Venture capital investors would be dopes to pass up this opportunity.
Colorado's burgeoning legalized marijuana trade is smoking hot and now worth more than $1 billion, according to an analysis from the New York-based Convergex brokerage. (Tweet This)
That's "a number so hard to reach that tech (venture capitalists) call any company worth that much a 'Unicorn,'" stated a note from the firm's Nicholas Colas and Jessica Rabe. The marijuana buzz has entrepreneurs "trying to get ahead of the competition as more states legalize the drug or are finding indirect ways to invest, particularly in the tech community."
Convergex has been tracking the industry since it was legalized in Colorado in 2012. The brokerage found that banks are generally loath to lend to anyone looking to start a pot-related business, though it did find one credit union "that aims to serve the cannabis and hemp industries specifically."
"In the meantime, numerous recreational marijuana stores are sitting on huge piles of cash and relying on extensive security measures to keep it safe," the note said.
Businesses involved in the trade are struggling with pricing power due to a growing level of competition, including, of course, from those who can simply grow their own plants at home.
But recreational marijuana stores still generated $313 million in revenue for 2014, according to a survey from the Colorado Marijuana Enforcement Division. Convergex expects that total to swell 35 percent in 2015 to $420 million. Applying a 30 percent margin and 40 percent tax rate, that translates to $76 million in after-tax earnings. Figuring in a 16 multiple brings the industry's market valuation to $1.2 billion; a 20 multiple takes it to $1.5 billion.
As for specific investment opportunities, the state requires two years of residence before applying for marijuana-related businesses. However, various start-ups are eagerly gobbling up VC cash—$90 million worth so far.
Among them are Privateer Holdings, which has three pot ventures and has attracted cash from Peter Thiel's Founders Fund; MassRoots, a social networking app that has reeled in $1.1 million so far; and Eaze and Meadow, a pair of delivery apps for medical marijuana patients that have attracted at least $1.5 million.
"There are several vectors of investment opportunities in the marijuana industry ranging from test facilities and security and software, to hydroponics, edible products, and vaporizers," Convergex said. "Those taking the risk now may beat big corporations to the punch."