Venture capital investment in the cannabis industry has exploded this year, as more investors seek to reap the same rewards in early-stage pot companies as some of their peers have enjoyed on capital markets.

Venture capital funding in the global marijuana space totalled US$235.7 million in the first three quarters of this year, compared to just US$47.9 million in the same period in 2017, according to data provider Refinitiv. In fact, the investment in cannabis venture capital so far in 2018 represents more than half of the total global investment in marijuana over the past five years, the data showed.

“We really stumbled onto cannabis,” said Everett Knight, portfolio manager at Calgary-based Matco Financial Inc., which manages about $500 million in assets. “Now, I think we’re in the second inning of a long-term growth industry.”

But venture capitalists aren’t looking to spend their seed capital in cannabis producers, many of which have already tapped capital markets and seen  valuations reach bubble-like heights. Instead, they’re focusing on cannabis’s ancillary industry, a segment that includes software development, extraction technology, testing firms, retail franchises and other companies that don’t “touch” pot but work with it across the supply chain. The potential could be massive as the market for cannabis products and services is valued between $7.8 billion and $13.9 billion, according to a 2016 report released by Deloitte.

The attention coming from the VC sector doesn’t surprise Matt Shalhoub. The managing director of Green Acre Capital has been keeping a close watch on the industry since 2013 when Ottawa started the process to legalize recreational cannabis.

Now, Shalhoub’s Green Acre Capital closed its second venture capital fund earlier this month valued at around $75 million with a mandate to invest in more than a dozen cannabis companies. That’s built off the success of his first fund that he closed just over a year ago – a $25 million fund that made 13 investments, including in Tokyo Smoke. The marijuana lifestyle brand is owned by Hiku Brands Co. Ltd., which was recently acquired by Canopy Growth Corp.

“This space has been largely financed by high-net-worth individuals so far and over time that’ll change to more sophisticated private capital,” Shaloub told BNN Bloomberg in an interview. “All the capital in this space has so far been in the cultivation of this product. There’s a misalignment of capital and there’s been so much money made by these producers financed by public markets. Now, there’s another part of the market that needs financing.”

Canopy Rivers Corp., the venture arm of Canopy Growth, has roughly $200 million in capital to spend on early-stage investments following its reverse-takeover last month that raised about $100 million on the TSX Venture Exchange. Narbe Alexandrian, vice president of business development for Canopy Rivers, told BNN Bloomberg that he gets pitched about 75 to 80 cannabis companies to invest in monthly.

“Our focus is to own the entire value chain,” he said. “Everything from cultivation, all the way up to sales and to help customers know what to buy next.”

Alexandrian, who came to Canopy Rivers after helping run OMERS Ventures – the venture arm of the Ontario Municipal Employees Retirement System fund – said the current opportunity closely resembles the Canadian technology space a decade ago. Companies are eagerly looking for investment opportunities between $5 million to $20 million, despite the high risk associated with the cannabis industry, Alexandrian said.

“Just like technology was in 2010, there isn’t a lot of money going into the cannabis space right now,” Alexandrian said. “Most of these companies aren’t bankable yet because [cannabis] hasn’t been legalized yet and all the banks are shying away from it right now.”

The potential to tap into early-stage cannabis firms is attracting traditional players, such as Matco Financial. It recently started the $15-million Matco Cannabis Investment Fund to invest in privately-run and publicly-traded cannabis companies.

“It’s just the tip of the iceberg,” Matco’s Knight said in an interview with BNN Bloomberg.

Knight said his recent interest in investing in early-stage cannabis companies is mostly focused on pot testing labs. That segment is expected to emerge as a very lucrative segment of the ancillary market as the amount of pesticides producers will have to test is set to nearly double due to Health Canada regulations.

“These testing companies are going to be doubling revenue overnight,” Knight said. “Investing in cannabis is a once-in-a-lifetime opportunity. But to find that real opportunity, you really need to look at the private space. Most of those companies aren’t in the public markets yet.”

Cannabis Canada is BNN Bloomberg’s in-depth series exploring the stunning formation of the entirely new – and controversial – Canadian recreational marijuana industry. Read more from the special series here and subscribe to our Cannabis Canada newsletter to have the latest marijuana news delivered directly to your inbox every day.