Marijuana IPOs Provide Investors With Gateway to Cannabis Boom

In an industrial section of Oakland, California, former Morgan Stanley investment banker Derek Peterson hops into a trailer being outfitted with shower drains, lights and humidifiers, all used for growing marijuana.

“This is one we’re finishing up, what we call our bloom room,” he said. Peterson, 36, sells the trailers for $30,000 to $80,000 as “plug-and-play” facilities for cultivating pot. Customers don’t need to buy hydroponic equipment or even stay on-site -- lighting, temperature, nutrients, water and humidity can be operated remotely via an iPhone app.

The legalization of medical marijuana -- permitted in at least 15 states -- has kicked off a booming economy in ancillary goods. Startups such as Peterson’s GrowOp Technology Ltd. and General Cannabis Inc. (CANA) compare the phenomenon to the California gold rush, when the people making the real money were the ones selling pick axes and shovels. Both companies are planning initial public offerings, part of an effort to remove the stigma from what’s seen as a multibillion-dollar industry.

“We’re better off by being in the public arena and showing a face of professionalism,” said Jim Pakulis, chief executive officer of General Cannabis, who says medical marijuana could be a $60 billion industry nationwide. “The market will just continue to expand.”

Growing marijuana violates federal law, and recreational use of the drug remains illegal at the state level. That puts related businesses at risk of getting shut down by law enforcement. By focusing on equipment, services and technology, Pakulis and Peterson aim to sidestep the legal pitfalls of the trade while reaping the benefits of its expansion.

Dispensary Map

General Cannabis operates several businesses, including WeedMaps.com, which directs users to more than 800 pot dispensaries nationally; a company that handles administrative tasks for more than a dozen medical marijuana clinics in California; and a payment-processing service for dispensaries.

“We are a technology company with an affinity toward medicinal cannabis,” Pakulis said in an interview.

General Cannabis, based in Costa Mesa, California, seeks to raise $10.5 million in an IPO, according to documents filed with the Securities and Exchange Commission on March 1. The company posted net income of $1.2 million in 2010 on revenue of $7.7 million, according to the filing.

Pakulis, 47, has been involved with managing and consulting startups in various industries for more than 15 years. The company also brought on a former Silicon Valley Bank executive in January to lead General Cannabis’s strategic efforts.

Morgan Stanley (MS)

GrowOp’s Peterson spent almost a decade managing investment portfolios before starting his current company. After stints at Wachovia and Morgan Stanley, where he managed a $100 million fund, he went out on his own, taking some clients with him. In addition to GrowOp, he oversees a $48 million portfolio with a partner.

GrowOp sold its first trailer in May, and by the end of the year posted $800,000 in revenue, Peterson said. It made $250,000 more in January alone, he said.

The business has mainly grown from word of mouth. Peterson is rolling out a catalog, which he expects to generate 90 percent of sales. It will offer hundreds of products for cultivating pot -- everything from special light bulbs and nutrients to something called “hydroponic grow medium.”

Pillow Stuffing

“It’s pillow stuffing,” Peterson said, as he digs his hand through a box of chunky blocks of white foam material. “But apparently plants grow phenomenal in it.”

Peterson wants to undercut distributors of these products to the retail hydroponic shops, where growers buy materials for cultivating plants. Distributors typically mark up their goods 100 percent, he said.

“We can operate a thriving business and do so with 60 to 70 percent margins,” Peterson said.

His goal is sales of $2.5 million this year, then $5 million to $8 million next year. While GrowOp hasn’t filed paperwork to go public -- and its revenue is smaller than General Cannabis’s -- it plans to have an IPO in 2011. GrowOp is currently in the audit stage of its offering plan and working with Network 1 Financial Securities Inc., Peterson said.

Peterson always wanted to take a company public, though he never found the right specialty. That changed when he learned how much medical marijuana growers were making, he said.

“The few dispensaries in my neighborhood -- I started talking to them and found out they were doing $10 million to $14 million in business a year,” Peterson said. “I just started to see the economics.”

Medical Uses

Marijuana, produced from the cannabis plant, can be smoked or ingested. Advocates of medical use say marijuana can ease cancer patients’ nausea from chemotherapy, help treat glaucoma, stimulate AIDS patients’ appetites and ease pain for multiple sclerosis sufferers.

While law enforcement has taken a hands-off approach to General Cannabis and GrowOp, the federal marijuana ban could mean the companies are targeted for aiding and abetting a crime.

“Under United States federal law, the possession, use, cultivation and transfer of cannabis is illegal,” General Cannabis said in the “risk factors” portion of its filing. “We provide services to customers that are engaged in those businesses. As a result, law enforcement authorities may seek to bring an action or actions against us.”

California Initiative

California voters approved a ballot initiative in 1996 permitting people with a doctor’s recommendation to possess the drug, though they rejected a proposition last year that would have legalized it for recreational purposes. Other states have followed California’s lead with their own medical-pot laws.

Not everyone thinks the industry is poised for growth. Dale Gieringer, who runs the California office for the National Organization for the Reform of Marijuana Laws, or NORML, said the value of medical pot has started to contract as more growers add supply to the market and reduce prices.

“There’s a glut on the market, a general retrenchment and it’s not clear to me how much the market can expand unless laws change,” Gieringer said.

In the past few years, prices have dropped by half to $1,800 a pound for marijuana grown outdoors, he said. Pot grown indoors fetches a higher price -- $3,000 a pound -- though it’s seeing a pullback as well, Gieringer said.

Peterson says customers are interested in his trailers and products for various reasons. One buyer in Colorado uses his to grow mushrooms for culinary use. Another wanted to get into the business because making a profit in his other profession as a porn-film director was getting difficult.

“They see the green rush -- and like the gold rush back in the day -- are getting picks and shovels,” Peterson said.

To contact the reporter on this story: Ryan Flinn in San Francisco at rflinn@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net

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