By Eric M. Johnson and Alex Dobuzinskis
SEATTLE/LOS ANGELES (Reuters) - In the sparse Seattle offices of Privateer Holdings, Brendan Kennedy grabs an iPad to show how his bet on legal marijuana is already paying dividends in the form of a Google results page for "blue cheese."
When Web users search that term, high on the list is a link to reviews of the pot strain "blue cheese" on Leafly.com, the medical cannabis website Privateer bought a year and a half ago and which it calls the Yelp of weed.
"We've got Wikipedia blue cheese and pictures of blue cheese, and the third thing you see is the 'blue cheese' strain on Leafly," Kennedy said as he displayed the Google results page. He says Leafly produces revenue of over $100,000 a month.
Popular interest in marijuana and moves by Washington state and Colorado to legalize recreational pot have led Kennedy's two-year-old private equity firm and a handful of politically connected investors to dive into the pot business. The drug remains illegal under federal law.
Privateer this week said it closed a $7 million first round of fundraising. It also named to its board of directors Michael Auerbach, an investor with ties to former U.S. Secretary of State Madeleine Albright.
A next round of Privateer fundraising to begin in the fall will be not less than $25 million, Kennedy and Privateer CFO Michael Blue said in a statement.
With annual marijuana sales, both on the black market and in 18 states that allow the drug as medicine, estimated at $20 billion nationally according to Harvard economist Jeffrey Miron, businesses are seeking legal avenues to enter the industry.
Still, the $7 million raised by Privateer is small by the standards of private equity firms, which typically raise hundreds of millions of dollars per fund.
"The obstacle is it's not a legal product yet ... It's not legal under federal law," Miron said. "That's a huge impediment to being able to earn a profit or keep a profit."
Apart from Privateer, the only other fund raising money with the sole purpose of capitalizing on the fast-growing pot industry is Emerald Ocean Capital, a division of Southern California-based venture capital firm Ghost Group, said Josh Rosen, a former analyst at Credit Suisse who co-founded cannabis retailer consultant 4Front Advisors.
Rosen said Privateer appears to be the larger of the two.
Washington state and Colorado are still tweaking their rules for the recreational-use pot business, which is slated to be up and running in both states next year.
Privateer says it will insulate itself from the risk of federal prosecution by investing in pot-related businesses not directly tied to U.S. production, distribution or sale of the drug.
"I'm not about to invest my personal funds in something that could get shut down tomorrow," said Auerbach, a senior adviser to global strategy firm Albright Stonebridge Group, which is co-chaired by Albright.
Auerbach said he has not spoken to Albright about pot, but both Kennedy and Blue, who are Yale MBA graduates, have lobbied members of Congress for a more tolerant federal stand on cannabis.
A U.S. Department of Justice representative declined to comment on groups investing in pot-related businesses.
Kennedy said Privateer, which has raised funds from family offices and high net worth individuals, will look at investing in everything from light designers for indoor cannabis growing to makers of harvesting equipment and trimmers.
Others are making bolder choices. A senior political aide in Washington state, who declined to be named, hopes to leave his job to build a marijuana farm in wine-producing Walla Walla. He said he and several co-investors had pooled $250,000 and hoped for $2.3 million more from a venture capitalist.
In May, former Microsoft executive Jamen Shively announced plans, criticized as unrealistic because of the federal ban, to create a U.S. marijuana brand. He drew attention for winning political support from former Mexican President Vicente Fox.
Kevin Sabet, co-founder of Project SAM which opposes pot legalization, said the entry of large investors in the market was worrisome. "This is about profit maximization based on addiction," he said.
(Additional reporting by Jonathan Kaminsky in Olympia, Washington; Editing by Cynthia Johnston and Phil Berlowitz)
(This story was refiled to correct Michael Auerbach to Michael Blue in paragraphs 6 and 15)