canadian subsidiary called Lafitte Ventures to build a 1.8-acre cultivation site in British Columbia, for example, and a similar American firm called Arbormain, planning 24 warehouses across Washington State for growing, testing and processing a range of products. Privateer also recently acquired Leafly, which is a kind of Yelp for pot, with user reviews of businesses and the products they sell.

Meanwhile, an astonishing amount of this fast-growing industry is still conducted in cash—a situation that can leave businesspeople a little jittery. “I’ve been in rooms with a million dollars,” Kennedy says. “It’s not a good feeling.” Companies have to pay for security to prevent robberies, and getting loans is a headache. “We wanted to build a farm on a piece of property where anyone with a credit score over 700 could get it,” Cooley says. “Mine is over 800, but I couldn’t get a loan. Last year, when we were jumping through hoops becoming permitted, instead of a line of credit, we stopped taking salary.”

And then there are all the requirements from the Justice Department, which, as a condition for allowing the businesses to operate without FBI raids, has mandated a long and complex set of regulations that the new businesses are struggling to meet. Washington’s marijuana-legalization initiative, for example, includes a provision that bans retail stores within 1,000 feet of a park, church or school. “In some parts of our state, it’s tough to get 1,000 feet away from anything!” Heck says. Colorado, meanwhile, has a strict inventory-tracking system to keep pot within state borders and away from black-market dealers—the Denver airport just banned pot from its site—and consumption must be done in private, creating dilemmas for would-be tourists and the hotels that serve them. All pot must be sold in child-resistant packaging with detailed labeling about potency and cultivation, and even the size of signs on storefronts is regulated to prevent aggressive marketing.

All these bottlenecks make it hard to meet demand, causing prices on opening day in Colorado to soar, which Kennedy predicts could continue for up to a year. With a still-robust underground economy, legal businesses have to hope consumers will pay a premium for legitimate weed, which removes the risk of arrest and adds a sheen of legitimacy. But, Kennedy says, “for this experiment to succeed, you have to undercut the black market. And you have to remove the inefficiencies and let capitalism work its magic. That means producing at scale.”

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Kennedy believes that regulators and business services, while lagging behind public sentiment, will eventually come around. He notes that insurers have started issuing policies for growers and manufacturers , and there are now point-of-sale software companies and security firms dedicated to serving cannabis businesses. Colorado merchants recently caught a break when processors of debit and credit cards relaxed their rules, allowing customers to pay with plastic.

But in the meantime, there’s a risk premium attached to laying out capital for pot. Kennedy and his colleagues at Privateer say it’s much easier to find investors than worthy investments. Their prices for rental space at Arbormain locations throughout Washington, at $4 a square foot, strike some industry professionals as high, but because some marijuana entrepreneurs have struggled to find landlords willing to take them, they just might find tenants willing to pay that much. “The rents they’re asking for are five times what it would be for a non-cannabis business,” Solstice’s Cooley says. “That’s not a sustainable cog.”

The hope is that a growing market will create enough competition to bring down the cost of doing business. Cooley managed to raise a round of funding privately (he would not disclose how much) for Solstice, offering equity stakes to investors. He plans a second round in a few months. And he convinced his landlords to rent property to him in downtown Seattle for closer to $1 per square foot. “It’s about a long-term relationship, not a get-rich quick scheme,” he says.

In time, Privateer envisions large national firms that could process, package and distribute marijuana; a former Microsoft employee known as “ the Bill Gates of bud” is making early investments along these lines for a retail chain catering to wealthy baby boomers. Some believe that as marijuana grows up, large-scale production techniques will drive down the price and make it hard for smaller retailers to compete.

But industry players do not yet fear for the Walmartization of pot. “People are talking about money to be made in this businessI don’t see it,” says Mark Kleiman, a UCLA policy professor who advised Washington State on its regulatory framework. Kennedy believes that even if the era of Big Marijuana does arrive, we’ll also still see boutique shops catering to special tastes. “I view it as a microbrewery model,” he says. “Whether I’m in Texas or Oregon or Washington, there’s always some local beer that I’ll try.”

And despite all the barriers to entry, the banner sales in the Rocky Mountain State this month offer a window into the potential windfall for those who can overcome the hurdles. “Colorado just went from a small market of licensed medical users to the whole state and 60 million annual tourists,” Kennedy says. “This is the biggest opportunity I’ve ever seen.”