It’s well-known that the cannabis industry is undergoing a rapid and massive transformation as revenue projections for the nascent, legalized industry expect to reach $50 billion in the next three years. Yet despite this economic promise, capturing a piece of that successful share will be thwarted by factors many businesses aren’t prepared to face such as financial restrictions, compliance, operations and a fundamental misreading of the industry.
Many think that launching a weed or weed-adjacent business in an age of legal cannabis and wider acceptance of the plant would be an instant gold-mine. But it is just this type of wishful groupthink and a belief in pop-culture mythology that has led to a staggering failure rate. Professionals from outside the industry often open cannabis businesses with lots of resources and support, then quickly find themselves in over their heads. They assumed - like many from outside the cannabis space - that the business is nothing more than legalized drug dealing and easy money. They try to ride the wave but end up drowning in what they don’t know.
Setting up a successful venture requires entrepreneurs to understand the business culture of the industry, be nimble enough to operate in a patchwork of inconsistent federal and local governments and regulatory frameworks, and implement operations that emerge as wholly separate from other industries.
They lack the sophistication to understand the market and state regulations they operate in. When a license is won, new owners base projections on faulty models and a misreading of the marketplace. One early operator built a large cultivation facility based on the forecasted price per pound of weed at the time. Their inexperience however meant they failed to consider that once competition in the space increased, the price per pound of cannabis would drop.
The lack of availability and access to reliable banking is also a challenge for most operators, forcing them to operate in either a mostly cash environment or one where there’s a Rube Goldberg-esq corporate structure allowing them to play cat and mouse with the banks. When banks in legal states do start to take deposits, their fees and requirements are outrageous in most cases. Some of these lending practices are predatory and charge upwards of 20-30% interest making it almost impossible for businesses, especially independent startups, to survive let alone thrive making capital inadequate for cannabis businesses to succeed. Plus, many individuals can’t get lending, mortgages, or a simple checking account once they’re marked as working in this industry. At the end of the day this cat and mouse game of cannabis being legal in some states but not in the eyes of the federal government scares away investors and enterprises that would otherwise look to operate or partner within the industry.
In terms of operations, many states generally follow a pattern starting with medical and then expanding to recreational. Only a very small number of the operators have been able to successfully make the jump. Usually, the market rapidly outpaces them forcing a sale or eventual shutdown. There again lacks an understanding of how the medical license market becomes less attractive and occupies a smaller share of the market pie.
The margins for medical marijuana fall roughly 40% after recreation is introduced which makes New York’s decision to reboot its medical market – after recently legalizing recreational - all the more confounding. When starting with medical and then ushering in recreational, the medical market decreases exponentially to the point where it’s no longer cost effective to operate a medical license. This is often overlooked when investing or trying to be a first mover within the market.
The one silver lining is while a business or investor setback is a tough blow, the industry’s growth rate is so rapid many are rehired at a strong pace. More importantly it will force those who remain or restart to adopt new business practices that are efficient, sustainable, and translatable and allows us to understand better what sets many successful companies apart; service standards, exclusivity, unique strains, and great marketing.
What would be just as helpful is if federal legalization is pushed through and imparts a broad set of laws and standards on all fifty states and countless localities on every portion of the business. Until then, the industry, which has never banded together, should attempt to come up with a set of standards across the industry and minimize the failure rate as much as possible.
Joseph Davidsohn and Ranson Shepherd are the cofounders of Qanvus, a Wyoming-based cannabis industry infrastructure and management consulting firm.
