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What’s the fastest growing industry segment in the US? Quick-take: One would expect this to be the IT industry! But no, this is not the case … yet there is a link with the IT sector, with some Silicon Valley venture capitalists having recently inhaled deeply from a potential pot of profit. In early February entrepreneurs from the quasi-legal marijuana growing and trade business met for 2 days at the Fairmont Hotel in San Francisco with venture capitalists from Silicon Valley. The aim of this meeting was to set the foundations for what is expected to become a new multibillion-dollar business: the soft-medicine industry, otherwise known as the growing and marketing of marijuana. |
The overall context
Over the past 10 years, a number of silent changes have taken place in the US. They are: A) The number of people living in or close to poverty levels remains at around 14.8% (average of all subgroups). Even with the Obama Health Care Plan to reorganize Medicare and Medicaid, a large part of this group of population still has no access to the healthcare system, B) Even when adjusted to relative wealth, US citizens spend about 20.5% more than the citizens of the core European countries on health care, and C) US healthcare service costs exceed the budget by a full USD 650 billion per year, with access to healthcare becoming more restrictive than ever.
Evidence suggests that the US healthcare system offers little additional value for the extra money spent. In the absence of a complete reorganization of the current system, citizens are turning to alternative and cheaper options, such as soft medicine. Furthermore, there is a conflict of interest between the providers and prescribers; it is widely admitted and known that doctors get kick-backs payment from pharmaceutical groups, so there is no easy solution in sight.
The key issues that must be resolved in the healthcare system include:
- Supply: A review of the cost of drugs and high-priced technology.
- Demand: Implementing a centralized information platform so patients are provided with accurate information and can be more informed about costs.
- Intermediation: Correcting the misaligned fee-for-service remuneration system.
As these issues are complex and difficult to address, alternative industry systems have a great opportunity to deploy their strategies.
The marijuana market
Today, the US marijuana market is estimated to be around USD 2.7 billion per year, with about half of that occurring in California, which was one of the first states to support the use cannabis for medical purposes. Once the current national prohibition ends, which could occur as soon as 2018-2019, the market opportunity could grow to as much as USD 200 billion per year.
How to invest?
The newly created marijuana market does not yet have a complete and precise value creation chain. Rather it is a pot-pourri of various activities; a blend of high-tech wheeler-dealer and new-fashioned gold diggers. Yet, there are a few major areas to consider:
| Utilities : |
> Consumption of electricity: households growing their own marijuana consume about 60% more electricity than the average household. Key beneficiaries of this could manufacturer of equipment & supplies for alternative energy projects and appliances. |
| Industrials : |
> Sources of Light: Indoor cultivation requires artificial lighting systems. LED producers such as Azoteq, Cree, Edison, Epistar, Everlight, Kingbright, LED Eco, LVX, Megaman, Nichia, Osram, Philips, Seoul Semiconducteur, SmartSlab, and Stanley could benefit from this particular development. > Facility management: Companies that develop NFC applications for water, humidity, and heat management could benefit too. These include u-blox, ams AG, NXP Semiconductors, STMicroelectronics, Texas Instruments, Samsung, Dai Nippon Printing (DNP), Polaric, and Shanghai Fudan Microelectronics. |
| Consumer Staples : |
> Snacks: New companies, specializing in manufacturing and selling marijuana-based snacks will be founded. Existing providers will most likely not enter into this market because of existing legal restrictions. |
| Transportation : |
> Delivery services: Not every household will set up its own infrastructure to grow marijuana. Most will rely on central plantation facilities which will fulfil and ship orders out to their customers. Beneficiaries of this particular demand could include Fedex, UPS, DHL, etc. |
| Information Technology : |
IT will play a central role in this new business. It will provide plantation management systems (light and humidity management), transformation management systems, and marketing and payment systems. There are multiple enablers in this segment which we have sub-categorized as follows: > Payments: Visa, Eurocard, American Express, PayPal, Ingenico, ams AG, etc. > Online marketplace: Amazon, Yahoo, etc. > Website creation, hosting, and traffic management: Synchronoss Technologies, Synaptics, Splunk, Avago Technologies, etc. |
So in other words, investment opportunities in this new business area are vast. The first round of capital raising is likely to be focused mostly on pure infrastructure projects such as building plantations and transformation facilities. A lot is still up in the air, many projects are in the starting blocks and big money is up for grabs by entrepreneurs and investors alike. Early birds should consider investment in enablers rather than trying to catch-up with the start-ups as the full federal legalization will occur within the next 5 to 8 years, at which point the market will explode. So be on the watch out for any news and keep an eye on companies that host, manage traffic, and enable connections.