The number of US states with laws legalizing marijuana for one purpose or another—i.e. recreational or medical—has only continued to grow. The cannabis industry is starting to look less like the Wild West and venture capital deal flow has largely reflected this over the past few years. Total capital invested jumped in 2014, and then proceeded to more than triple the following year. Although 2016 saw a drawback, that can be at least partly attributed to a general dip in overall venture activity.

Venture activity in cannabis startups

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Source: PitchBook

VC behavior thus far seems to indicate that firms expect to see the greatest returns in ancillary fields like the specialized logistics, technologies, finance and media supporting the cannabis industry. Indeed, some of the highest round post-valuations were reported by companies like Eaze ($115 million), which develops an on-demand app that automates the patient verification and caregiver dispatch process for the medical marijuana field; Privateer Holdings ($490 million), a PE investor and Peter Thiel beneficiary focusing on the cannabis marketplace; and Merry Jane (~$26 million), which operates an online media platform on cannabis culture and news. In another notable deal, Leafly—which provides an online platform to search for cannabis strains as well as other content—was acquired outright by Privateer.

While almost all of the highest-valued companies are in these ancillary fields, an impressive percentage of deal flow comes from the healthcare sector. This is predictable, given that cannabis is legal for medical purposes in a far larger number of states than it is for recreational use and customer demand for medical products is presumably reliable. Even then, clothing, chocolates, ointments, and pharmaceuticals seem to have greater cachet for investment than pure cannabis agriculture or retail. Sophisticated consumer products appear to retain some punch in a landscape mostly dominated by lab testing, specialized business services, software, media and emerging financial firms, but the raw material itself seems predominantly left to dry by VC investors, and despite the impressive totals, most healthcare investment in cannabis remains on the angel- and seed-level.

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In Washington (The “Ever-Green” State), the two highest-valued marijuana-related companies are the aforementioned Privateer and Headset, which develops a cannabis business intelligence platform. Significant new opportunities in this vein would seem likely, particularly if and when the trend toward legalization of recreational use continues in new markets.

Since cannabis generally lacks a pre-existing legal, physical and financial infrastructure, and faces potentially massive demand, it seems reasonable that financial and logistical services and technologies may be significant areas of growth. It may be premature to speculate, however, particularly given the unpredictable political climate and complex interplay of state and federal law.

Companies directly producing consumer goods are not completely out of the picture. Bhang, a producer of medicated chocolates, was bought out in 2014 by Mentor Capital, a California investment firm that valued the company at $65 million, and producers of cannabis-based medical products like Minnesota Medical and Leafline Labs represent a notable source of retail clout, albeit within a specialized niche.

Read more of our coverage on the cannabis industry here.

Article by Henry Apfel, PitchBook