Much like alcohol prohibition in the 1930’s, cannabis prohibition is coming to an end. This is great for several reasons (tax revenue, new jobs, freeing up jails, etc), but it also creates a massive economic opportunity. So did a bit of research to get a sense of the landscape.
A Bit of History
Cannabis has been around for a long time. One of the earliest appearances dates back to Taiwan ~10,000 years ago, and it’s all over several other ancient civilizations’ histories as well. It was used both casually and medicinally until it began getting criminalized, ultimately getting banned in the US in 1937 with the Marihuana Tax Act. Although still illegal federally, individual states have begun easing up on cannabis with Washington becoming the 1st state to legalize in 2012, Colorado soon after, and more.
Current
States are currently easing up on cannabis. There are different types of easing, up including medical, decriminalization, and recreational (fully legal). Currently, there are 4 states — Alaska, Colorado, Oregon, Washington (+ District of Colombia) that have fully legalized, as well as a few individual cities. 18 states have decriminalized, and 25 have medical. And across the rest of the world, it still varies quite a bit (map below).
Legalization — Looking Ahead
The ArcView Group (a leading marijuana group) predicts that 18 states will have fully legalized marijuana by 2020. Ackrell Capital recently published a report predicting the end of prohibition entirely by 2020.
Clearly a few different opinions on what the future looks like for cannabis — but given that 39 states already allow some form of legal / medicinal cannabis and with the majority of American citizens in support of legalization (58% via a 2015 Gallup Poll), it seems like an inevitability.
Even with states legalization, the end of prohibition is really about federal policy, and that is dependent on our next president. The leading candidates as of now are all against recreational, but there is support in moving cannabis to CSA 2, allowing medical. So thing are at least moving in the right direction.
My view is that it may take a bit longer than 2020 for us to fully legalize, but several states will have legalized by then (with California being the first), and we’ll have some more clarity on when prohibition will really be over.
Usage
People like marijuana. It’s the most commonly used drug in the US with 22.2 million monthly users in 2014 (~7% US population). Another study shows that in 2013 between 128 and 232 million people used cannabis (2.7% to 4.9% of the global population between the ages of 15 and 65).
For reference, about 16.8% of the US population in 2014 used tobacco, or 45 million users. So there’s a lot of cannabis users already.
With the onset of more states legalizing, can we expect an increase in usage? If we look at Coloardo, cannabis usage has gone up since legalization in 2013. For age groups over 18, there has been an average ~20% increase in last month users. However, tourism dollars have also gone up around ~23% on average since legalization. Not saying these are related, but there may be some overlap.
If we look back and use alcohol consumption post prohibition as an proxy, total alcohol consumption in the US definitely increased after prohibition (graph to the left). It’s not a 1:1 analogy, but it gives us some indication.
My take is that usage will definitely increase, but overal several years and a material increase in usage will come with a new generation new burdened by stigma.
Market Size
In an annual report the ArcView Group publishes, legal marijuana sales hit $5.4 Billion in 2015, up from $4.6 Billion in 2014. The report also predicts 2016 sales will rise to $6.7 Billion, and that it will reach $22 Billion by 2020.
Ackrell is estimating a $9.5 Billion market by 2019, and a $37 Billion market 5 years after it becomes federally legal. Overall, they’re predicting a global $100 Billion market.
It’s hard to measure a global market size for how much people are spending on marijuana collectively but Havocscope estimated that the global marijuana trade in 2005 was valued at $141.8 Billion with 164 million worldwide users.
Time will ultimately tell, but given the current numbers (with only a limited number of states legalized), both recreational & medicinal cannabis is undboutedly a massive multi-billion dollar industry that is continually growing.
Investment
Investors are seeing the opportunity and the number of firms, investments, and total dollars allocated to marijuana is increasing. CB Insights recently published some numbers on this, showing 98 cannabis deals in 2015, up from 63 in 2014.
