Should California decide to legalize recreational marijuana this election, it will cause a flood of venture capital to enter the market for cannabis startups, investors said Tuesday speaking at a conference for marijuana companies in Oakland.
A total of nine states will be voting to legalize marijuana in some capacity this November. That includes Arizona, Maine, Massachusetts and Nevada, which will be voting on legalizing recreational use, and Arkansas, Florida, Montana and North Dakota, which will be voting on medical marijuana.
The crown jewel, however, is California, which will also be voting to legalize the substance. Aside from offering the largest potential market for cannabis startups, California is home to a wealth of investors who could channel their capital into the market should it become less risky to invest in.
"As productive as the market is today in terms of available capital, assuming we do see passage here in California ... there is going to be a sea change," said Steve Berg, partner at The ArcView Group, which maintains a network of cannabis startup angel investors. Berg was speaking at the Elevate Conference in Oakland on Tuesday. "There is a great hunger, and with further legitimacy of increased legalization, we're going to see a lot more folks jumping into the space and writing bigger and bigger checks."
The amount of venture money pouring into the marijuana market has been on the rise since Colorado's milestone legalization of the plant for recreational use in 2014. That year, VCs invested more than $97 million, and in 2015, the figure climbed to north of $215 million, according to CB Insights. Legalization in California stands to further amplify that number.
"California coming online is a large hurdle, frankly. If we can get over that, we'll see a lot more institutional players start to consider this just because of sheer market size," said Nico Richardson, principal at Privateer Holdings. "Right now it's too much of a patchwork."
But while legalization in California would be a boon for the cannabis industry, there is still another major hurdle that stands to dissuade big-money investors: marijuana remains a Schedule 1 substance. That means that it is illegal under federal law to use, produce or manufacture marijuana, making the venture of investing in cannabis startups risky business. That risk has to come down for more money to pour into the market.
The cannabis market "needs to seem less exotic and less risky, and with more regulation, you achieve that," Berg said.