How to Invest in Dope Cut paper by Bovey Lee/Tom Schierlitz for The New York Times Brendan Kennedy and Michael Blue, private-equity financiers, settled into a downtown Seattle conference room in March to meet with a start-up. Both wore charcoal blazers and polished loafers. Kennedy, 41, is the former chief operating officer of SVB Analytics, an offshoot of Silicon Valley Bank. Blue, 35, learned his trade at the investment-banking firm de Visscher & Co. in Greenwich, Conn. Two years ago they quit comfortable posts to form Privateer Holdings, a firm that operates on the Kohlberg Kravis Roberts model: they buy companies using other people's money and try to increase their value. What sets them apart is the industry in which they invest. Privateer Holdings is the first private-equity firm to openly risk capital in the world of weed. Or as the Privateer partners prefer to call it, "the cannabis space." Megan and Ben Schwarting, a casually dressed couple in their early 30s, made a presentation. Their company, Kush Creams, produces "cannabis topicals," which are lotions andcreams infused with marijuana's active ingredients. Kennedy and Blue had invited them in to learn more about the pot-cream market. "We know nothing about topicals," Blue said as he reached for a little jar of something called Purple Haze. "Walk us through this like we're third graders," Kennedy added. Megan offered a nervous smile. Their products, she said, contain cannabinoids like THC and CBD. They're medically active but won't get you high. What do people use it for? Kennedy asked. "Pain relief, initially," Megan said. But customers have found them useful for "everything from fibromyalgia to psoriasis." She told the financiers about their product line, which included eye creams, toothache drops and a first-aid spray called Owie Wowie. How do you extract it? Kennedy said, referring to the cannabinoid oil that's mixed into the lotion. "That's kind of our company secret," Ben said. We work mostly with one strain. Others don't produce quite the same effect. What led you to start the company? The couple acknowledged that they started years ago as pot growers. "Then we had daughters and wanted to move into something with less risk," Megan said. The Privateer partners are always hunting for a good investment, but it was apparent that they wouldn't be taking a stake in topicals any time soon. Though state law allows the manufacture and sale of cannabis topicals, Kennedy and Blue worried about whether you could make the stuff without violating federal drug laws. This put topicals off-limits as an investment, at least for now. If there's one rule that Privateer lives by, it's "don't touch the leaf." Kennedy and Blue's venture into the cannabis space began three years ago. At the time, Kennedy was directing the operations of SVB Analytics, which specializes in entrepreneurial fields like high tech, genomics, medical devices and green energy. He spent part of his time in San Francisco and Santa Clara, Calif., for work and part in Seattle, where his wife has a high-profile career with the Pacific Northwest Ballet. One day a call came in to the SVB office from an entrepreneur who sold inventory software to medical-marijuana dispensaries. He wanted to know how to attract venture capital. Christian Groh, who was head of sales at SVB Analytics, took the call and told Kennedy about it. They were intrigued and amused. Pot software? They knew their own firm wouldn't touch it. "Nobody wants to be known as the first banker or venture capitalist to make an investment in the cannabis industry," Kennedy later told me. The risk to the firm's reputation is too great. Later that week, as he drove on I-280 through Silicon Valley's green hills, Kennedy happened to tune in a radio show on marijuana legalization. He hadn't touched pot since he was 19, he says, but the notion proposed by one guest seemed to make sense: Marijuana should be regulated like whiskey or wine. Kennedy thought about the software developer. Maybe there was a way to get into the business without being directly involved with pot. The growing and selling of marijuana, as it becomes increasingly legal, will require many ancillary products. "When everyone is looking for gold," the saying goes, "it's a good time to be in the pick-and-shovel business." Bruce Barcott is a former Guggenheim Fellow who is currently writing a book about the battle over salmon and Indian treaties in the Pacific Northwest. Editor: Ilena Silverman