Top Investor Touts $60B Market for Cannabis. Just Don't Call It Marijuana.

Q&A May 11, 2018 at 05:09 PM

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When the U.S. government was dead-set on banning marijuana in the 1920s and 1930s, it was propagandized as "concentrated sin" and "the weed with roots in hell." Today, weed is a multibillion-dollar industry and the fastest growing market in America, says Troy Dayton, co-founder and CEO of The Arcview Investor Network, in an interview. He describes the firm as the top source of capital for the cannabis industry.

Now a $10 billion market in North America, legal cannabis will grow to about $24 billion by 2021 and globally to $60 billion by 2027, according to Dayton.

Federal legalization could be a reality within a year or two, and major makers in the consumer products space, as well as giant mass merchandisers, are expected to join the party shortly thereafter, argues Dayton, who Fortune magazine names as one of the seven most powerful people in the cannabis industry and Forbes calls one of its Top 10 influencers.

Arcview connects about 600 high-net-worth accredited investors — including family offices and venture funds — with the highest-potential companies in the cannabis business. These investors have poured more than $160 million into 170-plus cannabis-related ventures, and the firm has raised more than $3 million for the legalization effort. In 2017, the firm's members placed more than $50 million in Arcview-curated companies.

From April 30 to May 2, Arcview hosted an event in Vancouver, British Columbia, to bring together cannabis companies and investors. Its next similar conference will be held in San Francisco on July 19.

In the interview, Dayton, 40, discusses how the confluence of three big developments in April marked "a turning point" in the path to federal legalization: President Donald Trump's signaling support for state marijuana legalization; former House Speaker John Boehner's joining the board of cannabis cultivator and distributor Acreage Holdings; and Senate Minority Leader Charles Schumer's introduction of a bill to federally decriminalize cannabis.

Nine states and the District of Columbia have legalized recreational marijuana use.

"Cannabis Retail: The $23 Billion Opportunity," an October 2017 report from Arcview Market Research and BDS Analytics, forecasts that, once cannabis is federally legalized, business opportunities could be "even more lucrative" than when alcohol prohibition was repealed in 1933.

The profile of the adult cannabis consumer in two states where weed is legal — California and Colorado — is quite different from the stereotype logy stoner, the report indicates. In California, the average household income of cannabis consumers is $93,800; 69% are employed full time; 64% are parents, and 37% have children age 10 or younger.

Most who buy cannabis at either medical or recreational dispensaries in those two states, the report says, use it to "manage anxiety": Consumption is "less about getting high and more about relaxation, pain relief and a better night's sleep."

Dayton has devoted 20-some years working on changing the cannabis laws. He co-founded Students for a Sensible Drug Policy, was the lead fund raiser for the Marijuana Policy Project and is a founding member of the National Cannabis Industry Association. Some years prior to starting Arcview with Steve DeAngelo, founder of Harborside Health Centers — the world's largest medical marijuana dispensary — Dayton helped launch Renewable Choice Energy, which Schneider Energy acquired last year.

ThinkAdvisor recently interviewed Dayton, on the phone from Arcview offices in Oakland, California. He discussed current and future investing opportunities in cannabis companies, and innovations under development, such as the sharp focus on specific strains for specific purposes. Dayton launched Arcview to speed up legalization by "using the engine of business to bring money and credibility to cannabis to help move the political needle," he says. "It's a nice symbiotic relationship that I set out to create, and it's starting to work."

Here are highlights of our conversation:

THINKADVISOR: Why do you prefer to use the term "cannabis" rather than "marijuana"?

TROY DAYTON: In the 1920s and 1930s, cannabis was used a lot as a medicine. To demonize it in order to gather support to ban it, [the government] called it marijuana to associate it with Mexican immigrants who were smoking it, as opposed to using it in a tincture, or other ways, as a medicine.

Where does cannabis legalization stand now?

