×

First tip for investing in marijuana—avoid publicly-traded companies

  • On 4/20, or Weed Day, investing in marijuana has never been easier.
  • Investing in legal marijuana doesn't have to be risky.
  • Here are four tips on investing in the fast growing marijuana industry.
Denis Balibouse | Reuters

It's 4/20, or Weed Day, and investing in the business has never been easier.

Marijuana, known otherwise as cannabis, (or more accurately, cannabis sativa or cannabis indica) is a naturally occurring plant that produces a wide variety of chemicals impacting people in a myriad of ways. Most of us know the most common impact – "getting high," as well as a few of the others, getting hungry, feeling relaxed, or becoming tired.

But here's another we can add to the list: getting rich. The marijuana plant is currently driving the fastest growing industry in the United States with over 30 percent compound annual growth, according to preliminary 2016 revenues reported in Colorado by the Marijuana Enforcement Division. In other words, if you're a serious investor you need to start taking cannabis seriously.

Now you may be saying, "We get that it's growing, but where should I actually put my money?"

There are some critical factors to consider when answering this question.

First, avoid publicly traded marijuana companies (they're all over-the-counter) such as Medbox (OTC:NGBL) which ended up settling with the SEC for securities fraud. There are very few solid businesses in the space and finding the right one to invest in is extremely difficult. Your best bet is to invest in privately-held companies, which means you need to be an accredited investor, per SEC guidelines.

Second, look for companies with solid management teams teams. Yes, this is somewhat obvious, but it's particularly important in a community where "stoners" are still rampant. If someone is getting high at a meeting, that can ruin negotiations and negatively impact the company.

Third, avoid interacting directly with cannabis to side step a lot of risk. A smarter way is to find ancillary companies such as IoT technology firms, business intelligence solutions and next generation marketing platforms that provide the tools to help grow and distribute the plant.

Examples include Flowhub, an innovative software company servicing cannabis businesses, Front Range Biosciences, which helps research the cannabis plant, and BDS Analytics, the industry's authoritative market research firm.

Other hotbeds for ancillary products in the cannabis industry include distribution (Tradiv), marketing, advertising (Adistry), payment solutions (Tokken), agriculture tech (Grownetics) and business intelligence.

"So again, play it safe and focus on the services and technologies that empower and facilitate the success of these new cannabis companies."

Marijuana is a highly-regulated industry, so it's helpful to look at other highly regulated industries for guidance. Identify solutions from other industries like prescription drugs, alcohol, and insurance, and find companies replicating them for the cannabis industry.

For instance, the rise of Xero and Quickbooks Online for finance tells us that cannabis companies will need online financial management solutions too. However, we know the unique challenges of marijuana will drive potpreneurs to look beyond off-the-shelf solutions like Quickbooks. That's where cannabis-specific ancillary products come in.

Based on that analysis we recently invested in a data and analytics company, Cannabis Big Data, that integrates disparate data sources (e.g., Quickbooks and government data) to create actionable insights. Another area we're excited about is robotics and its application to speed harvest times so we put money into Bloom Automation.

The last factor to consider when investing in the cannabis industry is the navigation of state-by-state intricacies. Market characteristics include open or closed regulatory frameworks, population size and demographic diversity, urban versus rural distributions, and even seasonality.

These variations will have the greatest impact on cultivators and retailers, those company that directly "touch the plant," but there's also impact on ancillary businesses like packaging companies or distributors.

This idea of state-by-state markets is fascinating and relatively unusual in the U.S. While Europeans are accustomed to complying with varying regulatory structures, we are still struggling to conceptualize companies with 50 different regulatory burdens.

In fact, we feel it is unlikely that companies will be successful in expanding and operating national entities due to these burdens. Franchises or other licensing-type arrangements may be manageable but we predict many entities will stay focused on just one or two states for the next few years while the industry matures and the supply chain evolves.

So again, play it safe and focus on the services and technologies that empower and facilitate the success of these new cannabis companies. As the industry grows, so will the need for these products and services regardless of specific regulatory hurdles.

Commentary by Micah Tapman, managing director of Canopy, a venture capital firm and business accelerator focused on the legal cannabis market with operations in Boulder, San Diego, and San Francisco. Follow him on Twitter @ mtapman .‏

Disclosure: Canopy holds positions in Front Range Biosciences, BDS Analytics, Tradiv, Adistry, Grownetics, Bloom Automation and Cannabis Big Data.

Follow CNBC's Opinion section on Twitter @CNBCopinion.