In my research I found 21 investors, including 2 accelerators (full list below). One of the largest was Privateer Holdings, who recently raised $75 Million from Peter Thiel’s Founders Fund). A few others include Weedmaps founder Justin Hartfield’s Emerald Ocean, High Times Growth Fund, PharmaCan Capital, and of course — Snoop Dogg’s Casa Verde Capital.
In 2015 atotal of $224.3 Million was invested into cannabis, up from $111.34 Million in 2014. The bulk of investment is in production companies like PharmaCannis & Leafline Labs, but many interesting companies emerging such as seed to sale software startups (MJ Freeway, BiotrackTHC), wholesale/distributor marketplaces (Tradiv, Leaflink), retail solutions (Webjoint, Headset), cannabusiness services (Insurance — Cannasure, Advertising — Adistry, Payments — Token), and consumer solutions (Eaze, Baker).
Despite increased investment, still a relatively small amount of money flowing into this space. Private equity deals by U.S. firms in 2014 were $48.3 billion last year, software companies raised $19.8 billion and internet companies raised $11.9 billion.
Click here for a list of cannabis investors.
Companies and Landscape
Below is a market map I put together of the cannabis industry. I split it up into Infrastructure, Production, Retail, and Consumer. Short descriptions of each area below.
Infrastructure
- Equipment / setup — make & sell equipment for marijuana production. Greenhouse, setup, grow lights, nutrients, pest management, drying, water filtration, software, etc.
- Labs — analyze the end product (cannabis, concentrates, baked goods, etc) and test/certify the quality.
- Packaging — containers, bottles, child safe bags, etc.
- Real Estate — acquiring space to produce cannabis and/or retail shops.
- Banking / Payments — banks that accept cannabis money and blockchain enabled payment services.
- Business Services / Other — some interesting ones here, including an audit scoring software service, insurance, ad network, etc.
Production
- Crop Production — growing, cultivating, and producing cannabis. Both recreational & medical.
- Pharmaceutical — alternative medicine utilizing the cannabis plant.
- Baked Goods — self explanatory. Chocolates, cookies, candy, etc.
Retail
- Dispensary Management — software to help you run a dispensary including POS, inventory, online menus, etc.
- Analytics — an interesting segment built to help understand customer behavior and optimize the strains in stock.
- Doctor Verification — services to help either get you a prescription or verify an existing one.
Consumer
- Discovery — help you find strains and dispensiares a la Yelp.
- On Demand — Uber for cannabis. Lots of activity here. Very regional.
- Ecommerce — online stores for accessories like pipes, wraps, etc.
- Social — posting about marijuana with friends.
- Content — both industry publications as well as consumer.
- Hardware — mostly different vaporizer companies.
Multiple — a few companies spanned both production and retail
- Marketplaces — connecting wholesale growers to dispensaries.
- Seed to Sale — software that helps track cannabis from production all the way to sale. Includes production, growth, inventory, POS, storefront, etc. A lot of activity here.
- End to end — mainly medical companies. Vertically integrated companies that grow, cultivate, and distribute cannabis on their own.
Next
While in no way comprehensive, hopefully this is helpful in getting started with the emerging cannabis industry.
Will do a follow-up post (follow me @chriseyin or sign up to get updates!) on what I think is interesting, but some quick thoughts —
- Early days for infrastructure and we’ll a lot of new companies start and get funded here. I’m particularly interested in business services.
- Production / retail are going to start seeing some early winners emerge in seed to sale software (Flowhub, Headset, etc) end to end and crop production. When prohibition is at its end, there will be some consolidation. I’m into these wholesaler/retail marketplaces.
- The consumer side is going to attract a lot of attention and funding. Will bee too much money / activity in on demand (I would be on Eaze). I’m interested in ecommerce and media.
Always open to feedback — so anything I missed, framed incorrectly, or am just plain wrong on, please let me know! Email, Twitter, Snapchat, or comments below are all welcome!
Originally published at www.chrisyin.com. Follow me @chriseyin or snap me.
Thanks to Patrick Rea of Canopy Boulder, Ben Larson of Gateway, and Brendan Kennedy of Privateer Holdings for reviewing the market map.
Also thanks to Sunny, Elliot, and James for feedback on the post.
