The Conference Where Guys in Suits Pitch Marijuana Start-Ups to Other Guys in Suits

Is this the pot-com bubble?

Sitting atop San Francisco's Nob Hill last week, in a banquet room of the opulent Fairmont Hotel, I began thinking maybe I ought to invest in marijuana. "You really should," said a woman at my table, who reminded me, in her wholesome, middle-aged earnestness, of my mom. About a year ago she poured money into Poseidon Asset Management, a marijuana hedge fund that requires a minimum investment of $100,000. The fund earned a 67 percent return in 2014, besting the S&P 500 by a factor of six. Now she's trying to figure out what to do with all of her extra cash.

As we talk, dozens of professional investors are listening to a handful of suit-wearing pot entrepreneurs compete onstage for start-up funding. There's SweetLeaf, an organic edibles company that will target the Whole Foods demographic; Intelligent Light Source, a maker of hydroponics lamps that has ties to MIT; and VapeXHale, a high-end vaporizer controlled by an iPhone app. I'm feeling pretty good about all of them, not least because they've already been vetted and incubated by the ArcView Group, the gathering's organizer and a sort of Y-Combinator for pot startups.

Y-Combinator partner Justin Kan had, in fact, lectured the crowd on pot investing strategy earlier in the conference. "People are breaking the law to go buy your product—we call that a 'product-market fit,'" joked Kan, who last year sold Twitch.TV to Amazon for $970 million. Cannabis "is any investor's dream. There's a massive opportunity to have first-mover advantage."

Although most of nation’s $40 billion marijuana industry is still illicit, the legal part is growing fast. According to ArcView's annual report, “The State of Legal Marijuana Markets,” legal cannabis sales will grow 32 percent in 2015 to $3.5 billion. By 2019, it predicts, sales will triple again.

By 2019, legal cannabis sales could top $10 billion.

Not surprisingly, this shift has begun to attract the sort of investors who have more in common with Kleiner and Perkins than Cheech and Chong. In early January, Peter Thiel's Founder's Fund, best known for its early investments in Facebook and AirBnB, invested $75 million in Privateer Holdings, a company that owns the Canadian medical marijuana producer Tilray and the Yelp-for-stoners website Leafly. Later this year, Privateer is launching a global marijuana brand in a partnership with relatives of Bob Marley.

Of course, getting rich off pot isn't as easy at it may seem. After rising to new highs early last year, publicly traded marijuana stocks have shed 70 percent of their value. Steve Berg, the CFO of O.pen.VAPE, the maker of a popular marijuana vapor pen, blames the crash on irrational exuberance fueled by "stock hucksters and get-rich-quick artists." That's where private equity firms run by industry veterans come in. O.pen.VAPE, for example, recently launched its own venture firm, which accepts a minimum investment of $100,000 and offers a 20 percent return.

Most banks and professional auditors still refuse to work with pot businesses that touch the plant.

On Tuesday afternoon, Berg, who cofounded ArcView with the legendary Oakland pot dispensary owner Steven DeAngelo, moderated a panel on "Lessons from the Due Diligence Battlefield." Most banks and professional auditors refuse to work with pot businesses that touch the plant. Which means that investing in them, even if they only operate where pot is legal, can be a leap of faith. The panelists agreed that investors need to keep an eye for exit strategies: Start-ups that offer ancillary services to growers—the so-called "shovels and pickaxes"—will soon be attractive buyout targets for bigger companies. Those that actually grow and sell marijuana, on the other hand, are income-generation plays, since they're unlikely to get bought out by the likes of Budweiser or Phillip Morris anytime soon.

Standing in line that afternoon at the meeting's lavish lunch buffet—the fried eggplant was excellent—I overheard two investors discussing how the pot sector is the perfect start-up incubator. "The nice thing about marijuana is that it allows these little companies to prove their concepts without pressure from the big guys," the guy said. "Once they get a foothold in pot, then they can expand to other sectors."

One example at the ArcView conference was DNATREK, which markets a DNA-based "biological barcode" that allows buyers to track the age, origin, and adulteration of produce. The company's CEO, Anthony Zografos, saw his biggest potential customer as Big Ag, but came to the pot conference because he knew strict product tracking is likely to be mandatory in most states that legalize marijuana for sale.

I was seeing far more suits than I'd seen at the fanciest of San Francisco tech conferences.

Zografogos, like almost everyone else at the ArcView forum, was wearing a blazer. I was seeing far more suits, in fact, than I'd seen at the fanciest of San Francisco tech conferences. It struck me as odd until I realized that in the world of pot, the suit is the new tie-dye. It's subversive and countercultural in a way that a suit anywhere else simply isn't.

Later on, I ran into Dennis Peron, the venerable 69-year-old pot legalization advocate, who was wearing a very loose tie and no coat. People in suits kept coming up, thanking him for all he's done, and rubbing his shoulders like he was the Buddha. I asked what he thinks of the new face of pot. "I hate it," he said. "It's no fun anymore." But here he was. And he actually seemed to be having a pretty good time.

Everyone did, really. At the end of the daylong pitch session, it fell to ArcView CEO Troy Dayton to announce the winning start-up, which would receive a $10,000 prize. Clad in a conservative white shirt and gray suit, he bounded up on stage amid pounding rock music and whipped through slides detailing how the companies stacked up against one another. Then he paused and started to sweat. The name of the winner had escaped him. "I . . . actually, they gave me the slide," he said with good-natured smile, "but I don't remember which one it is."