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Pritzker Scion Backs Pot Plans as Getting High Gets Legal

Jan. 13 (Bloomberg) -- Troy Dayton, chief executive officer of the ArcView Group, talks with Bloomberg's Alison Vekshin about investment in marijuana companies and the outlook for the industry. ArcView is a California-based network of marijuana investors who offer start-up money to cannabis businesses. (Source: Bloomberg)

Robert Frichtel will have 10 minutes to persuade a roomful of investors in Las Vegas to part with as much as $6 million for a business leasing space for growing marijuana.

Frichtel’s firm will be among 12 companies making pitches Jan. 23 to as many as 70 angel investors assembled by the ArcView Group, based in San Francisco. Members include Joby Pritzker, whose family started Hyatt Hotels Corp., and Adam Wiggins, co-founder of Heroku Inc., a software maker acquired by Salesforce.com Inc.

“Everybody is running toward this as the next entrepreneurial wave -- the green rush,” said Frichtel, 50, president and chief executive officer of Advanced Cannabis Solutions Inc., based in Colorado Springs, Colorado.

Related: Pot Shares Rally 21% to 1,700% as Speculators See Green

Investment interest in the marijuana industry has surged since Colorado and Washington voters in 2012 legalized sales to anyone 21 and older. Long lines formed when Colorado retail shops opened Jan. 1. Twenty states, including California and Massachusetts, now allow the medical use of marijuana. New York may be next under a plan announced by Governor Andrew Cuomo.

“Every day, more and more people realize that cannabis will be legal and that it will be the next great American industry, and so they’re placing their bets,” Troy Dayton, ArcView’s CEO, said in an interview at his home office in a three-bedroom apartment in Emeryville, California, near Oakland.

Photographer: David Paul Morris/Bloomberg *** Local Caption *** Douglas Chloupek

A medical-marijuana dispensary in San Jose, California. Close

A medical-marijuana dispensary in San Jose, California.

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Photographer: David Paul Morris/Bloomberg *** Local Caption *** Douglas Chloupek

A medical-marijuana dispensary in San Jose, California.

“Anything that you have for any other product, you’re going to see for cannabis,” said Dayton, 36, a native of Hillsborough, New Jersey. “The question is when, how and who. The who is largely being decided right now.”

Rising Market

Prospects for legalization of marijuana are also galvanizing stock market investors. While regulators warn of scams, some of the biggest percentage gains in the market this year are being harvested by investors speculating on marijuana penny stocks. GreenGro Technologies Inc., which provides management services for medical dispensaries, has soared 409 percent to 22 cents after touching 80 cents Jan. 8.

Advanced Cannabis climbed 105 percent to $6.65 this year from $3.25. The company reported a $472,000 loss on $455 in sales in the quarter ending Sept. 30.

The Financial Industry Regulatory Authority issued an alert in August saying investors should beware of potentially fraudulent purveyors of stocks connected to pot and related services. Scammers may be promoting the shares, then selling them in what’s called a “pump-and-dump” scheme, the brokerage watchdog organization said in a statement. It didn’t name any companies.

Photographer: Matthew Staver/Bloomberg

Investment interest in the marijuana industry has surged since Colorado and Washington voters in 2012 legalized sales to anyone 21 and older. Close

Investment interest in the marijuana industry has surged since Colorado and Washington... Read More

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Photographer: Matthew Staver/Bloomberg

Investment interest in the marijuana industry has surged since Colorado and Washington voters in 2012 legalized sales to anyone 21 and older.

Accredited Investors

In ArcView’s network, the number of accredited investors has grown to about 110 from about 20 a year ago, Dayton said. Members, who include Republican New York Assemblyman Steve Katz, pay a $3,500 annual fee and the company seeks investors who can put at least $50,000 into the industry in the next year, he said.

ArcView did six times more business last year than in 2012, Dayton said, declining to provide revenue figures. ArcView projects the U.S. marijuana market that’s legal under state law will grow to $2.34 billion this year.

Support for legalizing marijuana reached a majority among Americans last year for the first time, at 58 percent, according to a Gallup poll based on telephone interviews with 1,028 adults and released in October.

Prosecution Threat

Investor interest is increasing as the threat of prosecution wanes. While federal law still classifies marijuana as an illegal substance, the U.S. Justice Department said in August that it wouldn’t challenge the legalization laws in Washington and Colorado, provided the states prevent out-of-state distribution, access to minors and drugged driving, among other things.

Mark A.R. Kleiman, a professor of public policy at the University of California at Los Angeles, said a federal crackdown on marijuana-related businesses “would be the least of my worries.”

“I just don’t see how there’s money to be made producing an agricultural commodity,” he said in an interview. “Once this is a competitive market, prices will be driven down to the level of costs. Costs for cannabis are very small, if it’s produced legally.”

‘Ancillary’ Businesses

While some investors are starting to feel more at ease about investing directly in marijuana businesses, many are sticking with so-called ancillary companies with less risk of tangling with the federal government, such as security equipment, mobile applications and advertising.

Among them is MassRoots Inc., a Denver-based company that last year released a free mobile app that enables users to share photos of their weed use, similar to photo-sharing service Instagram Inc.

Isaac Dietrich, MassRoots’s co-founder and CEO, said he secured $150,000 from three investors after pitching at an ArcView meeting in Denver last year. His app has 30,000 monthly active users, he said.

“We’re still exploring exactly how to monetize the app,” said Dietrich, 21. “We’re getting people to use the app on a daily basis. As people use it more and more and our network grows, then we’ll start focusing on advertising.”

Justin Hartfield said he started Emerald Ocean Capital LP, a Newport Beach, California-based marijuana private-equity firm, in March “to take advantage of the changing cannabis laws.”

Weed Mapper

“It was only last year when we started getting inquiries from investors, from entrepreneurs, from existing businesses that they wanted to expand, or they wanted to get into this space,” said Hartfield, 30, CEO of Emerald Ocean and WeedMaps.com, a marijuana dispensary location website that started in 2007.

His firm plans to raise about $10 million by the end of the first quarter to invest only in ancillary businesses “that don’t directly touch the sun,” Hartfield said.

Jim Willett, a retired business owner from Woodinville, Washington, said he has invested more than $1 million since joining ArcView in December 2012.

His investments include a Denver-based marijuana grower and store, Kansas City, Missouri-based Agrisoft Development Group, which sells software that allows marijuana businesses to comply with regulations for tracking their product from seed to sale, and Canna Security America, a Denver-based security equipment company for pot businesses.

“I’m looking for companies that are already established,” said Willett, 63, who plans to attend the pitch meeting in Las Vegas. “Something that will be desirable wherever marijuana is made legal.”

Willett said that when he was a Navy pilot, he monitored the California coast for freighters smuggling marijuana from Mexico and South America.

“I’ve never smoked marijuana,” Willett said. “I’m no crusader. I’m in it for the money.”

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman in New York at smerelman@bloomberg.net.

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