Adam Bierman still sounds incredulous as he recounts his initial plunge into California's medical marijuana business. A former college baseball player who had never so much as taken a toke, he found himself in his apartment surrounded by 20 pounds of weed sealed in Ziploc bags.
"I was looking at my wife, like, 'What have we done?'" recalled Bierman, before stuffing the marijuana into garbage bags, depositing it in a bicycle basket and pedaling the merchandise to the pot shop he and his business partner were about to open in the seaside community of Marina del Rey, west of Los Angeles.
Bierman's business, and the state of the cannabis industry in California, have evolved substantially in the seven years since.
That first dispensary is gone, but Bierman and partner Andrew Modlin have helped more than 100 marijuana businesses navigate regulatory issues, refine their cultivation and production techniques or operate retail shops. Their management company, MedMen, just closed a $60-million private equity fund for investing in the emerging industry – with another investment vehicle on the horizon.
MedMen embodies the promise of the legal cannabis business in California, where there's a new gold rush to capitalize on a potential multibillion-dollar market.
Colorado and Washington state receive considerable attention for their fast-growing recreational cannabis markets – which reached a combined $1.5 billion in sales in 2016, up a brisk 66 percent from the prior year, according to the latest statistics from Marijuana Business Daily.
Yet California's legal sales already dwarf that. Arcview Market Research estimates medical marijuana purchases totaled $1.8 billion last year, on the way to a projected $5.7 billion by 2021, as the state opens the door to adult recreational use.
"There's a lot of excitement about what's going to happen there," says Chris Walsh, editorial director of Marijuana Business Daily, which each year publishes a comprehensive cannabis industry Factbook. "But it's going to be messy as they try to regulate this medical marijuana industry that's not used to any rules."
California was the first state to legalize medical marijuana use in 1996, but it never set statewide regulations – leaving oversight to local governments. That opened the door to disreputable players, says Walsh, making the state a pariah of the marijuana industry as it fought for legitimacy.
The Golden State has been slow to conform to guidelines laid out by the Justice Department in 2013, as it struggled to reconcile Congress' view of marijuana as a dangerous drug whose illicit proceeds finance criminal groups with state ballot initiatives legalizing pot use. The Obama administration spelled out its enforcement priorities so state regulators could avoid running afoul of federal prosecutors – namely preventing marijuana sales to minors, the diversion of revenue to gangs and cartels, or the use of an authorized businesses as cover for illegal drug trafficking.
"That's why California has been a hot seat for a while," says Mitchell Kulick, founding partner at the New York City law firm of Feuerstein Kulick, which advises investors and early stage cannabis companies. "Despite being the first, they were the worst."
Nearly 20 years after legalization, the California Legislature took steps in 2015 to license and regulate medical marijuana. The proposed rules – unveiled just last month – would require testing, seed-to-sale tracking and licensing of dispensaries. But these rules have yet to take effect.
Meanwhile, Gov. Jerry Brown is scrambling to align regulations for medical and recreational cannabis use, after voters last November approved a referendum legalizing its sale to adults 21 and older, starting in 2018.
"Even though California is the Holy Grail when it comes to cannabis – there isn't even a close second – I'm directing clients away from it until California gets its act together," Kulick says.
Uncertainties about whether the Trump administration will step up enforcement in the 29 states that have legalized medical or recreational marijuana hang over the industry.
Attorney General Jeff Sessions isn't exactly a fan of marijuana use – he once remarked in a congressional hearing that, "Good people don't smoke marijuana." In recent weeks, he has directed federal prosecutors to crack down on drug offenders and seek the strongest provable charges. That reverses Obama administration policies to reserve the toughest charges for major traffickers and violent criminals.
Most banks still shun the cannabis industry because of burdensome and costly federal regulations aimed at preventing money laundering. Some 301 banks and credit unions now do business with the industry – less than 3 percent of the nation's financial institutions, according to Arcview.
Internal Revenue Service rules also prohibit growers and sellers from writing off normal business expenses, such as marketing, involving anything "associated with selling illicit substances." That leaves legal cannabis businesses paying effective tax rates of up to 70 percent, Arcview notes.
In a sign that the marijuana industry is stepping out from under the grow lights and into the sunshine, cannabis company representatives met last week with congressional representatives in Washington, D.C., to advocate for tax reform and a change in banking regulations.
These in-person meetings, said MedMen's Bierman, are crucial to shaking off outdated notions about the industry.
