Hotseat: Brendan Kennedy

The founder of legal weed's biggest investor, Privateer Holdings, wants the door to Oregon kept open.

Kennedy is a Silicon Valley veteran who launched a tech firm and ran a company to acquire other startups, both before he turned 35. In 2011, he founded Privateer Holdings, a Seattle private equity firm that invests in legal marijuana operations. 

The company has already sunk millions of dollars into three investments: weed-review website Leafly, Canadian medical-marijuana producer Tilray, and a Bob Marley-themed strain of Jamaican pot called Marley Natural. This month, Privateer announced it had completed a $75 million round of funding, including backing from Peter Thiel, co-founder of PayPal.

But money can't buy happiness—and it may not be able to secure Privateer legal entry into the Oregon market. 

Many Oregon growers fear "Big Weed" companies like Privateer could drive them out of business. State lawmakers are backing legislation to block out-of-state investors (“Dope Without Borders,” WW, March 11, 2015). 

Kennedy, whose hesitating speech patterns recall angel investor Peter Gregory on the HBO comedy Silicon Valley, is trying to talk the Oregon Legislature down. 

He stopped by WW's offices to try his powers of persuasion on us—and proceeded to explain what legal weed has in common with goat cheese, bootlegging and organic raspberries.

WW: What's the analog to post-prohibition marijuana? Is it post-Prohibition alcohol? 

Brendan Kennedy: This is a mainstream product consumed by mainstream Americans. They're just looking for brands that don't insult or offend them, and most of the brands in this industry still do. In Silicon Valley, generally, there was a technology risk—you know, could this team build this thing? And if they build it, will people buy it? This industry doesn't have that risk. People were already consuming this product. What will happen is, it will transition from a state of prohibition to legalization. 

The Seattle media refer to you guys as potentially becoming the Starbucks of weed. Is that an idea you embrace?

Starbucks is really focused on one brand and one experience. The Starbucks of pot is a whole bunch of dispensaries; that's not really what appeals to us. A variety of brands can be built in this [marijuana] industry that can help facilitate the end of prohibition around the world. 

With alcohol regulation in Oregon, we have this three-tiered system that separates production from retail sale. Looks like in this industry, you're going to be able to do all three. 

On the other hand, there aren't many industries that are vertically integrated, and that's not ideal. Ideally, this industry wouldn't be vertically integrated. The only reason a company in this industry would be vertically integrated is because there's not a supply of consistent product. 

I've met "the world's greatest cannabis grower" 500 times. I grew up in California, and I know a lot of people who grow strawberries and a lot of people who grow artichokes and a lot of people who grow grapes, and none of them have ever told me they grow the greatest strawberries, grapes or artichokes. But I always hear someone who grows the best cannabis.

So where do you see the most opportunity?

We can move the needle the most at the wholesale level. We certainly know how to produce the product well—know how to produce the product in a way that is free of mold and mildew and fungus and heavy metals and pesticides. And that's an important part of the process, but we don't have a huge desire to replicate those facilities across the world.

You're talking about a premium agricultural product, like raspberries and goat cheese. If you go to Whole Foods, you're paying a lot for the product. In the long term, doesn't marijuana become a commodity?

Yes and no. In some cases, the product will be a commodity, that's inevitable. And we're seeing that today. We're seeing that in falling prices in Colorado and falling prices in Canada. So, raspberries—there's a raspberry example, [where] we have to go to a farmers market somewhere and buy local, organic, specific strains of cannabis. There will be local brands and regional brands and market brands as well.

With Marley Natural, is the idea you'll have a standard brand with standard specs, so people will know the THC content and it'll look the same wherever it's sold?

That's exactly right. There will be three different product lines. The first will be cannabis accessories: vaporizers and containers and grinders and pipes, things like that. All these products will launch around November. The second line is cannabis- and hemp-infused products, things like lotions and creams and shampoos. Not edible products. And then the third product is actual cannabis.

You've raised $82 million. Is it totally invested?

No. We raised $7 million four years ago—as hard as any round in the world that year. Raising $75 million was a lot easier. We weren't sure how we were going to deploy that $7 million. Today, we could easily deploy $200 million and could deploy it over the next two years.

What would Privateer like to do in Oregon?

One option is not to do anything. One is to license brands. There's an opportunity for Oregon to get this right. There's an opportunity for Oregon to serve as a model for future retail states. 

Oregon approved legal weed without a residency requirement. The Legislature is considering adding one. What's your analysis of that idea?

It's a problem for Oregon. You have similar regulations in Colorado and in Washington state. I'm not sure it's legal. I think that it results in adverse selection. 

The less scrupulous out-of-state investors [will] invest anyway. They just hide the investment; that's what we see in Washington and Colorado. People bury the money, but they still make the investment. And it grants an oligopoly to in-state investors. 

What would you point to and say, "Gee, Oregon could really screw this up"?

The residency [requirement] is more important than people think. It's really strange. I can't think of another industry that is in Oregon that requires in-state residency, or in-state residency for investors. I can't think of another industry in Oregon that discouraged out-of-state investors.

Who is pushing that residency requirement?

Bootleggers and criminals.

You're referring to people feeding the black market now. They're not usually obvious in the state Capitol.

That's what's really interesting, right? You're at a stage where members of the state Legislature are protecting bootleggers and criminals, to the detriment of the best legitimate players in the industry. That could harm the program, and that could prevent legitimate companies and legitimate entrepreneurs from succeeding.

What else could go wrong, other than shitty regulation and stupid bureaucrats?

Those are the two.

The team working on this doesn't have an easy job—certainly not one that I would envy. It's all complicated. And there's no really great model, because every time you say, “Oh, it looks like raspberries,” it doesn’t quite. It’s hard.