Three things that came out in a row this month — Trump saying he'll support states' rights, Boehner joining the board of Acreage and Chuck Schumer coming out with his bill — marked the turning point for a clear line in sight to the end of federal prohibition. When you've got the top Democrat, the [former] top Republican and the president all agreeing at the same time, what's in the way?

But what do you think Trump will wind up doing?

This is a wildly popular issue, and one of the few that's bringing America together: There's agreement on both sides of the aisle. It's a huge opportunity for Trump and the Republicans and, frankly, for the Democrats to get a win. They're all sort of falling all over one another to figure out who's going to claim credit.

How big is the cannabis market?

This is a multibillion-dollar market with a 27% compound annual growth rate in North America. You won't find another multibillion-dollar market growing at that clip that doesn't have multinational companies involved.

What investing opportunities does the cannabis industry present right now?

It's a real opportunity for smaller investors and smaller companies to get a swing at the market before they're competing with the big dogs. That's why most of the investment opportunity is geared to the private market, not so much the public market. Most of the early-stage companies won't be hitting the public markets for a while.

What kinds of "big dogs" will get into the business?

Big alcohol companies, big food companies, big agriculture companies — any big CPG [consumer packaged goods] company would be interested in cannabis.

Say, Nabisco?

Yes. I can't imagine any big CPG company that doesn't have somebody on their team looking heavily into this right now and figuring out their plan for how they'll eventually enter the market.

It's obvious that legalized cannabis poses a big threat to the alcohol-beverage industry.

That's why the alcohol business is interested! They're seeing cannabis impacting alcohol sales in Colorado, which is now bringing in more money from cannabis than from alcohol. Alcohol companies would be wise to invest in cannabis as a hedge — also, it just makes sense: They understand highly regulated, highly state-specific markets, which is what cannabis is.

Please elaborate on opportunities in the agriculture business.

Agriculture in general is seeing a boom because cannabis is such a specialized product with high margins, at least at present. So if you're innovating in plant science, cannabis is the plant you want to be innovating for. You're seeing a lot of companies getting into that space and also a lot of acquisitions at that crossroads. Scotts Miracle-Gro, a multibillion-dollar public company, has made hundreds of millions of dollars worth of acquisitions recently specifically targeted at businesses that are innovating in the cannabis market.

What sorts of innovations?

Innovations in terms of nutrients, supplies, light and other such areas. We haven't even begun to tap into what this plant can do. [Companies] are just starting to make new products that do different things. And the opportunity for innovation is going to be there for decades. That's going to come from smaller players who can move faster and think differently from the incumbents.

What else is being worked on?

They're trying to create a product that's a much better substitute for alcohol. A company is working on making a brewed cannabis liquid that mimics the experience of alcohol but without the hangover.

Anything else that's notable?

Companies are looking at the genome [map] of cannabis and cataloging the different strains. That wasn't available in the underground market. By knowing the genetic information, they're able to create things that are targeted at specific purposes.

Like what?

If someone wants to [use cannabis] to be creative, they'll have better information about what strains can be used for that, or what kinds of [cannabis] genetics lead people to experience creativity or strains that create hunger, which can have amazing applications for medicine.

What advantages does innovation in cannabis have compared to those of coffee, alcohol or tobacco?

You can only make those three stronger or lighter, or change the taste. With cannabis, you can do those; but there are also different routes of administration [smoking, eating, vaping, etc.] and duration of experience. Cannabis can create a bunch of different feelings, and they're getting better and better at dialing that in. What brand developers and merchandisers will create with that palette will be remarkable.

So will cannabis be target-marketed?

We've only just begun to see what this product can do and who the segments are that want it. We're just beginning to really understand what people want in order to create products that meet those needs.

To what extent are millennials driving the cannabis market?

Not as much as you'd think. There's a perception that cannabis consumers are [predominantly] young males. But, increasingly, what we've seen in states as the adult-use market matures, is that the customer base is skewing older and is more diverse from a gender and racial perspective. The average profile looks nothing like the stereotype people assume from picking up a copy of High Times.

What else is happening politically in favor of federal legalization?