"If I was going to talk to a regulatory affairs director for a pot company, (legislators may wonder) 'Is it someone who shows up with Birkenstocks and braids in her hair?'" Bierman says. "That's not what happened."
Still, the perceived risk and uncertainty is enough to keep Wall Street money out of the marijuana business – at least for the time being.
That creates opportunities for new players such as MedMen and others, whose private equity funds provide a way for smaller investors with a tolerance for risk to capitalize on an industry that financial services firm Cowen & Co. projects should reach $50 billion by 2026.
"You will not find another multibillion-dollar market growing at this type of rate anywhere in the world that does not already have big institutional players in it, big institutional funds and big multinational players," says Troy Dayton, chief executive of Arcview, whose investment network has invested in excess of $117 million into 145 cannabis startups.
The size of the opportunity coaxed Chris Leavy out of retirement. He spent two decades in asset management, most recently as chief investment officer responsible for $115 billion of fundamental equity assets at BlackRock.
Leavy's all about identifying undervalued assets – and the cannabis industry is ripe with businesses that are cheap relative to their potential, he says. With so many pools of capital on the sidelines, he decided to invest with MedMen. He took on an advisory role in late 2016, and in March was named co-chairman.
Bierman's aha moment came even earlier, in 2009, when he and Modlin were running a branding and marketing company called ModMan, a contraction of their surnames that also offered a subtle nod to the popular AMC television series "Mad Men," set in the 1960s advertising world of New York City's Madison Avenue.
The operator of a Sunset Boulevard pot shop had contacted ModMan about developing a new logo, store concept and website. Wearing a suiting and tie, and lugging a briefcase, Bierman met the owner of the tiny, 600-square-foot dispensary devoid of any amenities (he actually called it a "dump"). He asked basic questions about the operation, including revenues. He thought the owner misunderstood when he inquired about her monthly revenue. He was wrong.
"I left there, called Andrew and I said, 'This lady turns $300,000 a month. We can do way better,'" says Bierman, seeing parallels between the budding legal marijuana business in California and online poker.
"Gambling is something that Americans are participating in, whether it's legal or not," Bierman says. "When online poker became accessible, the demand was there. It was being fulfilled by black market means. It was being repressed."
The duo spent a year researching medical marijuana dispensaries before opening their dispensary, The Treehouse. The business evolved in 2012, when Massachusetts became the 18th state to legalize medical marijuana and Bierman began receiving calls from would-be dispensary operators, seeking to tap his expertise.
Bierman and Modlin shut down their branding operation, divested their assets in the marijuana world and began building a management company. They hired a chemist with a background in petroleum to develop standards for cannabis extraction and analysis. Another expert with a background in large-scale agriculture techniques helped develop guidelines for breeding, seed production and other practices in marijuana cultivation.
"That was a two- to three-year process," Bierman says. "We invested everything we had."
MedMen was out of cash when the phone started ringing with requests to operate dispensaries or help raise capital. The company's fortunes quickly rebounded. Earlier this year, it closed a transaction for $26 million to acquire Bloomfield Industries, one of five companies licensed to sell medical marijuana in New York.
Now, the company is growing so quickly it is searching for new office space.
As the business gains velocity, Bierman is turning his attention to wiping away the stoner stigma attached to marijuana use. The company took over operation of a dispensary in West Hollywood, renovated the space and reopened it under the MedMen brand last year, giving it an Apple-esque appearance, with long walnut tables, glass displays and an airy, well-lit interior. Small touches, such as artfully arranged circular glass cases that showcase individual buds, lend it the feel of an upscale mall store.
"If you sit and watch who walks in and out of the door, it is a representative of that community: young and old, gay and straight, rich and middle class, working and retired, it's Hollywood and blue collar," Bierman says. "That's what tells me we are succeeding in our attempts to mainstream marijuana."
Following the example of Apple Inc., which spent decades cultivating Hollywood, MedMen has been romancing the entertainment industry. Earlier this year, it hosted a private cannabis pairing dinner prepared by celebrity chef Neal Fraser attended by film, television and music industry executives.
Bierman hopes that such social events will help normalize pot use, and embolden Hollywood filmmakers to incorporate its use in mainstream films like the 2009 romantic comedy "It's Complicated," in which stars Meryl Streep and Steve Martin spice up date night by sharing a joint.
"These weren't hippie stoners," Bierman says. "These were middle-aged people dealing with complications of divorce and sharing an experience with cannabis. For me, that moment stood out."