Cannabis pitches can be hit or miss
Venture capitalists find some entrepreneurs don’t have enough high points
“What we want VCs to know is that the truth is coming out. You have to listen to the people.”
Evan Horowitz, co-founder of Weed-Club, a cannabis business hub
The invitation to the 420 Pitch competition last week in San Francisco included this warning: “No cannabis consumption in the Twitter Building. Stick around for details on the after-party.”
Other than that, the marijuana-focused event looked like something you’d see in Silicon Valley five days a week: 10 startups pitching their ideas to more than 100 major tech investors, “Shark Tank” style.
That was reassuring to organizers, who interpreted it as another step in integrating two of California’s major industries — tech and weed.
But there’s still a long way to go. Investors are wary of dropping cash on an industry that remains quasi-legal in California. Monday’s event was designed to show that the weed business is
slowly becoming professional.
“At what point does the traditional VC community say, ‘Aha. This has been demonized in the past,’ ” said Evan Horowitz, co-founder of WeedClub, a cannabis business hub that convened Monday’s event at the Market Street tech incubator Runway. “What we want VCs to know is that the truth is coming out. You have to listen to the people. A majority of people in a majority of states want marijuana.”
Until recently, deeppocketed tech investors have largely avoided California’s $2.7 billion marijuana market — but not because the VCs have any moral problems with the product. Many represent funds that won’t invest in illegal products. Others are concerned that banks don’t want anything to do with the cannabis business as long as there is a federal prohibition.
Needing confidence
Even in a world where investors dropped $1 million on a messaging app that just says “Yo,” all-cash businesses don’t inspire confidence.
“A lot of venture capitalists smoke,” one VC said privately before the pitches began. “This is about legality. They don’t want to deal with (cannabis) until it’s fully legal. It’s not worth the risk.”
While venture capitalists invest millions in Uber and Airbnb, which often operate in violation of local laws, they won’t invest in pot. Breaking a city’s ordinance means fines. Flaunting the federal government’s marijuana prohibition can get you a knock on the door from unsmiling men in dark suits.
But valley investors are starting to grow less reluctant.
Venture capitalists see the money the weed industry is virtually printing and have started to get into position to harvest it, anticipating that in 2016, Californians will vote to make marijuana legal for adult recreational use. Analysts say legalization could double the market. In Colorado, one of four states that has legalized all types of weed, the combined legal and medicinal markets generated $700 million last year, and sales are projected to hit $1 billion next year.
The collective investor interest was piqued this year when the Founders Fund, an investment firm started by PayPal cofounder Peter Thiel, joined a $75 million round for Privateer Holdings, which invests in several marijuana companies.
“Now is the time to get in,” Horowitz urged the investors Monday. “It’s going to be too late when legalization hits.”
But until legalization occurs, the weed industry has a lot to learn about business from the venture capital world. Before they pull out their checkbooks, venture capitalists want to know how a business is going to scale. How it is going to dominate a market. And what, in valley parlance, is the “secret sauce” that will enable it to remain a step ahead of competitors.
Investors showed little interest in marijuanarelated paraphernalia. Privately, they said they weren’t interested in funding something you could find in a head shop. “That doesn’t scale,” said one.
And they showed little desire to be cheerleaders for legalization. Instead, they fired tough questions at new entrepreneurs like Alex Garcia, who was pitching Emerald Vapes, a new type of cannabis vaporizing cartridge.
Investors made clear to him that they care about the green. Their green.
“You’re asking for a six-figure raise for what?” asked investor and pitch contest judge Alex Kwon. “Where are you going to use that money? How are we going to get that back? If you get to a scale, and you’re going to ask for more money, I want to know what my money is going to be used for.”
Tough questions
Eric Ferraro, an attorney who specializes in emerging tech firms, asked what differentiates Emerald Vape’s technology from rivals. “How are you going to capture the market?”
Ultimately, the panel wasn’t impressed; the company received the lowest score among the competition’s five finalists. Afterward, Garcia said he learned from the judges’ “brutal honesty.”
“We need to up our game,” said his partner Evan Cuellar. “And we will.”
Other pitches during the night came from all over the weed map. One company pitched a “wine club for medical marijuana,” another called Synchronicity said it would cater to women, while a third hawked a “members-only private cannabis lounge.” There was a reusable bamboo box — “It’s sustainable!” the pitchman said — to replace the single-use plastic containers that dispensaries use to package their product. Another sung the virtues of organ- ic fertilizer.
For some, this was one of the first times they pitched in front of a big crowd.
“No amount of cannabis will make you comfortable with public speaking,” Kyle Powers said to open his presentation for PrestoDoctor, an online platform connecting medical marijuana patients to doctors.
Angel investor and contest judge Lilian Chou empathized with the newbies. But now, she said, it’s time for the industry to “take a page from the books of the old entrepreneurs” and explain their value proposition.
“They have to up their game,” said Chou, who said she does not consume cannabis. “This is not a fringe business anymore. This is going to be coming to the main- stream. So they need to behave as though they are mainstream now. It’s not just like, ‘I’m your buddy. This is really great idea. Let’s smoke some pot.’ ”
Chou and other investors say they saw flashes of the industry’s potential Monday. Several noted the elevating pedigree of people coming into the business — from places such as MIT and Google.
“I hope the investors look at this, too, because there is some serious stuff going on here,” Chou said. “There are some people here — myself included — saying, ‘I really want to see your business plan.’ I think there is something there.” Joe Garofoli is a San Francisco Chronicle staff writer. E-mail: jgarofoli@sfchronicle.com Twitter: @joegarofoli