When Josh Gordon was setting up Rodawg, his company that markets rolling papers and other cannabis “lifestyle” accessories, he ran into a problem: Banks were unwilling to provide funding to marijuana-related businesses, and individual investors still weren’t savvy enough to understand the market.

As a result, there was a shortage of available capital for startups like his.

“People were intrigued by the industry, but at the same time they were a little skeptical,” he says. “Everyone I talked to expressed interest, but they weren’t putting their money where their mouth is because of federal law and just not understanding the industry.”

As a result, he decided to bootstrap the entire operation, first with his own savings and then via a series of investments from friends and family, including his father, who is now one of the company’s managing partners. That was in 2010.

Then something entirely unexpected happened -- Gordon went out and raised an additional half a million dollars from a private angel investor.

“Since legalization, the tide [of investment] has really changed,” Gordon says. “People were all of the sudden looking at this thing as, ‘yes, it’s a reality’ and there’s money to be made here. One thing led to the next, and we raised all $500,000 through one angel. And the rest is history.”

A growing opportunity

Rodawg is only one in a string of new marijuana-related businesses that are finding success on the private markets due to federal regulations that have, to date, kept banks and more established small business funding players out of the industry.

Angel investing in the cannabis space has become so popular that an investment firm called the ArcView Group has sprung up in San Francisco, dedicated to matching informed investors with up-and-coming marijuana entrepreneurs. In May, the group announced plans to invest more than $1 million in several different industry startups, including Rodawg. Others chosen were Uptoke, a digital vaporizer maker; Apeks, an oil extractor manufacturer; and Canna Security America, which specializes in the unique security needs of dispensaries and cannabis cultivation facilities.

[Related: For Cannabis Entrepreneurs, Industry Expansion Brings Growing Pains]

“As is always the case in new markets, the best opportunities are private investments in private companies,” says Troy Dayton, CEO of the ArcView Group.

The group has amassed a roster of nearly 70 qualified investors (ArcView only works with those willing to invest $50,000 or more and who have significant financial means), and it has been holding meet-and-greet sessions across the country over the last several months, at which potential entrepreneurs pitch their ideas.

Among the investors are a number of experienced and longtime industry insiders, such as dispensary operators, pipe manufacturers and cultivators, as well as venture capital representatives, ancillary investment groups and a handful of high net worth individuals. The key, Dayton says, is that everyone in the room is intimately familiar with the challenges and realities of the ever-evolving cannabis market and what an investment in the sector really entails.

“Take the example of point-of-sale software,” Dayton says. “There are plenty of regular point-of-sale companies out there, but why aren’t they getting involved in this industry? One, it’s too small. Two, they don’t understand the market or the customers. And three, they fear reputational and legal risk. But in the next three to five years, the market will grow and those risks will drop, but you’ll still have a very idiosyncratic market.”

At the state legislatures’ level, the reception to legalized marijuana has been warming. The movement got a shot in the arm last fall when recreational cannabis use by adults 21 and over was passed by voters in both Colorado and Washington state. Plus, the 15 other states where the drug is approved for medicinal use ensure a large and growing market for marijuana and related products.

According to the Colorado Center on Law and Policy (CCLP), legalizing marijuana is expected to produce as much as $60 million in combined annual tax revenue and savings for the state budget, and new excise tax receipts alone could total $24 million in the first year. That's on top of the $181 million in revenue that the Colorado medical marijuana industry has generated since 2010, resulting in nearly $10 million in annual tax income statewide.

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