Marijuana and the Entrepreneur
The Blank Center’s Marijuana and the Entrepreneur was both an information session on an emerging industry and a Q&A with experts in the industry, rolled into one, and has likely sparked the imagination of numerous attendees. The panel was made up of Ben Ferri, founder of Kind & Co, Mark Slater, Chief Investment Officer at Sensible Alternative Investments, and Connor McCaffery, Founder at Livfree Holdings, who represent what might be the three fundamental components to the marijuana industry: small growers, financiers, and conglomerates. The entire session was hosted by Pierce Atwood, a startup advisory, and can be viewed online by clicking here.
Sarah McGarrell of Pierce Atwood, the MC for the event, kicked it off with a discussion that would demystify the question of branding in a very broad, segmented marketplace. The (green) elephant in the room was of course the question of legality: marijuana is federally illegal, and has varying legality from state to state, including recreationally legal, medicinally legal, and illegal. This segmentation has raised challenges for effectively marketing marijuana businesses. McCaffery pointed out that having new, fun names for marijuana strains like “Super AK” and “Bubba Kush” is no longer enough, and is often false advertising, since stores will sometimes change strain names based on what is “hot”. While Ferri was not optimistic about the current effectiveness of branding, he suggested that a company should build their brand ahead of time so that when federal legality of recreational marijuana is passed their brand strategy is ready to be implemented immediately.
The numerous tips for entrepreneurs looking for a way into the burgeoning industry varied based on sector. Slater indicated that his company looked for an “element” of intellectual protection, and compared cannabis investing to technology investing. SAI also looks for cultural and business model differences, things that can set apart one vape pen from another. Ferri offered advice to entrepreneurs taking a more traditional approach to entry, stating that entrants should find something that works for them. In his opinion, entry level entrants should not start growing, but edibles can be a more accessible foot in the door. Something like 40% of Colorado (an industry hub) recreational purchases are in edibles. He also suggested photography and other creative paths as a way into the industry.
However, it became abundantly clear from McCaffery that, while there is money to be made for the present in “mom and pop” marijuana businesses, large companies with huge production/grow facilities and chains of stores are turning marijuana into a commodity. It could be useful to compare the industry to that of the beer industry, where large companies own numerous beer brands, but small “craft” brewers find it necessary to differentiate through production of higher quality, niche products. Entering into the industry as a grower is extremely risk, since equipment is expensive at around $350 per square foot (similar to luxury hotels), so it is only wise to do so if you are able to lease equipment or if a store will give you the equipment to be their exclusive grower (a fairly common practice).
While there were differing opinions on industry trends, the one near-certainty of the discussion was that marijuana will become federally legal, with Slater estimating a five to seven year time frame and Ferri and McCaffery seeing a much quicker turnaround of a few years. The huge effect this will have on the industry cannot be overstated. Currently, banking is an issue in cannabis, with too much money and nowhere to keep it; McCaffery told a story of driving a mini-van to the bank with some $2.5 million in cash and a single security guard and thinking to himself, “I’m gonna die…”
Another issue is that banks must be local to the state, which makes moving money around difficult. Of course, this opened a side discussion on the altcoin market, with varied opinions on whether it will be a long term solution. Slater in particular was not a fan of altcoins for moving money, in particular having issues with its legality, but did see some potentially good use-cases for cannabis logistics and distribution systems. A further problem for cannabis businesses is that, since dispensing is federally illegal, tax deductions for expenses are not allowed according to IRS code 280e, and have been a big dispensary killer. When everything becomes legal, companies that were already profitable without tax deductions will see a spike in their earnings.
Legality will also have an impact on the stock market. Currently, the Toronto stock exchange is hot with cannabis companies, notably Canopy Pharmaceuticals, and many companies in the US will go public, offering opportunities for faster industry growth. Furthermore, research will become more accessible and effective. Under the current Federal restrictions a federally licensed “grow” needs to be your source of cannabis, making it difficult for smaller companies to start doing research. In addition to this, a number of large companies such as GW Pharmaceuticals, will go to the FDA with their compounds for approval; currently most of the quality research and patenting is going on in Israel and the Netherlands, but that could shift as markets like the US open up.
The exciting news for Babson entrepreneurs is that the industry has many issues that need solving, both in the short term (while there is varied legality from state to state), and in the long term, with federal legality on the horizon. These issues offer opportunities for change-makers and innovators to provide creative solutions. Although there is a great deal of uncertainty for new entrants in the industry, time will tell what fruits they may bear.