Pot-adjacent companies look to cash in

BRIGID SWEENEY  - Crain’s

The cannabis business in Illinois is booming—and not just for big-name, consumer-facing companies.

For every Green Thumb Industries, Cresco Labs or PharmaCann—the rapidly growing local cannabis manufacturers and dispensary operators that are opening stores and production facilities across the country—there are more behind-the-scenes firms like Block & Co., an unassuming cash-handling company in Wheeling that has seen its business from cannabis clients increase 50 percent this year.

"A few years ago, we saw articles about people in dispensaries walking around with tens of thousands of dollars in shopping bags and realized this was a business we needed to get into," says Philip Robins, Block's chief sales and marketing officer.

When Robins and his colleagues manned a booth at the Marijuana Business Conference & Expo in Las Vegas each of the past two years, they brought along a machine called a discriminator that can quickly count different bill denominations. During each day of the three-day conference, they counted several hundred thousand dollars for attendees who approached with rolls of cash.

The 200-person company, which has served banks, casinos and retailers since 1934, decided to pursue marijuana clients in 2014, shortly after former Gov. Pat Quinn legalized medical use here and the industry's banking constraints became apparent. Because marijuana is classified as a Schedule 1 drug and remains illegal at the federal level, federally chartered financial institutions can't serve marijuana companies. Most state-chartered ones also decline to do so, even in states where marijuana is legal in some capacity, due to liability concerns; the few that do often charge higher fees. As a result, cash remains king.

Robins would not give Block's overall revenue or say how much income it gets from marijuana clients, but he acknowledges the number remains small, accounting for less than 1 percent of revenue. "It's not materially impactful right now, but it's growing at 50 percent this year, and I do think it will become material as we continue to see growth over the next several years," he says. "What other cash-based industry is growing at that rate?"

In addition to offering cash bags, lockboxes, currency counters and cash register trays, Block created a lockbox called the Med-Master that's being marketed as a way to keep your (legal) marijuana away from your teens. It's on shelves at Walgreens.

MAINSTREAM SERVICES

Block isn't the only company angling to get into the cannabis business without actually touching the plant.

The Arcview Group, a Las Vegas marijuana investment collective and market researcher, believes the widening state-by-state legalization of medical and recreational cannabis is bringing operators into the mainstream—which puts them in dire need of mainstream business solutions.

The firm, established in 2010—which makes it an elder statesman in the industry—expects legal U.S. marijuana sales to more than double to beyond $23 billion by 2022. This boom will leave fast-expanding multistate operators scrambling to find both digital and physical vendors who can help with online delivery, government compliance, logistics, payroll and other infrastructure needs.

Michael Gruber agrees. The managing director of Salveo Capital, a Northbrook-based venture firm focused on the marijuana industry, says he's invested in a handful of companies that don't actually touch the plant.

One, Denver-based Baker Technologies, is a software platform for dispensaries that's "trying to become the Salesforce of cannabis customer relationship management," Gruber says. Another, Headset in Seattle, is an analytics company hoping to become the industry's Nielsen. And Wurk, also headquartered in Denver, offers payroll, HR and timekeeping software, while Treez, based in Oakland, Calif., offers dispensaries point-of-sale software that lets them track orders and inventory.

"What became very evident to me as big as this industry was—and it can be considered a $250 billion, $300 billion global industry—was that a lot of the infrastructure just wasn't there," says Gruber, who launched his $25 million fund at the end of 2016, closed it at the end of 2018 and is launching a $100 million fund in March. "We're still in the second inning."

Though most of the venture-backed ancillary cannabis businesses that focus on technology are based on the West Coast, the Chicago area is home to a few others with different specialties.

In Naperville, microbiologist Asha Oroskar invented a way to extract large amounts of cannabidiol, or CBD—the trendy, non-THC marijuana derivative that has cropped up in everything from lotions to gummies—from the hemp plant.

The cannabis-industry future of Oroskar's company, Orochem Technologies, remains uncertain, though. She's embroiled in a potentially landmark intellectual property lawsuit with Folium, a Colorado hemp company she originally partnered with. Folium recently opened a new extraction and purification facility to produce CBD oil using the extraction process.

While the outcome of the case, filed in federal court in Chicago, remains uncertain, the stakes are clearly high—just as they are for all nascent cannabis companies racing to gain a foothold.

"Right now, it's a mad scramble to achieve scale and consolidation in a wide-open space," Gruber says.

Sean Doyle