Small Business

Solving marijuana's banking problem

PE looks to cash in on cannabis
PE looks to cash in on cannabis

One of the main struggles marijuana entrepreneurs face is funding. The fact that businesses are selling a drug that's deemed illegal under federal rules makes financial institutions wary of cannabis start-ups.

But at the Marijuana Business Conference and Expo in Las Vegas last week, both traditional banks and private equity firms were warming up to the funding idea, thanks to a midterm election cycle that legalized recreational use in Alaska, Oregon and Washington, D.C. It was a sign of shifting public perception of the industry.

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Tripp Keber, CEO of Denver-based Dixie Elixirs, a cannabis-infused edibles company, says accessing financial services is the industry's biggest challenge and opportunity.

"Even in a state where [recreational cannabis] is regulated like Colorado or Washington ... most businesses do not have access to traditional banking," Keber said. "I do ultimately think that states will work with the federal government to ensure businesses like mine have banking like you would in any other industry."

First Security Bank of Nevada is among the first financial institutions to step into the cannabis industry.

The bank is beginning to establish relationships with marijuana businesses under tight regulatory scrutiny within Nevada. John Sullivan, First Security's president and chief executive, says it has opened accounts for about 80 marijuana-related businesses. "The applicants hold approximately $35 million in deposits at present," Sullivan said.

Entrepreneurs gathered in Las Vegas for the Marijuana Business Conference and Expo in November 2014.
Harriet Taylor | CNBC

The federal government wants banks to work with these businesses, says Sullivan, because it's safer in the long run.

"The government desires that the marijuana industry operate within the banking system so that all activities are transparent," Sullivan said. "As a small community bank, there are benefits to providing services to the industry ... in the form of new deposits as well as opening doors to other businesses and services."

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Private equity is also entering the cannabis industry.

Privateer Holdings in Seattle is at the forefront of investing in cannabis. The private equity firm has risked capital on the cannabis industry. And it has more than 40 investors, and has raised more than $50 million to date.

Ben of Ben & Jerry's: Pot goes with 'Cherry Garcia'
Ben of Ben & Jerry's picks a pot flavor

The one catch? Privateer Holdings doesn't invest in any American companies that touch the product because cannabis is not yet federally legal, says Brendan Kennedy, the firm's founder.

"We're waiting for further clarification from the federal government in the U.S.," Kennedy said. "The disparity between state and federal laws has given us a lot of concern."

Privateer Holdings' only U.S. acquisition thus far is Leafly, a company that operates like a Yelp of the cannabis world. The site allows users to rate cannabis products. Leafly helps users find the right strain for patients, and also serves as an information hub for consumers and patients.

Marijuana edibles under fire
Marijuana edibles under fire

Seattle-based Leafly today has 30 employees, and does about $1 million a month in revenue, Kennedy says. Last month, 4 million people visited the site.

As more states begin to legalize cannabis, Kennedy says the hope is federal legislation will become a reality, opening the doors for Privateer Holdings to expand investments.

The marijuana sector overall is forecast to grow further.

America's legal wholesale and retail cannabis industry reached $1.5 billion in 2013, according to The ArcView Group, which invests in cannabis businesses and collects related data. The sector is forecast to grow to $2.6 billion by year-end, and to $10.2 billion by 2018.

With additional reporting by CNBC's Harriet Taylor.