Why The Cannabis Market Is Difficult To Break Into
By Roger Malespin photo/istock.com/venakr
The cannabis industry has come a long way in the few short years it has been established. Right now, 29 states have legalized some form of cannabis use, 9 of which have recreational marijuana, the majority of Americans are in favor of legalization in every poll conducted, and lawmakers on both sides of the aisle in state and local levels are working toward legalization in most other states. With the rapidly rising industry becoming open to more entrepreneurs, many people are wondering how viable it is to break into the industry as a young startup. There is a lot to say about it, but potential business owners should know a few things before investing a lot of time and money into the industry.
The most difficult problem of course is funding. Because of the classification of cannabis as a schedule 1 drug at the federal level, banks will not fund cannabis business ventures, which is a death blow for many of the upstarts. Assuming the entrepreneur doesn’t have a small fortune saved away, they typically take out a home equity line of credit, use credit cards or raise funds from friends and family. Essentially, The first step for entrepreneurs seeking funding for their business is to decide between debt (a loan) and equity (selling a piece of the company).
The next step is equally difficult in many ways - predicting the flow of the market. Aside from Uruguay, marijuana is illegal in every country in the world. This means there is virtually no market to study the trends of supply and demand. Producers have no precedent to go on, meaning they are guessing the amount to grow and hoping they don’t overproduce too much and drive the wholesale prices down.
Another thing to consider is that the big players in the game will use the system to their advantage to drive out competition. Bigger companies can purposely flood the market with product to drive prices down, putting strain on the startups while absorbing minimal impact. They also have the advantage of forming long term ties with distributors and establishing their brand name in the market well before others.
All is not lost, however. The market will eventually hit a bottom and it is then that startups can better understand the chain of supply and demand. It’s difficult to predict when that will happen but every day brings us closer to it. Additionally, though banks will not provide funding, there are several large venture capital and investment funds are targeting the industry. Privateer Holdings has raised more than $100M to fund legal marijuana businesses - Tuatara Capital, MedMen Capital, and Snoop Dogg’s Casa Verde are a few of the other, more recognizable names. To entrepreneurs who will be looking for funding, it is of the utmost importance to maintain a strong credit rating and keep excellent financial records.
This is a complex subject with a lot more to it, but these are some of the major issues to consider when planning to start a business in the industry. Newcomers can be daunted when faced with these barriers, but good planning goes a long way and acquiring funding is not impossible.