In early 2011, Brendan Kennedy left his post as the COO of SVB Analytics—taking his Yale MBA with him—to found Privateer Holdings, the first private equity firm devoted to cultivating start-ups in the cannabis space.

“I’ve worked in early stages of nascent industries with companies like LivingSocial, Groupon, and Tesla Motors, and the cannabis industry is the biggest opportunity I’ve ever seen,” Kennedy said. “I feel like Joseph Kennedy at the end of prohibition or Jeff Bezos talking about something called the Internet—it has the same feeling.”

The cannabis industry is already worth over $2 billion a year, according to Aaron Smith, the executive director of the National Cannabis Industry Association. And with adult use legalized in Washington and Colorado, provisions in 18 states—including the District of Columbia—that have legalized cannabis for medical use, and with the promise of further legalization in states like California, he said that is has the potential to grow to a $35 to $45 billion a year industry.

“The cannabis industry has traditionally been a business community full of activists, but we’re now seeing investors enter the space with real skin in the game,” Smith said. 

You could consider Kennedy one of these serious players. Since launching the firm, he's made a major acquisition and has gathered capital from non-traditional sources—gearing up to fund ventures he thinks will define the industry.

A True Cash Crop?

Because of long-standing negative associations with cannabis use, Kennedy said that his Seattle-based firm does not solicit capital from the typical sources like VC firms, endowments, and retirement funds. He explained that most of Privateer’s capital comes from high net worth individuals from all over the country.

In just the past three months, Privateer has received over 200 investor pitches from cannabis industry start-up hopefuls, according to Kennedy. They have also received resumes from over 150 Ivy League, blue chip MBAs asking for a job.

Privateer made its first acquisition 13 months ago when it purchased Leafly, a website that allows users to rate and review various medical marijuana strains.

It’s in the process of raising another $7 million of private equity with the intention of investing in testing labs and start-ups targeting industry infrastructure, a component that Kennedy said is currently underdeveloped. Kennedy did not offer specifics, but said he is also looking to fund "pioneering" growers and dispensaries.

However, he explained that Privateer is currently inundated with pitches from businesses articulating plans to become the Wal-Mart of marijuana—something he doesn't think will ever happen. He expects that the industry will eventually resemble something like the wine industry or the microbrewery beer market.

But before that can happen, Smith said that that two big legal hurdles need to be overcome. Presently, Treasury regulations make it difficult for banks to deal with cannabis-related companies, often forcing dispensaries to change banks several times a year. And IRS rules make it illegal for cannabis-related companies to deduct any of their business expenses.

“It’s all devastating and cruelly ironic policy because it doesn’t create problems that black market drug dealers have to put up with,” Smith said.

Although, he expects the Treasury and Congress to amended these policies within the next one to three years.

For the time being, the VC and private equity segment of the space is relatively unpopulated. An angel investment network called the ArcView Group has begun targeting the ancillary businesses in the industry, and an outfit called Cannabis Consulting Inc. has been around since early 2010.