Need for Weed: How One ex-Wall Streeter Plans to Get Rich in the Pot Trade

Last Updated Mar 10, 2011 10:44 PM EST

Former Wall Street investment banker Derek Peterson is high on the medical cannabis business. He wants to take his GrowOp Technology startup, which sells mobile hydroponic trailers (pictured below), fans and other marijuana-growing equipment, public sometime this year:

Peterson, who used to work at Morgan Stanley (MS) and Wachovia, tells Bloomberg that GrowOp is now undergoing an audit ahead of preparing its prospectus. The company has raised nearly $1 million from some 40 private shareholders, he says. It is targeting sales this year of $2.5 million and up to $8 million in 2012.

He got into the business after discovering that marijuana dispensaries in California, which permits the use of pot to treat cancer, arthritis and other diseases, were bringing home up to $14 million a year. Sales of medical marijuana in the state last year reached $1.3 billion. In what might be called a "weedmart" strategy, Peterson wants to sell marijuana-growing gear more cheaply than other distributors, whose pricing includes steep mark-ups:

"We can operate a thriving business and do so with 60 to 70 percent margins," Peterson said.
GrowOp's "Big Bud" trailers start at roughly $80,000. Here's what that gets you: a flowering room and combination vegetative/cloning chamber; high-output T-5 lighting; power-cloning machines; 16 1000-watt lights; RF protected dimmable ballasts; and 8-inch air-cooled reflectors that let growers harvest weed anywhere from weekly to bi-monthly. An optional inline nutrient doser and video surveillance system costs extra.

No leather seats? What a rip! But here's a nice feature -- you can control the whole set-up, from lighting and temperature to water and humidity levels, through your iPhone. Which is great because nothing is worse than having to cut short dinner with the wife because the damned dimmable ballast is on the blink again.

Waiting to inhale
GrowOp wouldn't be the first public company capitalizing on the boom in medical marijuana. General Cannabis (CANA) already trades over-the-counter. It also filed this month to raise $10.5 million and list its shares on the upper tier of the OTC market.

Like GrowOp, General Cannabis isn't directly in the pot business. Instead, more than half of its revenue comes from helping other companies manage medical cannabis clinics. It also runs WeedMaps.com, a listing of online pot dispensaries, which pay a subscription fee to appear on the site.

The company says WeedMaps attracts 600,000 visitors per month and generates more than 5 million page views. It even uses Groupon-style marketing by offering daily deals that allow medical marijuana users to get discounts -- or "WeedFreebies" -- at participating dispensaries (And if you don't mind, don't Bogart that coupon.)

General Cannabis doesn't do huge business, but it is profitable and growing, largely through acquisition. For 2010, the company reported earnings of $1.2 million on revenue of $7.7 million, compared with a loss of $1.2 million on sales of $2.7 million the previous year.

Don't end up in the joint
The obvious risk for such "hempreneurs," as they are sometimes called, is the fuzz -- oops, I mean law enforcement. Although 15 states allow medical marijuana use, recreational usage in the U.S. remains illegal under federal law. Even in California, the police has been cracking down on dispensaries accused of illegally pushing pot. States General Cannabis in its offer document:

Some of the business activities of some of our customers, while believed to be compliant with applicable state law, are illegal under federal law. If our customers are closed by law enforcement authorities, it will materially and adversely affect our business.
What such companies are counting on is a softening in societal attitudes toward pot and, in time, perhaps even full legalization. As one professional investor in the sector recently told Mother Jones (no public link):
"Because the industry's moving from the black market into the light, there are just so many different ways that money can be made," says David Abernathy, the director of Compassionate Green Financial Services, a venture-capital firm that advertises a staggering 80 percent average annual return on its marijuana-based investments. A former investment-bank analyst, he claims to have sunk more than $1 million (he won't disclose the precise amount) into pot dispensaries, delivery services and grow ops.
Forget Silicon Valley! Humboldt County is where it's at, dude. Now pass the Doritos.

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