(Corrects Michael Auerbach to Michael Blue in paragraphs 6, 15)
By Eric M. Johnson and Alex Dobuzinskis
SEATTLE/LOS ANGELES, July 18 In the sparse
Seattle offices of Privateer Holdings, Brendan Kennedy grabs an
iPad to show how his bet on legal marijuana is already paying
dividends in the form of a Google results page for "blue
When Web users search that term, high on the list is a link
to reviews of the pot strain "blue cheese" on Leafly.com, the
medical cannabis website Privateer bought a year and a half ago
and which it calls the Yelp of weed.
"We've got Wikipedia blue cheese and pictures of blue
cheese, and the third thing you see is the 'blue cheese' strain
on Leafly," Kennedy said as he displayed the Google results
page. He says Leafly produces revenue of over $100,000 a month.
Popular interest in marijuana and moves by Washington state
and Colorado to legalize recreational pot have led Kennedy's
two-year-old private equity firm and a handful of politically
connected investors to dive into the pot business. The drug
remains illegal under federal law.
Privateer this week said it closed a $7 million first round
of fundraising. It also named to its board of directors Michael
Auerbach, an investor with ties to former U.S. Secretary of
State Madeleine Albright.
A next round of Privateer fundraising to begin in the fall
will be not less than $25 million, Kennedy and Privateer CFO
Michael Blue said in a statement.
With annual marijuana sales, both on the black market and in
18 states that allow the drug as medicine, estimated at $20
billion nationally according to Harvard economist Jeffrey Miron,
businesses are seeking legal avenues to enter the industry.
Still, the $7 million raised by Privateer is small by the
standards of private equity firms, which typically raise
hundreds of millions of dollars per fund.
"The obstacle is it's not a legal product yet ... It's not
legal under federal law," Miron said. "That's a huge impediment
to being able to earn a profit or keep a profit."
Apart from Privateer, the only other fund raising money with
the sole purpose of capitalizing on the fast-growing pot
industry is Emerald Ocean Capital, a division of Southern
California-based venture capital firm Ghost Group, said Josh
Rosen, a former analyst at Credit Suisse who co-founded cannabis
retailer consultant 4Front Advisors.
Rosen said Privateer appears to be the larger of the two.
Washington state and Colorado are still tweaking their rules
for the recreational-use pot business, which is slated to be up
and running in both states next year.
Privateer says it will insulate itself from the risk of
federal prosecution by investing in pot-related businesses not
directly tied to U.S. production, distribution or sale of the
"I'm not about to invest my personal funds in something that
could get shut down tomorrow," said Auerbach, a senior adviser
to global strategy firm Albright Stonebridge Group, which is
co-chaired by Albright.
Auerbach said he has not spoken to Albright about pot, but
both Kennedy and Blue, who are Yale MBA graduates, have lobbied
members of Congress for a more tolerant federal stand on
A U.S. Department of Justice representative declined to
comment on groups investing in pot-related businesses.
Kennedy said Privateer, which has raised funds from family
offices and high net worth individuals, will look at investing
in everything from light designers for indoor cannabis growing
to makers of harvesting equipment and trimmers.
Others are making bolder choices. A senior political aide in
Washington state, who declined to be named, hopes to leave his
job to build a marijuana farm in wine-producing Walla Walla. He
said he and several co-investors had pooled $250,000 and hoped
for $2.3 million more from a venture capitalist.
In May, former Microsoft executive Jamen Shively announced
plans, criticized as unrealistic because of the federal ban, to
create a U.S. marijuana brand. He drew attention for winning
political support from former Mexican President Vicente Fox.
Kevin Sabet, co-founder of Project SAM which opposes pot
legalization, said the entry of large investors in the market
was worrisome. "This is about profit maximization based on
addiction," he said.
(Additional reporting by Jonathan Kaminsky in Olympia,
Washington; Editing by Cynthia Johnston and Phil Berlowitz)