2014-01-27

Co.Exist

Pay Close Attention To This Marijuana Millionaire's Weed Venture Capital Fund

A "high" tech startup boom could grow around the pot plant, as legalization efforts gain momentum. And Emerald Ocean Capital is going to help fund it.

Before medical marijuana, before Colorado and Washington's legalization initiatives, there was only the underground weed economy. There was no such thing as a mainstream marijuana entrepreneur. How things have changed.

Now there's a new crop of buttoned-up weed entrepreneurs who have never been involved in the black market, with a support system of marijuana venture capital firms and private equity funds popping up beside them. "We used to get questions like "Isn't it true that marijuana causes men to grow breasts?' Now 98% of the questions we get have to do with capital formation, taxation, regulation, port liability, and zoning," says Allen St. Pierre, the executive director of NORML.

The poster boy for the above-ground weed entrepreneur movement is Justin Hartfield, the CEO of marijuana review and discussion site WeedMaps. Hartfield makes big money from WeedMaps--the company generates over $25 million per year. He's continuing to expand his empire, co-founding marijuana technology venture capital firm Ghost Group in 2012 (brands include WeedMaps, MMJMenu.com, Marijuana.com, and marketing company Bonfire), and more recently, launching marijuana VC investment fund Emerald Ocean Capital.

The fund's goal, according to its website:

The Emerald Ocean Capital team seeks to cement a leading position within the legal cannabis industry by consolidating market share through strategic investments. The principals look to build upon their past experience in the legal cannabis industry to navigate the opportunities in this emerging industry.

The 29-year-old Hartfield launched Emerald Ocean Capital in 2013 for the same reason that he's launched all his other marijuana ventures: There was an opening in the market. "We started to see a lot more investors and entrepreneurs coming through our contact form and submitting business plans. We always got a bunch of business plans in past, but they were starting to get better and better," he says. "We decided we wanted to capitalize on those opportunities. It just made a lot of sense."

While Emerald Ocean is investing in marijuana-related business, it won't put money into any dispensaries or grow operations--at least not in the near future. With a federal ban still in place on marijuana, that would be too risky even for Hartfield, who is already peripherally participating in a semi-legal industry. And up until recently, banks didn't allow marijuana businesses to open bank accounts, making direct weed investments even more dicey.

He's more interested in software companies that dance around the edges of the marijuana economy, like WeedMaps.

Hartfield also says that his firm, which is working with friends and family investors to raise up to $25 million, is keeping an eye on marijuana testing labs. These days, testing labs often just scrape by; they're hardly raking in cash since most states don't yet require safety testing for marijuana. But Washington will have mandatory testing when its recreational marijuana program rolls out. So will Illinois' upcoming medical marijuana program. "Right now, it's really expensive to do the tests. As machinery gets more sophisticated, prices are going to come down," Hartfield believes.

Of course, if the next president decides to take a more aggressive approach in enforcing federal marijuana law, many of these investments could go down the tubes. "Justin has a high tolerance for risk, that's for sure, compared to most people. Maybe it's his age or general libertarianism," says St. Pierre. "Most other venture capitalist and hedge fund folks are well into their 40s, 50s, 60s, and have lived life long enough to be sufficiently paranoid to know what happens if you look like you're a deviant or standing out."

If legalization continues at its current rate, though, Hartfield stands to become even more wealthy. The rapid pace at which marijuana dispensaries cleared their stock when Colorado legalized the drug is only a harbinger of things to come: the $1.4 billion legal marijuana market is projected to grow to $10.2 billion in the next five years. Once more states start to legalize onsite marijuana consumption in dispensaries--like the Netherlands "coffeeshop" model--the market will grow even larger.

Emerald Ocean is investing in about one company per quarter, eschewing what Hartfield calls "that traditional Silicon Valley thing" of picking dozens of companies and banking that a few will make it big. Instead, he says, "It's much more bootstrapped. ... We'll be providing management and installing help and experienced professionals."

But marijuana entrepreneurs have a growing number of options besides Emerald Ocean. The ArcView Angel Investor Network--which includes VC fund representatives, dispensary owners, and successful entrepreneurs--banks on a wide range of marijuana-related companies. High Times (yes, the magazine) recently announced the High Times Growth Fund, a private equity fund that also invests in businesses on the outskirts of the industry.

Hartfield isn't concerned about competitors. "I think the pie is about to get a lot bigger," he says. There are also other related industries, like LED lighting and nutraceuticals, that could use their own funds, especially as more states--like New York and California--put full legalization on the ballot in the coming years.

Now that marijuana is seeming more like a legitimate industry every day, Hartfield's employee talent pool is also looking up. "My summer internship group this summer is crazy," he explains. "It's going to look like an Ivy League Daily Show writer's staff or something like that."

[Image: Joint via Shutterstock]

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