Paypal founder Peter Thiel becomes marijuana’s first big investor
Thiel’s Founders Fund is the first institutional investor to put money into the nascent cannabis industry, which is still illegal in half the US
Thursday 8 January 2015 06.00 EST
Peter Thiel has never shied away from investing in companies so experimental that they’re too new to even be part of an industry.
So it’s hardly surprising that Thiel’s Founders Fund has become the first institutional investor to make an investment in the nascent cannabis industry – a business that isn’t even legal in half of the states in the country.
This morning, Founders Fund confirmed the buzz that has been circulating for several weeks: partner Geoff Lewis is leading an effort to take a minority stake in Privateer Holdings, the Seattle-based company that owns Leafly.com. For those who haven’t heard of it, Leafly is like Yelp for pot and medical marijuana buyers looking for reviews and price information. Privateer also controls a Canadian medical marijuana growing operation, Tilray, and other cannabis ventures.
Founders Fund is not disclosing the terms. Lewis won’t discuss them either, other than to say it’s a minority stake in Privateer, which hopes to turn a profit this year. As of its last public disclosure to the SEC last July, however, Privateer still was hoping to raise another $56m of the total $75m it has been seeking in its most recent funding round.
Investing in the cannabis business – now legal for recreational use in only four states and the District of Columbia, and with at least some form of medical marijuana usage approved by 24 states – “is just a slightly more extreme version of something we’ve shown in our other investments that we’re comfortable with”, says Lewis. “We’re fine with investing in businesses with regulatory ambiguity, because we believe that regulation follows public sentiment.”
More than a year has elapsed since the first polls showed Americans now clearly favor legalizing marijuana usage, with support for making medical marijuana legal reaching 80% in some surveys.
“Then the first retail stores opened in Colorado, and the world didn’t end, and the federal government didn’t step in, which they could have done,” says Brendan Kennedy, co-founder and CEO of Privateer.
Then late last year, the omnibus spending bill, passed in a frantic rush, contained provisions that will prevent the Justice Department from spending any of its resources fighting medical marijuana laws in those jurisdictions that now make cannabis available to people with a doctor’s prescription.
“Every time the tide recedes, we are able to take a step forward” in building Privateer’s existing businesses and in seeking out new investments, Kennedy said.
Indeed, at this point, Lewis figures that the biggest risk of Founders Fund’s latest investment is pretty prosaic: can Privateer’s founders execute their vision of transforming their company into the world’s first cannabis conglomerate?
Having studied the industry, and Privateer, for about 18 months before deciding to forge ahead, Lewis is optimistic.
“At this point, we don’t think there is any other company in Privateer’s league. They have a strong first-mover advantage,” – that’s Silicon Valley speak for planting your flag first – “and they’re in a position to build a strong brand.”
Indeed, if you ask Lewis or Kennedy, one of the key factors in determining whether or not Privateer will become the Starbucks of the embryonic cannabis industry is precisely that: not its business idea, but its ability to get the job done.
For Kennedy, part of doing so is assembling the right team – and his includes folks with MBAs from Ivy League institutions who have joined Privateer from a host of companies with very big brand names – Microsoft, Amazon, T-Mobile and the like.
He’s also hired some more unconventional types, ranging from botanists to perfect medical marijuana strands, and an outsize security staff to protect their Tilray facility, which actually contains cannabis.
The motivation of these recruits?
“They want to end prohibition and the harm caused by prohibition, and they want to do it by creating a smart, professional brand in a space where most of the brands are so amateurish,” Kennedy said.
Ask Kennedy for specifics, though, and it quickly becomes apparent just what the industry’s fledgling status means in terms of the range of its business opportunities (potentially infinite) and challenges (unpredictable).
How, for instance, might Privateer leverage the immense amounts of data it has acquired about consumers’ habits and preferences from Leafly.com? “There are many possibilities,” he says, vaguely.
“There are no standards, no leaders, no significant brands – we’re at the point where the industry is being ‘productized’, where suddenly someone buying cannabis might begin seeing it packaged nicely, in a way that implies safety, consistency and quality,” he says.
“That’s a big leap from buying something in a Ziploc bag.”
But there’s a long way to go before someone looking for a few ounces of weed will instantly know to ask for a specific brand, in the same way that you can wander into your Starbucks or Peet’s Coffee franchise and reel off your order without even pausing to think.
Privateer is hoping that it will have an edge here, at least.
If there is one figure closely identified with cannabis, it’s probably the late reggae legend Bob Marley – and late last year, Privateer signed a 30-year agreement to use his name on what is likely to be the world’s first global marijuana brand, Marley Natural. Look for the first products to hit the market later this year – wherever they are legal.
Founders Fund figures that it, too, has an edge as a first mover. The cannabis industry – if one can begin to call it that – is legally, socially and politically complicated. Any investor that wants to follow in their footsteps is going to face a steep learning curve – or be prepared to run big risks.
And Lewis would like to make it clear that Founders Fund’s excitement about the latest addition to their portfolio has nothing to do with the nature of Privateer’s product. Nothing at all. Really. The possibility that this will give them a front-row seat on the world’s best varieties of marijuana as they emerge “did not play into the investment decision whatsoever”.
And for the record, I believe them.