Summary List Placement
Cannabis tech, an often-overlooked corner of the burgeoning industry, is quickly becoming the hottest area for investors.
In August alone, three cannabis-tech startups closed major, 8-figure funding rounds. While these startups are not all alike — focusing instead on disparate areas like e-commerce, inventory management, and compliance — they are all software firms geared toward the growing industry. And none of them actually sell products containing cannabis.
Since July 1, cannabis-tech startups have raised $57 million in equity, according to Viridian Capital Advisors, a cannabis investment fund. It’s the first time that cannabis tech and software companies took in more money than other sectors of the industry, such as firms that grow or sell marijuana.
Among the notable deals in the third quarter:
- Cannabis software startup Springbig raised an $11.5 million Series B funding round, led by San Diego-based venture fund TVC Capital. Fyllo, another cannabis tech firm, closed a $26 million Series A funding round led by cannabis-focused fund JW Asset Management, among other investors. About $16 million of Fyllo’s Series A came in before the quarter began. Dutchie, an e-commerce platform for cannabis dispensaries, closed a $35 million Series B funding round, led by Josh Kushner’s Thrive Capital. The round included other mainstream funds, including Kevin Durant’s Thirty Five Ventures, and Starbucks founder Howard Schultz.
Those deals came after a rough period for cannabis investors. One index of public cannabis stocks lost close to 90% of its value in 2019 and investors saw their profits and exit opportunities vanish. In 2020, the same index of has slipped another 13%.
In the private market, the story was similar. In the second quarter of 2019, venture investors poured $946 million into cannabis startups across 73 deals, per the data provider PitchBook. By the first quarter of 2020, that dried up to only $157 million across 43 deals, though things have since started to pick up.
“We actually have this unique opportunity being in cannabis with such a brand new industry, and it’s evolving so fast that we get to define it,” Dutchie CEO Ross Lipson told Business Insider in August, when asked about the reasons why entrepreneurs, and the investors that back them, are keen on diving into cannabis.
Betting on the upside of cannabis while avoiding the risks
Cannabis tech companies like Dutchie, among others, have provided an attractive way for VCs to bet on the upside of the cannabis industry while avoiding much of the risk, since they don’t grow or sell marijuana.
Most mainstream venture firms are barred from investing directly in cannabis companies, since THC, the chief psychoactive compound of the plant, is illegal at the federal level in the US. Though Democrats have proposed legislation to decriminalize cannabis at the federal level, the bill is a nonstarter as long as Republicans control the Senate.
As a SaaS (software-as-a-service) company, Springbig CEO Jeffrey Harris said he was looking for a tech fund to lead his startup’s Series B, rather than a cannabis fund, as he wanted a partner who could help advise on the technical details of the startup’s growth.
He found a perfect fit in TVC Capital, a San Diego-based fund that has invested in and exited SaaS startups, as well as companies working on innovative mapping software and cyber security.
“We were primarily looking for a technology fund to lead this round,” Harris said in an August interview. “That’s nothing against cannabis funds, we love cannabis funds.”
He added that he learned things through TVC Capital’s diligence process that he’s already implementing at Springbig.
For Fyllo CEO Chad Bronstein, the opportunity to expand their network beyond the cannabis industry is a good way to broaden the appeal of its core products.
“Our TAM [total addressable market] is very sizable because we built a data ecosystem that mainstream brands could target,” Bronstein said in an August interview “You could be a Fortune 100 brand wanting to be able to target a cannabis consumer. You may not want to say it, you may not be running cannabis ads per se, but you can want to target that consumer because that consumer is very much a consumer of other products or have other behavioral traits the company wants to target.”