Yes We Cannabis Essay
Yes we cannabis By Roger Parloff, senior editor @FortuneMagazine March 21, 2013: 4:11 PM ET * * * * * EmailPrint (Fortune) Jason Levin, a young engineer who lives in Berkeley, is addressing a group of 30 angel investors gathered in a long conference room at Seattle’s stodgy Washington Athletic Club. Levin is hoping to persuade one or more of the people around the table to invest in the startup company he envisions, called Uptoke, in exchange for a stake in the company. He has seven minutes to make his presentation.
Levin and his team of engineers have produced prototypes of a high-tech, handheld portable vaporizer, he explains. Such devices heat cannabis (or tobacco or herbs) to the point where active chemicals are released without combustion of the plant material. The vapors are less harsh to the throat than smoke and contain few, if any, toxins. The most effective vaporizer on the market today is the Volcano, a tabletop model that usually costs at least $650, isn’t portable, and requires the use of a balloon to capture the vapors, Levin explains.
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Handheld vaporizers — powered by either batteries or butane — are also available, but all have their drawbacks. The simplest, which adapt e-cigarette technologies, are inexpensive but can clog and break and don’t work with conventional cannabis flowers (i. e. , buds), requiring instead the use of a canister of cannabis oil, which is messy, hard to find, and not to everyone’s taste. The better compact vaporizers, which sell for about $250, can vaporize conventional marijuana but still take time to heat up, may require waiting between tokes, and need prior grinding and bud preparation.
In contrast, Levin explains, the Uptoke has a built-in grinder; buds are prepared and vaporized in a single chamber. It heats to 375° F in just 2. 5 seconds, and requires no waiting between puffs. Power management tools automatically turn off the heating mechanism when the user isn’t inhaling, which means that both cannabis supply and batteries last longer. Levin sees a retail price point of around $300. A couple of investors nod approvingly.
We are inside the sixth quarterly forum of the ArcView Angel Network. ArcView was formed in 2010 to bring together businfoessmen who believe that the prohibition era for marijuana in America is coming to an end and that a legitimate cannabis industry is now taking shape. “A geyser is going to go off,” ArcView CEO and co-founder Troy Dayton tells me the day before the event, held on Jan. 28. “The question is, Which companies are going to be sitting on top of it when it does? ArcView aims to bridge the gap between would-be financiers of this new industry — investors who sometimes know little about marijuana — and would-be entrepreneurs in it, who sometimes know little about finance or business. ArcView launched its Angel Network in November 2011 — right in the teeth of a federal crackdown during which hundreds of medical marijuana dispensaries in California, Michigan, and Montana were being closed down, killing investor enthusiasm.
But January’s event — to whose closed-door sessions Fortune was granted exclusive access — is taking place in a different world. Everything changed last Nov. 6, when voters in Colorado and Washington approved, by 10-percentage-point margins, ballot initiatives that not only made it lawful for adults to use and possess up to an ounce of marijuana — for any purpose, not just medical — but also ordered state regulators to begin licensing commercial businesses to engage in for-profit cultivation and distribution of the drug, much as those regulators currently do with tobacco and alcohol.
Though other jurisdictions had legalized the use of marijuana for medical purposes — 18 states and the District of Columbia now do so — or had “decriminalized” possession of small quantities of the stuff (meaning you risk only a ticket and a fine if you’re caught), these two “tax and regulate” initiatives were a breakthrough of a different order. If their implementation is not blocked by the U. S. Department of Justice — which has said so far only that it is “reviewing” the matter — they will usher in an environment in some respects more liberal than that of the Netherlands.
