As California Votes to Legalize Weed, The Drug’s Tech Industry is Enjoying High Times

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The US marijuana industry is lighting up. America now has 8.4 million regular cannabis users, up from half that in 2002. Thanks largely to legalizations in Alaska, Washington, Oregon and Colorado, the market is now worth $7.2bn, and it is growing at an annual rate of 29%.

Earlier this month marijuana executives met at the New West Summit in San Francisco. Experts told Red Herring the event felt like an awakening, for an industry that has hidden in the periphery of the US economy for decades.

Even renowned British entrepreneur Sir Richard Branson had his say at the summit. “I certainly would be out there in this industry,” he told attendees via a Skype linkup. “It has enormous potential with the ability to do a lot of good.”

That the event took place at the home of American technology was no accident: while marijuana innovation to date has largely focused on edibles, strains and vaporizers, tech startups have begun to enter the fray. And they’ve brought Silicon Valley-level funding with them.

This week Eaze, an on-demand medical marijuana firm, secured $25m series B funding round, making it the most funded cannabis technology company in the world. “This is a critical time for the marijuana industry. Adult use is on the precipice of becoming legal in California, the largest marijuana market in the United States. Eaze is setting a new standard for accessibility, safety, and professionalism, which makes it best positioned to educate and service the future market,” said Keith McCarty, CEO of Eaze, in a statement.

Prop 64 will go to the polls in California November 8. If it passes it will be a momentous boost to the marijuana industry: California’s 38.8 million population is over twice that of the other states combined. The World Bank claims the state to have the equivalent of the world’s sixth largest economy.

The entry of such a large and important state into the marijuana industry will, most experts agree, pave a significant path for countrywide legalization. Massachusetts and Maine will also vote on cannabis initiatives next month. Arizona and Nevada have similar votes slated for recreational use.

There was initial excitement around cannabis investing when Colorado first instituted regulations (the first recreational marijuana was sold there in 2014),” Mike Bologna, founder of Green Lion Partners, tells Red Herring. “It was short and frenzied but settled. It picked up again as the market in Colorado matured and starting showing excellent cash flow.

“It is still growing rapidly as more states add regulations, which creates a lot of new markets and opportunities for investors,” he adds. “As far as international legalization, Canada is at the top of list due to its proximity and positive steps towards full repeal of cannabis prohibition. Europe, Asia, and many other countries are also intriguing but are in various states of regulation.”

Deregulation will help a raft of tech startups to have appeared in recent years. Innovators include Grownetics, which uses machine learning to increase bud yields. Fleurish Farms claims to have created a product that captures more sunlight for home-growers, and reduces the process’ environmental impact.

FlowHub is a cloud-based point-of-sale (POS) software that is winning clients across the industry. Customer-facing PotBot allows users to pick a strain of cannabis depending on their needs.

B2B acceleration has been comparatively slow for a number of reasons. “The biggest breakthrough in enterprise solutions will come from the customers of the solutions themselves,” says Bologna. “Currently, there are few, if any, companies that can be considered ‘enterprise’ level supply chains in cannabis.

“Some major product manufacturers and distributors likely have mature supply chains and business tools, but cannabis processors are not at that scale,” he adds. “The increasing need to lower cost will drive the advanced companies towards efficiencies offered through standardization and software similar to other mature industries.”

Investment in the industry, though, has grown rapidly. $360m was put into the sector in 2015. This year another $137m has been spent. In 2012 that figure was just $7m.

Bologna, who founded Green Lion in January 2015 with business partner Jeffrey Zucker, says he sees “technical advances in cannabis every day. It ranges from software to agricultural automation to medical research and testing capabilities. This industry has allowed brilliant people the freedom to implement some very impressive advancements over the past few years, as they increasingly leave industries that may stifle their creativity in a way the cannabis industry generally doesn’t due to it’s open-minded environment.”

Bologna adds that, in the long-term, he expects infused products, software and medical research to be the biggest drivers of revenue in the marijuana market.

Leslie Bocskor, president of Las Vegas-based Electrum Partners, agrees. “We’re seeing a substantial overlap between cannabis and technology, which is fueled partially by cultural similarities and previous overlap,” he says. “The anecdote that the reason Silicon Valley companies don’t drug test is because they’d lose all their most talented workers is something that we’ve heard more than once.”

Bocskor estimates that in Nevada alone, over $300m has been spent on basic infrastructure for its first real medical marijuana market. He adds that, while most people believe the patchwork nature of the regulatory frameworks in the US creates a challenge, “we find that the “ring fence” around each state, due to the lack of interstate commerce, in fact creates a better environment for entrepreneurs to be able to navigate, since competition is limited.”

Scaling in that environment, however—and encouraging big investment platforms to put Valley-rivaling sums into marijuana technology startups—is difficult for a number of reasons. Companies find it tough to handle large amounts of capital because of the haziness of banking regulations. Licensing, physician recommendations and other bureaucratic hangups all represent severe roadblocks to those looking to expand beyond state borders.

With widespread legalization those problems should, in time, blow away. It will also allow firms to analyze data and project for the future, which are currently difficult to do. Out-of-state ownership, which has begun to be allowed, will also ease financial bottlenecks.

Perhaps with that in their arsenal, marijuana tech startups will be able to look to a future beyond the United States. Latin America and Europe are expected to present huge cannabis opportunities in coming years. Israel has also emerged as a home for marijuana innovation, with a host of private investors pumping money into the field.

With all that in mind, American marijuana entrepreneurs will be looking to blaze a trail across the weed world.