The business of selling pot...legally

Medical marijuana on display at a dispensary in Seattle.

Medical marijuana plants on display at a dispensary in Seattle.

Brendan Kennedy and Michael Blue, CEO and CFO of Leafly.com.

Eighteen states and the District of Columbia now permit medical use of cannabis -- pot with a prescription. Voters in Washington and Colorado just legalized recreational marijuana: not de-criminalization, but a system where the state won’t bust you, but will set up a new system to regulate and tax production, distribution and sale.

And that’s the backdrop to a business story. We’re now seeing the rapid emergence -- in the ‘grey-market-space’ for medical and recreational marijuana -- of "pot-trepreneurs" including, in Seattle, where this reporter met revelers on a recent weekend night. The streets and clubs were full of ebullient crowds celebrating legalization of not only gay marriage, but of recreational pot.

Mike Graves is a videographer and recreational marijuana user. He says now that he’ll be able to buy and smoke legally, he wants consumer services.

“I would like to have a compendium established of various strains and their effects,” says Graves. “There are strains of pot that make you more mellow, there are strains that make you more up, more social. I’d be a more educated purchaser.”

Enter Brendan Kennedy. We met at a downtown Seattle office the next morning. He’s 40, dressed in business attire, with an MBA from Yale and stints at Silicon Valley venture capital firms on his resume. Kennedy is CEO of Leafly.com. It’s like Yelp for medical marijuana.

“What Leafly does is to provide 50,000 patient reviews about the medical effects of cannabis,” says Kennedy. “These are all the different dispensaries. You can read dispensary reviews. Patients can look for something that helps with nausea or migraines, or they can look for something that deals with pain or euphoria. Leafly deals with both of those segments.”

Here’s where it gets interesting. The startup was already going gangbusters with web traffic and advertising from medical marijuana dispensaries up 20 percent per month. Then, legalization passed in Colorado and Washington. Kennedy and his private equity partners at Privateer Holdings are finishing a $7 million first investment round to plough into the cannabis industry (not production, distribution or sale of the drug, but businesses related to it, like media, marketing, supplies, services, etc.). And Kennedy says the firm is very comfortable going after this new market.

“People who are using cannabis for more recreational purposes, rather than open a bottle of chardonnay Friday night at the end of a long week to relax, they happen to use cannabis,” says Kennedy. “And we’re building something that has a mainstream look and feel.”

Kennedy has the branding worked out. “It’s Wine Spectator or Cigar Afficionado for cannabis,” says Kennedy. “The big difference is no one will argue that alcohol has health benefits.”

The problem is many, including the federal government, will argue marijuana doesn’t boost your health either. “This is still illegal under the federal laws,” says Beau Kilmer, co-director of the Drug Policy Center at the Rand Corporation and co-author of the recent book, “Marijuana Legalization: What Everyone Needs to Know.” Kilmer says medical marijuana is already a legal grey area -- sometimes tacitly tolerated by the feds, sometimes not. There have been crackdowns on dispensaries and suppliers suspected of "leaking" extra medical marijuana into the nationwide black market for recreational users. Kilmer says there’s no telling what the feds might do with legalization of recreational pot.

“The DEA, the U.S. attorneys, the IRS -- they could potentially prioritize going after those entities that are producing massive amounts,” says Kilmer. “Or they could choose to go after those entities that are actively marketing to youth.”

Kilmer says they might also go after advertising. And that could make it complicated for websites that don’t sell any marijuana or even handle it in their offices, but do promote pot brands or dispensaries that are selling it. Then again, says Kilmer, “One of the difficulties about having legal marijuana in the United States is trying to regulate advertising because of commercial free speech. So there’ll be a lot challenges there.”

Michael Blue, the chief financial officer at Leafly.com, says he and his partners already know plenty about the legal and business complications their industry faces.

“With just about any typical service that you’d need to have as a startup -- a bank, a lawyer, an accountant -- all that’s more difficult in this industry simply because of the grey nature associated with it,” says Blue.

In spite of their Ivy League and Silicon Valley pedigree (Blue and Kennedy even won their year’s business-plan competition at Yale), Kennedy says Leafly.com tried nine banks before one would work with them to provide basic services like checking. He won’t say which bank it is.

“The problems with the industry are also the opportunities,” Kennedy insists. “The managers are unprofessional. There are no standards. There’s no involvement by Wall Street, private equity, venture capital firms, banks. You have to have a high tolerance for risk. And despite all those problems, annual revenues are large and growing rapidly.”

The numbers Kennedy cites are staggering. He projects cannabis (production, distribution, sale, and services) will be a $50 billion to $75 billion industry in the U.S. within five years. He points to figures showing that the value of (mostly illegal) marijuana produced in the U.S. is already higher than corn ($40 billion, compared to $34 billion for corn).

“So if you think about Lincoln, Neb., there’s corn insurance and corn banks, agricultural supply houses, and high-fructose corn syrup,” says Kennedy. “All of that needs to be built for cannabis” now that legalization appears to be spreading.

“I spent the last seven years studying different industries,” Kennedy continues, “electric cars, online games, daily coupons, solar cells. And when I started to study the immensity of this industry, I felt comfortable taking that risk. This is the biggest opportunity that we’re going to see in our lifetimes.”

Kennedy says there are promising investment opportunities to get in on the ground floor in everything from greenhouse equipment and lab services to software and breeding to financial services like insurance. Not to mention plenty of opportunity to produce ancillary products like pot brownies and gummi bears.

The Leafly executives were meeting with some Colorado dispensary owners after the interview with this reporter. The dispensary owners are marketing a new liquid extract and pen-like cartridge that delivers marijuana discreetly to the user in a vaporizer called OpenVape. Entrepreneur Jeremy Heidl calls it "pot for soccer moms."

“The three strains that are in front of you are Chernobyl, Epic Blueberry and Blueberry Diesel,” Heidl explained as he fanned out the colorfully packaged OpenVape cartridges on the table.

Which points out one big challenge Brendan Kennedy faces getting mainstream business acceptance: the stoner stigma.

“We’re looking for something that doesn’t explicitly embrace all the clichés,” says Kennedy. “There’s a periodic table of the elements look that we’ve created to the Leafly.com site, so we can avoid some of the less fortunate names of strains.” Including, for instance, Lemon Haze, Green Crack, and Trainwreck -- all reviewed thrillingly by users on Leafly.com.

About the author

Mitchell Hartman is the senior reporter for Marketplace’s Entrepreneurship Desk and also covers employment.

Medical marijuana plants on display at a dispensary in Seattle.

Brendan Kennedy and Michael Blue, CEO and CFO of Leafly.com.

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