While that nation famously tolerates coffee shops selling small quantities of marijuana, shop owners must still prococure inventory through the backdoor, i. e. , illegally. Cannabis retailers in Colorado and Washington, by contrast, are supposed to be able to buy their inventory from licensed, for-profit cultivators or wholesalers — possibly by year-end. Lawful cannabis sales in the U. S. this year will total $1. 3 billion to $1. 5 billion, according to the Medical Marijuana Business Daily’s Factbook 2013. But it projects that sales could spike to $2. billion to $3 billion in 2014 if retail stores open in Colorado and Washington. “This is dramatically different from anything we’ve ever seen before,” says Steve DeAngelo, ArcView’s president and other co-founder, and a marijuana activist for 40 years. “The reality on the ground now,” he says, “is you’re seeing the birth of a whole new industry. ” ArcView works like this. Accredited investors pay ArcView to join — currently about $3,500 per year. (Because of snowballing interest, all fees are constantly being revised upward. ArcView culls solicitations from entrepreneurs who seek funding for their nascent businesses. Those who make it through this prescreening can pay for the opportunity to make a pitch at one of ArcView’s quarterly meetings. That fee is about $1,250 to $3,000, depending on the size of the company. If investors like what they hear, they can strike deals with the entrepreneurs individually or jointly. (ArcView itself doesn’t invest. ) The meeting is called to order by ArcView’s two founders, the 54-year-old ex-yippie DeAngelo and the 35-year-old yuppie Dayton.
In 2006, DeAngelo founded one of the nation’s largest and most lauded medical marijuana dispensaries, Harborside Health Center of Oakland, which he still runs. He wears braids and a “stingy-brimmed” fedora that he rarely takes off. It’s an homage to a role model, Quanah Parker, who was a half-white, half-Comanche Indian chief, warrior, political activist, and successful businessman of the late 19th century. Co-founder Dayton comes from a different era. Clean-cut, chipper, and on the make, Dayton comes across as the anti-Cheech-and-Chong.
While DeAngelo sees the cannabis plant as a sacrament, Dayton has no apparent emotional attachment to it. “I’m not in this because I love the plant,” he explains to me before the meeting. “I’m in this because I love freedom, enterprise, and being a pioneer in a new industry. ” The angel investors arrayed around the table are all male, but otherwise they’re a diverse lot. Some look natural in business suits, while others, like DeAngelo, wear theirs to ironic effect. Some ArcView investors are scions of old money, like Joby Pritzker, of the Hyatt Hotel chain dynasty, and Richard Wolfe, whose family bought the Columbus
Dispatch in 1905. Others are self-made. Adam Wiggins, for instance, co-founded Heroku, a cloud-platform that was purchased by Salesforce. com for $250 million in 2010. (Pritzker, Wolfe, and Wiggins aren’t present at this particular meeting but are kept apprised by Dayton of all pitches. ) Retired Navy pilot Jim Willett of nearby Woodinville, Wash. , signed up for the event just the night before. “I’m not a user” of cannabis, he tells me during a break, “and I don’t know anybody who is. But he’s accustomed to finding investment opportunities where others disdain to tread. He founded a company that used to recycle the City of Los Angeles’ sewage sludge as fertilizer. Other ArcView investors already have ties to the cannabis industry. As they go around the table introducing themselves, more than one says he’s been in it since he was 15. Part of the allure of ArcView, to both investors and entrepreneurs, is the opportunity it affords to compare notes with some of the nation’s savviest, most experienced business minds in the field.
Several investors run medical cannabis dispensaries; others run businesses selling pipes, bongs, storage jars, and such. Justin Hartfield, 29, founded WeedMaps, an Internet medical marijuana dispensary locator. Tripp Keber, 44, runs Dixie Elixirs & Edibles, a Denver company that, since 2009, has been making “infused products” — cannabis-laced soft drinks, candies, lozenges, tinctures — for medical marijuana dispensaries. A recent addition to ArcView’s investor ranks is Bruce Bedrick, 44, a chiropractor who wants to be called Dr.
Bruce. Bedrick is the CEO of Medbox, which markets a dispensing machine that can distribute up to 50 varieties of cannabis — or possibly pharmaceuticals — after an authorized person enters biometric identification (like fingerprints), passwords, and other information. Through reverse merger, the company is traded publicly over the counter. It was trading at about $3 last October but shot to $215 on Nov. 15 — nine days after the ballot initiatives passed — and now trades at about $30, giving the company a market cap of $620 million.