In the Illinois gubernatorial race, a Republican and a Democrat are trying to outwit each other on who is more pro-cannabis. In the [Democratic primary] race for New York governor, Gov. Andrew Cuomo has been standoffish about cannabis, but he's really getting poked on this issue by his opponent [Cynthia Nixon] and is seeing how popular it is. So he's slowly walking himself back.

What about Senate elections?

In Texas, Rep. Beto O'Rourke [a Democrat] is trying to unseat Sen. Ted Cruz [a Republican], and one of the big things he's hitting him on is cannabis. A poll that just came out shows that 61% of Texans support cannabis legalization! In Texas!

What are other issues to be aware of when investing in cannabis companies?

For public companies, the same things you'd look at with any other company. The U.S. companies, if they're legitimate and solid, are generally undervalued. It all depends on when you think federal law will change. When that happens — boom — you're likely to see a really big increase. The big companies will enter in short order. It's just a question as to whether they'll build or buy.

So would there be a shakeout of the smaller companies?

Certainly smaller companies need to make sure they have a strong strategy. But in the alcohol industry — to use that as an example — which has been legal for a long time, one of the biggest places for private investment and some of the biggest opportunities [today] are in microbreweries and craft distillers because people are interested in a sense of craft.

How does that relate to cannabis?

The same [type of] phenomenon, if not a bigger one, will happen with the cannabis sector because of that pull toward authenticity. So not every one of the small companies is going to sell when the big dogs come in. Some of them will hold on and become big dogs themselves.

What's happening in the Canadian cannabis industry?

The stocks are probably overvalued because Canada doesn't have the same federal-state conflict we have in the U.S., and they've been able to have a lot of institutional capital come in to very few companies. A lot of Canadian companies are the biggest investors now because they're very flush with cash as a result of the run-up of the market there.

Are developments progressing in the use of medical cannabis?

We're only in the second or third inning. We're just starting to get really specific about the medicinal application of cannabis, looking at its components and seeing what they can do.

What are the challenges to the cannabis industry?

There are plenty. This is the hardest industry in the world to be in. It's very tough for these businesses to use banks, which causes huge problems. There's the problem of the IRS tax code, which essentially charges cannabis companies at a much higher tax rate. That limits capital, opportunity and jobs. Another big problem: You can't move the product across state lines, which is horribly inefficient. Each state has different laws around labeling, taxes, etc.

Is there a positive side to any of that?

People who are staying out of the market because of those problems provide an opportunity for others to get in on the ground floor. As those barriers are lifted and a flood of investments and entrepreneurs come in, that's where the early [-to-the-space] people will get their rewards.

How much of a threat does Kevin Sabet, executive director of Smart Approaches to Marijuana, pose to federal legalization?

He seems to be the only opponent in the world on this issue! They're losing, and that's because of the public's recognition that the propaganda of the last 75 years around cannabis — that it's dangerous and needs to be prohibited — is a fraud. They're recognizing that cannabis is safer than alcohol, that adults should have the right to choose it and that we should have jobs and tax money and everything else that comes with [an industry]. The sky doesn't fall when cannabis becomes legal.

I recently interviewed a psychotherapist with many Wall Street clients who use cannabis, which, he says, negatively affects their work because it "dulls" them and "kills motivation." How is the industry going to deal with those sorts of issues?

Like anything — whether it's smartphones, social media, video games, alcohol or tobacco — people can have not-good relationships. But all the data show that cannabis is really low on that list. So to the degree that people wind up using cannabis instead of alcohol or tobacco, it should be a net benefit in terms of societal or personal harm because of that substitution effect. That's not to say cannabis is harmless, but it's clearly in the realm of things that we should let adults in a free society have the right to make choices about.

You're 40 and have been involved in trying to legalize cannabis for more than 20 years. So I assume you use it, or have used it?

I'm a light consumer; I've never been a big consumer. I was more interested in this because I love freedom and the social justice aspect of it. The idea of free enterprise really excites me as well — an opportunity to build a business. But the product itself — I enjoy it, but it's not a major part of my life.

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