Record Legal Marijuana VC Funding

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Record Legal Marijuana VC Funding

Public marijuana companies may get the headlines, but venture capital investing in the space has also grown rapidly over the past year and a half. We highlight whenever Fortune 500 companies invest in public pot stocks by way of stakes or partnerships, but cannabis startups are also important for those interested in the space. Not only are they eventual acquisition targets for already-public companies, but they could also IPO in the future as the industry increases in size from further legalization.

Last year, venture capitalist firms invested a record sum in legal marijuana startups and this year they have already topped that figure. Here are the highlights from data firm PitchBook:

  • Capital Invested: VC investment in US cannabis startups set a new record at $1.2 billion in 2018.

    There’s already been $1.6 billion capital invested in the space this year through July 19th, or almost half a billion dollars more than all of last year with still +5 months to go.
  • Deal Count: The number of deals increased by 32% y/y to 135 last year, a new high. This year will likely surpass that figure, as there have already been 126 deals funded.
  • State Concentration: We continually note the challenges in California relative to high tax rates and onerous regulations, but over 40% the capital invested in marijuana startups this year has flowed to CA-based companies.
  • Recreational v. Medical: “Even though recreational marijuana is expected to emerge as the biggest driver of growth within the cannabis industry in a few years, medical marijuana led the global (VC) market share at 70.3% last year, according to research firm Grand View Research.”

The biggest deals so far this year, according to PitchBook, include:

#1: PAX Labs, a marijuana vaporizer manufacturer which spun out of Juul in 2017, secured $420 million in April and gained unicorn status with a $1.7 billion valuation. That was the biggest deal for a VC-backed marijuana company in US history. You’ll likely recognize one of its investors: Tiger Global. 

And yes, the exact amount is not lost on us given the number’s significance in marijuana culture…

#2 & #4: Surterra Wellness – develops marijuana-based medical products such as vape pens, tinctures and creams – raised $265 million between two rounds in April and June. Some of its investors include Valkyrie Capital and former Patrón Spirits CEO Edward Brown.

#3: Flow Kana, which partners with small Californian farms to cultivate sun-grown marijuana, secured $125 million in February. One of its investors includes Gotham Green Partners, which is tied with another VC (Arcadian Fund) as the second most active investor in cannabis startups this year with 5 deals.

#5: Grassroots – another provider of medical cannabis products – had a $90 million round this past March. This month it agreed to be bought in cash and stock by Curaleaf Holdings, valued at about $875 million. This deal made Curaleaf the largest legal cannabis operation in the US and gave it access to Illinois’ market, the latest state to legalize recreational cannabis use and sales.

To sum up, here are our two investment takeaways from this data:

#1: Venture funding for marijuana companies continues to increase amid further cannabis legalization in the US. The marijuana industry’s total addressable market keeps rising as more states legalize the drug at the ballot box, and more recently this year through state legislatures. 

A month ago, Illinois was the first state to legalize retail sales through its state legislature and the 11th to legalize recreational use, potentially encouraging other populous states like New York and New Jersey to follow suit. Presidential Democratic candidates have also included national marijuana legalization on their campaign platforms, so it will only get more air play as we approach the national election. No doubt this continues to spur investor interest to get involved and ahead of the curve, especially as more US marijuana companies go public in Canada since it is now nationally legal there.

#2: Many of the biggest rounds this year include plant touching startups because upstream (cultivation and manufacturing) and downstream (retail) companies are highly capital intensive and will only get more so with time.One important issue: higher capital needs due to state-specific regulatory requirements. For example, marijuana companies need to purchase or greenfield local operations to distribute in multiple states because of interstate commerce laws. 

Of course, ancillary businesses have also secured some large funding rounds this year, particularly from institutional investors that may be concerned marijuana is still federally illegal and classified as a Schedule I drug. PAX Labs, first on the list, is a great example with backing from Tiger Global. Although it manufactures vaporizers that allow users to inhale cannabis oil, “Pax stays one degree away from cannabis itself by making local suppliers produce and distribute the cannabis oil in its pods” according to Crunchbase.

Bottom line: venture capital is still investing heavily in the US legal marijuana industry even though public equity valuations peaked 10 months ago. To our thinking that is a vote of confidence in the space.

Sources:
Pitchbook Report: https://pitchbook.com/news/articles/vcs-smoke-last-years-record-for-cannabis-funding

Crunchbase Report:https://news.crunchbase.com/news/cannabis-startups-spark-joy-for-investors/

https://www.barrons.com/articles/merger-makes-curaleaf-the-worlds-biggest-marijuana-seller-51563394673