There are also two investment funds at the table. ArcView investor Brendan Kennedy, 40, co-founded Privateer Holdings in 2011 as a private equity fund investing solely in cannabis-related projects. Kennedy got his MBA from the Yale School of Management and later became chief operating officer of SVB Analytics — a unit of Silicon Valley Bank. He is also now CEO of Leafly, a company Privateer bought in 2011. Leafly operates a website that currently carries 50,000 reviews of cannabis strains and dispensaries.
The other fund is MC Advisors, whose investors include Moral Compass, which was created by John Sperling, the for-profit education pioneer who founded the University of Phoenix. It is represented here by Kris Krane, 34, who runs a Phoenix-based medical cannabis consulting firm called 4Front Advisors, which is an MC Advisors investment. At the outset DeAngelo takes up a fundamental question about the ground rules. Until now ArcView as an organization has pursued only “ancillary” cannabis projects, meaning businesses whose products and services don’t require the entrepreneurs to actually touch the drug.
That’s because initially most ArcView investors did not want to sink money into ventures that, on top of all the ordinary market risks, could at any juncture be seized by the federal government in civil forfeiture proceedings But a number of investors are now eager to start hearing pitches from state-licensed businesses that do handle cannabis. No immediate decision is reached. “Ancillary” is, in any case, a fuzzy notion. The federal law against drug paraphernalia bans equipment that is “primarily intended or designed” for growing or ingesting cannabis.
In practice, it seems, pipes and vaporizers may be sold legally if marketed for tobacco or “herbs,” and similarly, hydroponics equipment is fine, as long as it’s marketed for tomatoes. Yet the same products can become illegal if openly sold for pot. (Speaking of Cheech and Chong, actor Tommy Chong received a nine-month federal prison term in 2003 for selling glass pipes, informally known as Chong Bongs, over the Internet. ) DeAngelo acknowledges the difficulty in guaranteeing the legality of some ancillary products, noting, to laughter, “You don’t know till the verdict comes in. Several products being pitched at today’s meeting might run afoul of these laws if marketed too explicitly for cannabis. On the other hand, such devices — no matter how they are marketed — appear to be lawful now in Oregon and Washington, notes Rob Kampia, executive director of the Marijuana Policy Project, who is also present. The paraphernalia law, by its terms, exempts equipment authorized by state law, he points out, and the Colorado and Washington initiatives authorize most marijuana paraphernalia.
Whatever the legal niceties, another borderline paraphernalia product quickly engenders considerable investor interest. Jordan Nogee, 42, and Matt Luxton, 30, the principals of a company called Royght! , make the pitch for their product, the Halo. Engineered by a Seattle firm called Precision Engineering, the Halo is a glass or aluminum pipe fitted into a portable piece of injection-molded nylon that clasps onto any standard 20-ounce paper cup — like a Starbucks Venti — to create a water pipe.
It would retail for about $20 and would come in two colors, Venti Green and McMedium Red, though some investors observe that Starbucks and McDonald’s might have issues with those names. One investor is concerned that to use the Halo, you seem to have to get your face pretty close to the flame. The presenters say that’s an optical illusion, but in any case, they’ve angled the bowl farther away from the user on newer models. Somebody jokes that dreadlocks might still be an issue. ArcView’s DeAngelo is clearly uncomfortable with some of the Halo’s selling points.
