Investors Betting $2 Billion on Cannabis Startups as Stocks Crash

Cannabis stocks are experiencing a major selloff this year but there’s certainly no shortage of cash for new startups in the industry. Bullish venture capital (VC) investors have pumped close to $2 billion into fledgling marijuana companies since the start of the year through to the end of October. That’s more than 100 times the $17 million raised by cannabis startups in 2013, shortly after the industry gained legal status in the state of Colorado, according to a recent major story in Business Insider.

Eight of the startups that have raised the most cash and the amount they have raised include Pax Labs with $546.7 million raised, Parallel (formerly Surterra Wellness) with $366.2 million, Privateer Holdings with $182 million, Eaze with $166 million, Flow Kana with $147.8 million, PharmaCann with $100.8 million, Grassroots Cannabis with $100 million, and Integrated CBD with $95.7 million.

Key Takeaways

  • VC investors have pumped $2 billion into cannabis startups this year.
  • In 2013, cannabis startups raised just $17 million.
  • Startup frenzy occurs as publicly traded companies experience selloff.
  • Early-stage startups garnering the majority of VC investments.

What It Means for Investors

Many pot stocks have lost more than half their value this year as a number of concerns have hit the industry. The ETFMG Alternative Harvest ETF (MJ), a fund that contains some of the biggest names in the cannabis industry, is down more than 30% since the start of the year. Driving the decline are signs of a slower pace of growth in demand for legal cannabis in Canada, where the drug has been legalized for both medicinal and recreational use, as well as regulatory and legal hurdles in the U.S. 

While those hurdles may be causing pain for the shares of publicly traded companies, cannabis startups, especially ones in the early stages of the startup lifecycle, are garnering more cash than ever. Startups at a later stage in the growth cycle are still having trouble raising cash since THC, the psychoactive component in marijuana, is still federally illegal in the U.S., a detractor for many big VC funds.

Later-stage startups at a point of producing and distributing the drug are a “touch-the-plant” variety of startup, and therefore face a lot more restrictions and regulations than do earlier-stage startups, which might only be engaged in developing a piece of software related to the industry. While both types of startups depend on the survival of the cannabis industry, institutional VC funds still draw a hard line between the two, avoiding the touch-the-plant variety to appease their main investors, including pension funds, endowment, and sovereign wealth funds. 

Pax Labs, for example, is a non-toucher of the plant and makes cannabis vaporizers and vaporizer technology. Founded in 2007, the company raised $420 million in a Series B round of funding in April of this year for a post-money valuation of $1.7 billion. Some of the companies many backers include Prescott General Partners, Fidelity Investments, and Tiger Global Management among others. 

Parallel, on the other hand, does touch the plant as a cannabis cultivator and retailer. The company was founded in 2014 and has operations in Florida, Texas, Nevada, and Massachusetts. Parallel raised $100 million in a Series D round of funding at the end of June, and the company’s main backers are Valkyrie Capital and Wychwood Asset Management.

Other startups that have raised a large chunk of money this year and their specific lines of business include private equity firm Privateer Holdings, which invests in cannabis companies, cannabis delivery service Eaze, cannabis distributor Flow Kana, cannabis cultivator and retailer PharmaCann, medical cannabis cultivator and retailer Grassroots Cannabis, and industrial-scale hemp oil manufacturer Integrated CBD.

Looking Ahead

Overall, it’s been a strong fundraising year for cannabis startups. But judging from the fact that total funding declined from $967.1 million in the second quarter of the year to just $452.8 million in the third quarter, raising cash in 2020 may get a lot tougher unless more regulatory hurdles are removed.  

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