What to look for when starting a cannabis business
Jay and Diane Czarkowski of Canna Advisors describe what a cannabis entrepreneur must look for when navigating through the industry.
Recently, we got some outstanding news. Our first client, David, sold his business — Advanced Grow Labs, a licensed medical cannabis cultivation and processing operation — to Green Thumb Industries for $80 million. We called him up to congratulate him and asked, “Why now?” reminding him that “the show’s just getting started!” He said, “Five years ago, you taught me to read the room. The stigma is fading fast, we’ve exceeded our business objectives in all directions, and there are other things I want to do.”
Reading the room is a golden skill, and it’s even more important in an emerging industry like cannabis. For David, reading the room meant knowing that the industry had matured to the point where others were well-positioned to carry on the work that he started. For cannabis entrepreneurs and investors just beginning to pay attention to cannabis, it means understanding where, when and how to jump in.
Reading the room in the cannabis industry is a big part of what we do every day to secure licenses for clients, while providing guidance to their businesses. But every state is a different room to read.
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In 2009, we founded one of the first licensed medical cannabis dispensaries in Colorado. It was in the very early days of the industry, and, much like the Napster years for digital music, we were all making up the rules as we went, operating without much of a safety net or commercial infrastructure. And, like the digital music industry before it, cannabis’ evolution from an unregulated industry would prove to be a catalyst for massive innovation.
We operated that first business for six years before a successful exit. From our own experiences, we have three big takeaways for anyone beginning that journey themselves.
- Have a community mindset. Set your business up to improve people’s lives. For a business stepping into the early legal days of an industry like cannabis, you must be a good neighbor to succeed.
- Embrace law enforcement. Don’t just follow the letter of the law. Meet your local law enforcement and get to know them. Work together to develop plans of action that are suitable to the needs and laws of your community, as well as the demands of public safety.
- Own the legitimacy of your enterprise. Build a paper trail, because that’s what professional businesses do. If it’s early days for your state, local growers may look at you like you have three eyes the first time you ask them for an invoice. Leadership in this area can be infectious.
The common thread of those takeaways? Integrity and professionalism. But setting good intentions isn’t the only bar to clear.
Operating a cannabis business is high-risk and extraordinarily hard work. Just one example: Imagine your tax burden effectively doubling because you can’t write-off business expenses. Scary, right? But that’s the tax situation for an otherwise legitimate business that derives its income in violation of the Controlled Substances Act.
The good news is that the rest of the legal market bears that same burden, and policy reform may eventually fix the situation. But if you aren’t recognizing that kind of unique challenge when you “read the room” for yourself, you’re missing critical pieces that could lead to a failed business.
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What about the bigger picture? What’s the “read” on the industry as a whole? Here are a few key trends to look for:
- Brands are a big part of the story right now. Almost all the current strong cannabis brands are from Colorado and the west coast. But the country’s major traditional centers of branding talent, like Chicago and New York, haven’t made their impact on the industry in a meaningful way yet. Big changes are coming — because we’re not just slingin’ weed anymore.
- Another big branding trend is premium brands. We see a lot of players trying to stake out the high-end market and go mainstream with expensive brands. There will be winners at the top, but we think that, for most companies, that strategy is going to lose out to low-cost options.
- Capital is far more available today than it has been in years past. Some of the Fortune 500 companies are poking around, but only two or three of them have made any moves yet. We expect a price correction in the market, and, once that occurs, more folks will jump in. However, because so few state markets are mature, we still expect many years of 20 percent compound growth in the U.S. industry.
- This is only the beginning. By our estimates, the national industry is only 5 percent of what it will be, and the global market is at only fractions of a percent of its potential. Interstate commerce alone will be a massive game changer. We expect CBD to pave the way there, considering it is now legal in all but a few states. As the health benefits of products like full-spectrum cannabis topicals and edibles become more apparent to the market, we anticipate those products to follow suit into interstate commerce.
So, is now your time to get into the cannabis industry? Take a minute, and read the room for yourself. What’s it like in your state, or your county? If legalization of cannabis is still not a reality where you are, consider advocacy as your first step to leadership in the community.
If licenses are soon to be available in your state, know that the time to start preparing is now. Whether you’re planning to apply for yourself, invest in an applicant, or start a business to serve licensees, you absolutely must have all the right pieces in place to have any hope of success.
The cannabis industry has its challenges, no doubt. But you can overcome them by working hard, being true to the community, and keeping a close read on the rapidly changing landscape. None of us know exactly where this ends up, but we can guarantee it will be a page-turner along the way.
Find out more about Canna Advisors on the company’s website.
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