Jun 22, 2019 - Economy & Business

Deep Dive: Weed, Inc.

Illustration: Sarah Grillo/Axios

Venture capitalists are investing record sums in marijuana startups, growing twice as fast as 2018.

Why it matters: These investments are a bet that marijuana will be legalized in the U.S. at the federal level, as it has been in Canada.

Details:

  • The sector garnered $1.3 billion through mid-June, compared with $1 billion for all of 2018 and $370 million for 2017, according to PitchBook Data.
  • Both the 2018 and 2017 figures were all-time hauls at the time.
  • Some of these investments are in actual cannabis growers, while others are in adjacent businesses needed to build out the industry (logistics, finance, retail, accessories, etc.). Kind of like the difference between oil producers and oilfield services.

There's a catch: Legalization would expand the total addressable market, or TAM, for growers, but could render the related startups obsolete.

  • For example, why would growers need cannabis-specific transportation companies if FedEx began working with them?
  • Why would dispensaries need specialized financial facilitators, once banks could handle their accounts?
  • And why would dispensaries or specialty retailers be needed at all, once neighborhood pharmacies and gas stations could handle the stuff?

It's a catch-22 that could slow the industry's growth, particularly given that many of the biggest venture capital firms still avoid companies that "touch the plant," to keep in the good graces of both law enforcement and their more conservative investors.

  • Despite the "record" sums, VC investment in marijuana remains relatively tiny — consider that individual tech companies have raised singular rounds larger than $1.3 billion.
  • Yes, some services brands would survive legalization, just as wine stores persist in areas where wine is sold in supermarkets. But many would disappear, and it's a prospect that could keep potential investors on the sidelines.

What we're hearing: "Investing for the short-term in specialized companies that become irrelevant after legalization has never made sense to me," says Brendan Kennedy, CEO of Tilray, the Canadian company that last year became the first cannabis firm listed on the NASDAQ. "I think these companies will eventually revert to zero."

The bottom line: VCs never needed to question marijuana's "product/market fit," as they typically do for tech startups, nor its efficacy, as they do for health-care startups. But now they need to question legalization, and what that would mean for the billions they've already invested.

Go deeper:

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Venture capital funding fled U.S. and China for Britain in 2019

Reproduced from Tech Nation; Chart: Axios Visuals

Venture capital funding fell significantly in the U.S. and China last year, but boomed in the U.K., rising to a record $13.2 billion, according to a report prepared for the British government by industry group Tech Nation and research firm Dealroom.

Why it matters: The U.K. saw a significant increase in the number of deals and amount of money pledged by venture capital firms, far outpacing other European economies, with half the total funding coming from firms and investors based in the U.S. and Asia.

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The state of the space industry

Earth from space. Photo: NASA

2019 was a record year for investment in the space industry, according to a report from the investment firm Space Angels.

Why it matters: The report paints a picture of an industry that's coming of age, with total investment in 2019 reaching $5.8 billion, up 73% from 2018 and exceeding 2017's record-setting year that saw $5.1 billion of investment.

Go deeperArrowJan 21, 2020

Health care VCs haven't made plans for a Bernie Sanders win

Illustration: Sarah Grillo/Axios

Bernie Sanders still may eke out a win in Iowa, and is the consensus front-runner in New Hampshire. But most venture capitalists investing in America's health care industry — the primary target of Bernie's ire — have shoved their heads so deep in the sand that they've found water.

Why it matters: At some point, it could become a failure of fiduciary duty.