Jan 16, 2017 · 8 minutes

Hold on: Is the National Cannabis Industry Association high?

This article is going to piss off a lot of libertarian pals of mine, but lately, I’ve noticed that the only people in California that I talk to who aren’t freaked out about what a Donald Trump presidency could mean for them are weed activists.

Which is strange because last week confirmation hearings started for Donald Trump’s Attorney General nominee Jeff Sessions, who has a history of opposing any legalization of marijuana, even for medical use.

Here’s Politico:

By nominating Senator Jefferson Beauregard Sessions III for attorney general, President-elect Donald J. Trump is about to put into the nation’s top law enforcement job a man with a long and antagonistic attitude toward marijuana. As a U.S. Attorney in Alabama in the 1980s, Sessions said he thought the KKK "were OK until I found out they smoked pot.” In April, he said, “Good people don't smoke marijuana,” and that it was a "very real danger" that is “not the kind of thing that ought to be legalized.” Sessions, who turns 70 on Christmas Eve, has called marijuana reform a "tragic mistake" and criticized FBI Director James Comey and Attorneys General Eric Holder and Loretta Lynch for not vigorously enforcing a the federal prohibition that President Obama has called “untenable over the long term.” In a floor speech earlier this year, Senator Sessions said: "You can’t have the President of the United States of America talking about marijuana like it is no different than taking a drink… It is different….It is already causing a disturbance in the states that have made it legal.”

So…. not a fan. It should tell you something about Sessions’ views on weed that the corners of the industry were hoping Rudy Giuliani would get nominated.

Leading up to the nomination, the NCIA had made only this statement:

Voters in 28 states have chosen programs that shift cannabis from the criminal market to highly regulated, tax-paying businesses. Senator Sessions has long advocated for state sovereignty, and we look forward to working with him to ensure that states’ rights and voter choices on cannabis are respected.

WTF? I thought you guys were supposed to be paranoid?

Oh, yes, the GOP’s adoration of states’ rights. The thing we in states like California remind ourselves as we rock in a corner terrified of the upcoming four years.

Couple things.

First of all, as Alex Halperin noted in his Weed Week newsletter Friday, Sessions said nothing reassuring. He made it clear that the hard fought legalization efforts could be turned back when he said, “The U.S. Congress made the possession of marijuana in every state — and the distribution — an illegal act. If that’s something that’s not desired any longer, Congress should pass a law to change the rule.”

Sessions also described a link between drug use and an increase in violent crime. And says Halperin:

Sessions expressed no support for the principle of state’s rights on marijuana, or legalization’s widespread popularity saying "I won't commit to never enforcing federal law." Instead he considers marijuana enforcement "a problem of resources for the federal government. 

It seems the NCIA was hoping an olive branch would buy them some cooperation from Sessions. We all know how well that works with this administration.

And again, Sessions will absolutely have the power to do something about it. Again, from Politico:

With little more than the stroke of his own pen, the new attorney general will be able to arrest growers, retailers and users, defying the will of more than half the nation’s voters, including those in his own state where legislators approved the use of CBD. Aggressive enforcement could cause chaos in a $6.7 billion industry that is already attracting major investment from Wall Street hedge funds and expected to hit $21.8 billion by 2020….

We’ll get to this in a moment… “major investment’ is a stretch. Still:

Without any protection from Congress, every marijuana grower and dispensary owner who came out of the shadows to become a taxpaying member of the legal recreational cannabis industry in Colorado, Oregon, Washington state and Alaska has exposed himself to potential criminal prosecution by a DOJ run by Sessions. A list of potential defendants would number in the hundreds (The National Cannabis Industry Association, a trade group, boasts more than 1,000 dues-paying members). The higher the profile of these cannabis businesspeople, the more at risk to federal prosecution—like when the Justice Department under George W. Bush went after Tommy Chong of "Cheech & Chong" fame for selling glass pipes across state lines.

But this part of the article should give everyone comfort:

[T]he only thing that could stand in Attorney General Sessions's way of launching a new front in the marijuana wars is the president-elect.