He cares deeply about cannabis’s image — and ArcView’s. One of the oldest people in the room, DeAngelo has seen the marijuana movement come a long way, and he doesn’t want that progress squandered. He has published articles discussing how the medical marijuana movement has refurbished cannabis’s image, properly reorienting connotations away from intoxication and irresponsibility and toward wellness and spirituality. He has warned against “play[ing] right into the hands of the prohibitionists, who are itching for another opportunity to portray cannabis users as decadent hedonists. (DeAngelo almost always uses the scientific term “cannabis” to distance the plant from the baggage associated with the word “marijuana. “) DeAngelo asks Nogee and Luxton if the Halo might not be seen “as encouraging people to smoke in public. ” The presenters do not pick up on his concerns, suggesting that controversy “sort of goes with the territory” and will, in fact, generate free publicity. A more unimpeachable product is proposed by Claire Kaufmann, 33, the mother of three small children from Portland, Ore. She wants to launch a crowdfunding website called WeCanna. om — basically a Kickstarter for ancillary cannabis-related projects. An online branding expert with an MBA from Pepperdine, Kaufmann became interested in the democratizing effect of microcredit while in business school. The investors respond favorably to both the idealism of Kaufmann’s pitch and the tasteful professionalism of the graphics she has selected for her mockup site. In fact, be it business cards, product design, logos, or user interfaces, the entrepreneurs pitching today are overwhelmingly eschewing pot leafs, hippie motifs, psychedelic graphics, and tie-dyed anything. My products are for someone who looks to complement his lifestyle with marijuana,” says Josh Gordon, 26, a recent graduate of Fordham School of Business, “rather than someone whose life revolves around marijuana. ” Gordon’s company, Rodawg, aims to produce designer joint cases, storage jars, and fashionable, upscale, cannabis-themed accessories and apparel that might be suitable for, say, ski shops. Chris Walker, 40, of Radiant LED Growth Systems, is pitching another high-tech product.
Radiant sells a lamp made by the Swedish company Heliospectra. In Nordic countries, where summers are short, it has long been common to grow vegetables indoors under artificial light. Heliospectra makes lamps with adjustable spectrum controls and determines the optimal spectrum for individual species of plants, for strains within a single species, and even for phases within a single strain’s growth cycle. A 600-watt LED lamp with fully adjustable spectrum controls, optimized for cannabis, will sell for about $7,500.
One investor thinks that price is way too high for most growers. Further dampening enthusiasm, perhaps, is the fact that earlier in the day a different presenter, Kristin Nevedal of the Emerald Growers Association, questioned the future of indoor growing itself, characterizing it as an outmoded artifact of the prohibition era. The EGA (which is here seeking donations, not investments) is a trade group of medical marijuana farmers from California’s Humboldt, Mendocino, and Trinity counties, also known as the Emerald Triangle.
The area is reputed to be one of the best for outdoor marijuana cultivation, with cannabis trees sometimes growing to 18 feet in height. Foreseeing a day when interstate cannabis commerce will be legal, she sees a tremendous “branding opportunity” for the Emerald counties to become “like Napa is to wine. ” “Artificial-light-grown cannabis is out,” she argues. “Ancillary businesses that rely on it have, at best, eight to 12 years left,” she predicts. “It’s not cost-effective anymore. The EGA’s place on the agenda may reflect the fact that DeAngelo is also a big booster of “sungrown” cannabis, which he touts for ecological reasons. “It takes 200 pounds of coal to produce the electricity needed to produce one pound of cannabis under high-intensity lamps,” he told me a couple of days before the forum, “and that, for me — as someone who loves the plant — is not an acceptable tradeoff. ” (Neither he nor Harborside owns land in the Emerald Triangle, he says. ) One of the most skilled presenters is Amy Poinsett of Denver, 45.
She and Jessica Billingsley of Atlanta, 35, co-founded MJ Freeway, which makes cloud-based, seed-to-sale, “track every gram” software for regulated medical marijuana dispensaries and farms. Their software is already used by several hundred dispensaries in 11 states, D. C. , and Canada, Poinsett says. In 2012 their software processed $200 million in dispensary sales, and their servers currently store the records of 1. 2 million patients. With revenue approaching $1 million, they turned a profit in 2012 — an observation that fetches hardy applause all around the table.
They seek funds to make small acquisitions. One investor notes that many pot farms are in such remote locations, it’s hard to reach the Internet to use a cloud-based system. Poinsett responds that the company does offer a locally hosted option, but so far no dispensary has opted for that because of the greater security of storing information in the cloud. At about 7 p. m. , immediately after the event concludes, there is a catered, media-packed reception in the Washington Athletic Club’s ballroom, sponsored by the National Cannabis Industry Association — another group co-founded by ArcView’s Dayton.
Seattle’s mayor, Michael McGinn, who met privately with the ArcView participants earlier in the day, blesses the event publicly from the podium. As he does so, Dayton turns to me, his eyes welling up with tears. “This is the pinnacle,” he says. “Right now. It’s never been like this before. ” Yet the euphoria is playing out against a backdrop of appalling risk. Everything these investors and entrepreneurs are banking on remains very much illegal under federal law, which, under the supremacy clause of the U. S. Constitution, unambiguously trumps state law.
