Tech investors move into the marijuana market

William M. Welch | USA TODAY

SAN FRANCISCO — Some Silicon Valley venture capitalists are high on the profit potential of pot.

In an ornate ballroom of the posh Fairmont Hotel atop Nob Hill, entrepreneurs of the quasi-legal marijuana trade sat down for two days this week with high-tech moguls looking to get in on the ground floor of the booming, multibillion-dollar business of selling marijuana in states where it is permitted.

"This is the fastest-growing industry in America,'' says Troy Dayton, CEO of ArcView Group, an investor network focused on the cannabis business. "Despite all the stigma, people are recognizing this could be the next great American industry.''

The gathering and locale, under crystal chandeliers, are signs of the pot industry's rapid maturation. With institutional investors and big corporations scared away by continuing federal prohibitions on marijuana, the growing list of states allowing marijuana for medical or recreational use has created opportunity for smaller investors willing to take the risks of investing in a business whose legality is far from settled.

"This is a basement industry looking to put on its big-boy pants,'' says Tom Bollich, CEO of Surna, a Colorado-based company that provides climate-control hardware and software for marijuana growers as well as management systems to track the product from seed to sale.

Bollich is a past winner in Silicon Valley's start-up business culture. In 2007 he co-founded Zynga, a company that developed FarmVille and other online games before going public, the lucrative goal of most start-ups. He got into the marijuana business two years ago and moved from here to Boulder, Colo., where marijuana is legal for recreational use.

"I was looking for a new industry, frankly, and this started popping up,'' he said.

It's easy to see why it's an attractive business for those with the stomach for risk. A market study released this week by ArcView found a 74% increase in U.S. cannabis sales in 2014 over 2013, as Colorado and Washington began allowing sale of marijuana for recreational use. Two more states, Alaska and Oregon, are to begin legal sales this year, and 23 states have approved legal medical uses.

It estimated the size of the marijuana market nationally at $2.7 billion, with almost half of that in California, which passed the first legal medical use state law in 1996.

The potential upside is enormous: ArcView President Steve DeAngelo, a pioneer in California's medical cannabis movement, estimates it could grow to $100 billion to $200 billion a year if national prohibition ends.

The investor group itself is emblematic of marijuana's rising fortunes. Started five years ago, ArcView Group had barely 100 members this time last year and now has more than 400 vetted investors looking for places to put their money, DeAngelo says. Its investors have put $20 million into businesses, not counting deals made this week, the group says.

Scores of companies competed for one of a handful of opportunities to take the ballroom stage and make a nine-minute business pitch in a setting akin to the Shark Tank reality TV show.

The businesses were a blend of high-tech wheeler-dealers and new-fashioned stoners. There were companies offering software solutions for dispensaries and growers, online marketplaces for wholesale transactions, LED lighting systems for indoor cultivation, and companies selling marijuana-infused snacks and topical medicines, even for pets. Growers from Northern California's Emerald Triangle, the Napa Valley of domestic marijuana cultivation, sat with Silicon Valley veterans and recent business school graduates.

There was even an artisan glass maker, Sasquatch Glass of Seattle, whose CEO, Scott Hunter, said he needs $750,000 to increase production because he can't meet the high demand for his bongs, or elaborate pipes.

"We are leaving money on the table,'' he moaned.

A $10,000 best-pitch award, voted by the audience, went to Seibo Shen,​ a Silicon Valley veteran whose start-up VapeXhale makes and sells what it calls a better, healthier line of herb vaporizers.

Hanging over the discussions was the prospect of several of new state battlegrounds in the campaign to make marijuana consumption legal. Investors said they were carefully watching California in particular, where a potential 2016 vote to legalize recreational marijuana use could expand the market significantly and make it more friendly for investment.

"Everybody here thinks there will be federal legalization in five to 10 years,'' says Dayton. "This is a chance for small players to get a shot at the big market before the big players.''