A Colorado-based cannabis investor reveals how best to get into this burgeoning area.
With four years of legal cannabis under our belts here in Colorado, we’ve seen some fortunes created by bringing an enormous black market online as a wholly new and regulated industry. For those that are considering the opportunity created by Election Day legalization in their home state, we can point you to some interesting business ideas.
From edibles to security, the U.S. cannabis industry has opportunities for entrepreneurs and investors with the skills that can grow the business to $50 billion within a decade.
U.S. legal cannabis sales jumped 34 percent to $6.9 billion in 2016, according to ArcView Market Research. The research firm forecasts legal sales growth of 26 percent annually for the next five years, bringing the market to $21.6 billion by 2021.
It’s easy to see where that growth will come from, following Election Day victories -- medical use for treating such things as cancer and glaucoma was approved or expanded in Florida, Arkansas, Montana and North Dakota, and recreational use was approved in California, Massachusetts, Maine and Nevada. Now, 28 states and the District of Columbia allow medical use, while eight of those and D.C. permit recreational use.
As an executive at a firm providing commercial-grade horticultural products and other services to the industry, investors and entrepreneurs ask me what are the hottest opportunities.
First, however, a word of caution. This is not a gold rush where all you need is a trowel and a pan to find your fortune. This is serious business and only those with real expertise -- whether that’s being a branding expert, a genius at commercial greenhouse-cultivation or a security and logistics whiz -- should get involved. Someone who is expert at growing a nice plant at home but has no experience with commercial greenhouse cultivations should probably remain a hobbyist.
So, where will all the money be made?
1. Dispensary and grow operations
The first thing many would-be cannabis entrepreneurs consider is opening a dispensary or grow operation. However, that is probably the area of the business with the tightest margins. This remains an agricultural commodity, which will generally experience downward price pressure as legal use grows. A few years ago, wholesale marijuana prices were about $4,000 a pound; today it’s below $1,500 in Colorado -- a drastic change in economics. Those who entered this business under assumptions of black market pricing are now suffering mightily.
Anyone who nevertheless wants to grow and dispense should consider working in a state that has restricted numbers of licenses, rather than a state such as California or Colorado where there are few such barriers to entry. For example, Colorado has nearly 3,000 grow and dispense licenses in a state of 5.5 million, while Florida has six cultivators for a population of 22 million and Arkansas will have five cultivators and 32 dispensaries for a population of 3 million. However, getting a license in a state with only a small number available typically requires proving you have $1 million or more in available cash.
The parts of the business where larger profit margins are available include those areas where brands can be built. One to consider is any product that uses trim, rather than expensive buds, to extract oil that can be used in such products as vapor pens, cartridges or edibles. Trim costs less than buds because it’s too harsh to smoke but it still produces good oil for other uses.
The potential market for edibles is similar to the natural food trend, where there has been a proliferation of good-for-you brands and natural or organic foods. It also has parallels to the popular craft beer industry. A company can be domiciled in one state and open bakeries in different states, eventually distributing the brand nationwide once marijuana is legalized across the country. Companies like Cheeba Chews are successfully carving out an edibles niche and others will follow. Once the edibles market matures, a support industry will grow, from manufacturing bakeries that help brands scale to quality and safety firms to specialist lawyers.
In Colorado, we have learned that labeling highly potent edibles is critical. New York Times columnist Maureen Dowd wrote a column about a freak out she had in a Colorado hotel room after consuming edibles. And, there has been a spike in visits to veterinarians here to treat stoned dogs and cats. Labeling explaining the correct amount to consume and warning about keeping edibles out of reach of pets and kids is important.
Such news is a black eye for the industry, but has not slowed the legalization trend. Culturally and politically, pressure is increasing on the federal government to reassess its almost 80-year prohibition of marijuana. Pew Research says 57 percent of U.S. adults believe marijuana should be legal, while 37 percent say it should be illegal, a reversal of opinions held a decade ago.
3. Processing cannabis
Another aspect of the industry worth a look at is the processing of cannabis. For example, the MagicalButter machine cooks a potent tincture that has attracted many imitators. Others sell products to make rosin, a solvent-free extraction that is particularly good for medical use. Companies could also develop brands of potent extract that can be branded an upscale product for the connoisseur. Vaping is another area that is growing as more cannabis-specific products are developed.
4. Security and other services
Security offers significant opportunity. With huge amounts of cash generated and cannabis being transported, many transport firms use armored cars and employ military veterans. Any firm that builds a gold standard distribution network will profit handsomely.
Entrepreneurs that want to build a national or international brand should start with a business that does not touch the plant and therefore does not require a license. Companies that do not touch the plant will also avoid the banking problems cannabis growers and distributors face, due to federal regulations that lag the laws in states where cannabis is legal.
Other aspects of the industry included in this don’t-touch-the-plant category are anything from software tracking to branding and marketing services.
Finding long-term success
One thing is certain -- the business will expand. Looking past states that legalized marijuana on Election Day, Texas may soon pass legislation for medical use, and there is growing bipartisan support in states including Virginia, Tennessee and South Carolina. These states and those that voted on Election Day offer opportunities for investors and entrepreneurs.
Anyone new to the business should find partners that have learned the industry through trial and error over the past decade. Wherever possible, businesses should remember the importance of protecting any intellectual property and patents to safeguard your product and brand.
Like any business, the cannabis industry is one where those who succeed are those who really know what they are doing. But for investors that do their due diligence and find the right partners, the rewards will be significant.