The cannabis market is made of the stuff that usually keeps venture capitalists away: uncertain regulation, difficult banking rules, a product with a social stigma.
And yet certain intrepid investors haven’t turned away.
The reason is simply. More states and nations are opening their doors to recreational and medical marijuana, and the potential of a large, lucrative market is at hand. This has many mainstream venture firms beginning to take a closer peek.
One active investor is Kyle Lui, a partner at DCM Ventures.
“There’s been a lot of interest in cannabis recently, but the cannabis space is really difficult,” Lui said. Still, he added, “There are a lot of folks who are looking at this space, really trying to study it.”
VCJ recently spoke with Lui about cannabis investing. An edited transcript of the conversation follows:
Q: Are mainstream firms showing new interest in this category?
A: Relative to a few years ago there’s absolutely much more interest from traditional VCs and growth-equity funds.
I think the bar to investing in the cannabis space is much higher. Because it’s highly regulated. Because the regulations are changing. Because of the difference between state and federal regulation.
But I’ve seen an increased interest in companies focused on CBD, particularly after the Farm Bill passed.
Q: Is the regulatory environment improving?
A: The regulatory side is generally moving in the right direction. If you look at where we have gone in the last five years, there’s increasingly more states coming online.
We have Canada legalizing cannabis federally. We have the Farm Bill passing which created a pathway for federal legalization of CBD. We have the SAFE Banking Act and the STATES Act, which are both being considered by Congress.
So I think on the regulatory side, there is a lot to be excited about.
Q: DCM backed Eaze, including in a $65 million Series C round in December. What do you see as the company’s competitive advantage?
A: If you were to look at Eaze’s key barriers, one is the fact that they have massive scale in California. It gives them the advantage to be able to more efficiently market to the customer base.
Two is you also have to have that level of scale to work closely with the brands and dispensary partners to drive best in class pricing.
And three is you do need to have that level of scale to attract the best talent.
Q: Where are you investing in the cannabis space today?
A: There are really two areas we’re incredibly excited about. The first is software and software-enabled services to this space. Many large traditional software companies are not going into cannabis and are not servicing cannabis customers, just given their policies. That leaves room for software companies to come help drive this market forward.
The second area is around brand. As the market continues to evolve, I think that the agriculture and cultivation side is getting largely commoditized and the value is starting to accrue to brands as a lot of everyday consumers enter the space.
Q: For companies, are the biggest regulatory hurdles banking issues, tax issues, or the gap between federal and state law?
A: I would say it is all the above and they are all related.
If you take the 30,000-foot view, it really is the distinction between how cannabis is treated at the state level and how it is treated at the federal level, which is very unique to cannabis. That causes a ton of complexity. The most obvious of which is around the banking and tax side.
As a Schedule I drug you’re not able to write off, for example, cost of goods sold. At the same time, these are real businesses. These are businesses trying to grow in a market where there is clearly a lot of demand.
Q: Cannabis still has a stigma attached to it. How to you address this narrative?
A: We really view cannabis as a product that can really help patients and consumers with a number of different issues, including a reduction of the reliance on opioids for pain management. (Also) the ability for people to really reduce stress and anxiety. We really view cannabis in the category of wellness and not in the category of vice.
Q: What do you see as the total market opportunity in cannabis?
A: We think the market is obviously large. Internally we believe it will be at least $25 billion in the coming five years (in the U.S.) and the global market opportunity by 2030 will potentially exceed $100 billion.
The U.S. will be the largest cannabis market for the foreseeable future. But there is definitely an expansion on the medical side globally.