No one understands this better than ArcView’s DeAngelo. His exemplary Harborside — with its wall full of framed good-citizenship laurels from the County of Alameda and assorted community groups — is currently defending a civil lawsuit in which the U. S. attorney for the Northern District of California, Melinda Haag, is asking a federal judge to declare everything DeAngelo has built since 2006 forfeited to the U. S. government. Haag filed it in July, just six months before the ArcView event. (Oakland has intervened on
Harborside’s behalf, in part because the dispensary is its second-largest retail taxpayer. ) Harborside has also been under a continual Internal Revenue Service audit since 2010. Though DeAngelo says he has scrupulously paid all conventional taxes, the IRS seeks — as is its policy vis-a-vis cannabis dispensaries — crushing additional sums under a weird 1982 provision of the tax code known as Section 280E. That clause dictates that in the rare event that a drug trafficker tries to pay taxes, he must be denied almost every ordinary business deduction — like rent, salaries, and overhead.
On top of that, since late 2009, Harborside’s banks and credit card payment processors have repeatedly closed its accounts, having been advised that to knowingly accept deposits from narcotics dealers violates federal money-laundering and drug-conspiracy laws. Finally, looming over everything else is the threat of criminal prosecution. Every day DeAngelo sells enough seedlings out of Harborside’s nursery — over 2,000 — to qualify for a mandatory minimum 10-year federal prison term. Yet DeAngelo, Dayton, and their confreres party on.
They think the polls tell the story, and the latest Gallup numbers, as anyone here can tell you, show that 48% of Americans now favor “adult use” legalization — up from just 30% in 2000 — while 64% think the federal government should honor state medical marijuana laws. More adult-use laws look to be on the way in at least three states and additional medical marijuana laws in at least four, and activists hope to have no fewer than seven adult-use initiatives on ballots in November 2016.
The drug could be legal for one purpose or another in more than half the states by then, at which point the U. S. Congress would be hard-pressed to defer calls for national marijuana law reform. “Marijuana prohibition is a house of cards,” Dayton told me the day before the ArcView event, “and the first two cards just got pulled out. When the public, investors, politicians, and business community saw that, the entire conversation changed. ” Business is driving the change, he continues. Business is the most powerful platform for political change that’s ever existed,” he says. “When there is money for government, money for investors, money for entrepreneurs, and benefits to communities, that’s a powerful incentive for change. ” After the reception, I am invited to a party for forum participants, but on condition that all conversations there be off the record. The precaution proves superfluous. When I was a kid growing up in the late 1960s and 1970s, much marijuana purchased on the street was of poor quality.
Levels of tetrahydrocannabinol — or THC, the key psychoactive ingredient in cannabis — were then maybe in the 3% to 6% range. Contemporary cannabis grown for the medical marijuana market, in contrast, ranges from 6% to 22%, and cannabis concentrates — formerly known as hashish — range from about 20% to 60%. In a hotel room shortly after the mayor’s speech, I take a long inhalation of a 40% THC concentrate from a smoking pipe, and then supplement that with a number of puffs from two or three handheld vaporizers, each loaded with cannabis-oil canisters of unknown strength.
By the time I reach the party, I can no longer follow other guests’ sentences. Each time a string of words comes to an end, I can’t remember how it began. At the same time I develop an enhanced attention span for staring at the faces of those who are trying to speak to me, examining the musculature beneath their cheeks, the pores of their skin, the hair follicles, the decades-old acne scars, and the striking resemblance that a vigorously speaking human mouth can bear to a wolf ‘s tearing flesh.
I reach my hotel without incident, using a car service. I also catch my early plane flight the next morning, although I have more than customary difficulty negotiating the automated touchscreen preboarding menus, especially the question about how many bags I want to check. (The correct answer, I finally determine, is “one. “) This story is from the April 08, 2013 issue of Fortune. First Published: March 21, 2013: 7:28 AM ET * Share