So what does Trump think? Who the hell knows. He said this at the February CPAC gathering about states rights:

"If they vote for it, they vote for it. But they've got a lot of problems going on right now in Colorado. Some big problems. But I think medical marijuana, 100 percent.”

But let’s assume none of that -- whatever the hell Trump was describing -- actually happens, or does happen, or whatever’s worse. Let’s go with the best case scenario and assume Sessions does respect the sovereignty of states’ rights, I don’t see that being great for the hugely hyped marijuana industry either in the next few years.

CB Insights offered a reality check this past week with a few reports of just how much money has gone into pot companies. Although they described it as a “boom time” and an “explosion of funding” and a “burgeoning industry,” the numbers weren’t impressive. In 2015 -- the biggest year on record for weed funding-- only $225 million was spread across 106 deals total. And in 2016, funding pulled back. This despite 2016 ushering in a wave of 29 states and the District of Columbia now having legalized medical marijuana in some form. From 2014 to 2016 only 147 marijuana companies were funded and recieved any venture capital at all.

Yes, that’s up some 3000% since the time when it was mostly illegal in the US. That still doesn’t mean it’s a boom market. So far the so called “green rush” has been way more talk than it has been funding or action.

To put the dollars into perspective: The total venture capital raised in just the fourth quarter of 2015 was $37 billion. The entire marijuana industry is the total of one or two individual mega-rounds. Even content companies -- long reviled as a way for VCs to make money-- raised nearly $1 billion in 2014.

There is decent evidence a large industry will eventually develop here. In 2015 the legal weed industry had sizable revenues of some $5.4 billion, and the hope is that will grow dramatically given the illegal market is estimated at some $40 billion. Alcohol sales are north of $200 billion. (And, again, thanks to alcohol being legislated at the state level, VCs have lost hundreds of millions on different ecommerce booze companies.)

Those are the numbers that marijuana boosters tout. Not so much the $225 million figure. It is a shockingly small haul of money for an industry that some pundits argue could one day “be bigger than the Internet,” but it’s not surprising.

There’s such a convoluted crazy quilt of individual states’ rules-- many of which are still fluid-- that it’s difficult to conceive of a scalable business. Investors are even limited to whether or not they can own shares in the companies in some cases, depending on the state where the company is founded and whether or not the investors are residents there.

I don’t see how another four to eight years of the marijuana industry -- at best-- being protected by states rights is a plus for this market’s evolution.

Wrote Halperin in a Pando profile of Ebbu, a high-profile weed startup that raised north of $9 million in capital:

The legal obstacles companies face might be more daunting than the scientific problem. In Colorado, generally regarded as the world’s most mature marijuana market and an example studied by other states, the industry’s legal framework is just over three years old and individual rules change often, with potential implications far beyond the state’s borders.

If Colorado companies follow state laws, they’re unlikely to be raided and shut down by the federal government —  during the Obama administration, at least — but they operate in unmapped terrain. For marijuana companies, bedrock business needs like fundraising, intellectual property protection, selling in other legal states and simply opening a bank account involve layers of complexity that companies in other industries don’t have to think about.

So lemme get this pitch straight: You could be raided and shut down at any time? And the top law enforcement officer of the land thinks any state legalization was “a tragic mistake”? Your industry lobbying association has taken no stance on this? And the only hopes of someone intervening are Donald Trump?

Where do I wire the cash?

I know the last few years represent huge change in pot legalization, but that doesn’t mean this is yet a fundable category, which the paltry investment numbers-- falling already last year-- seem to reflect. And bear in mind: 2015 was an insanely frothy venture capital year.

VCs tend to hate companies that are “science projects.” They tend to hate regulated industries. They loathe industries where legislation varies state-to-state. Many of their LPs still aren’t comfortable with the morality of them investing in drug companies. If the weed industry is going to explode the way activists hope, it may have to do it without the venture industry’s deep pockets behind it.