A New Frontier: America’s Profitable but Problematic Marijuana Industry

Lucas Goldman ‘20

Marijuana — a leafy, green plant native to Eastern Asia — has incited a rat race in America. The sight of entrepreneurs flocking to the frontier of opportunity opened by this newly regulated industry is a rendition of America’s craze for gold in 1848. A “green rush” is underway.

    Marijuana entrepreneurs, called ‘ganjapreneurs,’ are rightfully attracted to the emerging business landscape as cannabis continues to gain legal status across the country. New findings about marijuana’s therapeutic powers in treating conditions from PTSD to common back pain are encouraging the public to see cannabis in a new light. Between 2004 and 2014, American’s approval of cannabis legalization surged from 34% to 58%. Since Colorado and Washington became the first states to legalize the herb in 2012, others have followed in their footsteps. Five more states — Massachusetts, Arizona, Maine, Nevada and California — have recreational legalization ballot propositions this November. Marijuana sales are following a similar upward trend, rising from $4.6 to $5.4 billion between 2014 and 2015, and are forecasted to reach $6.7 billion by the end of 2016.

    However, there are myriad obstacles scaring off prospective ganjapreneurs and burdening those who already made the risky leap into the lucrative industry.

    “These businesses have to fight everybody: the federal government, the state, even the city” explains John Tayer, the president of Boulder, Colorado’s Chamber of Commerce. Cannabis business owners confront an uphill battle well before they even launch their ventures.

    High barriers to entry ward off a majority of undedicated ganjapreneurs from the start. For example, the Massachusetts recreational marijuana proposition lays out a costly procedure for marijuana business applicants: $1,500 for stage one applicants, $30,000 for stage two applicants and $50,000 in annual registration fees. Worse yet, applicants often face a long, uncertain waiting period  — characteristic of the hastily-designed and understaffed government departments tasked with handling the applications.

    Meanwhile, marijuana businesses are at the mercy of a system of convoluted and highly unsettled laws and regulations. Business owners must simultaneously adhere to state and local policies while facing the threat of penalty from the federal government who still sees cannabis as a schedule I narcotic — a legal status shared by heroin, ecstasy and some of the other most harmful drugs. For shrewd, well-dressed businessmen used to the predictability of highly regulated industries, this legal uncertainty is uncomfortable, perhaps even unbearable. Tayer explains, “Business owners must navigate a volatile system of regulations. Should an incident occur, say with an edible, new regulations are likely to follow. Business owners better adhere to the new rules or face heavy scrutiny from the law.” Not everyone is cut out for such trailblazing, the industry is truly rough.  

    For successful marijuana dispensaries with valuable inventories, insurance is another grave concern. Dispensaries, stocked with cash, expensive edible products, and pounds of cannabis, are prime targets for robberies. In addition, they are vulnerable to federal raids at any moment. Accordingly, insurance is essential. However, from the eyes of insurance companies, these businesses are often deemed too risky to serve as profitable clients.

    Tax policies place those dealing with the growing, processing, and selling of cannabis at another disadvantage. Section 208e of the internal revenue code states that businesses that handle controlled substances are prohibited from receiving tax deductions. Therefore, operating costs associated with handling the marijuana such as employee wages and rent are not deducted from the business’s income. The only deduction these businesses receive is the cost of the good itself.

    Banking causes another painful headache for ganjapreneurs. Understandably, banks are tentative about interacting with cannabis businesses because of federal laws prohibiting them from accepting illegal ‘drug money.’ As a penalty for violating these rules, banks fear they may lose their FDIC accreditation. Consequently, marijuana business owners are stuck with an awkward dilemma: huge stacks of cash that they cannot deposit. For those who choose to simply hold onto their earnings, they must invest in expensive security equipment. Meanwhile, some business owners pursue cash investments such as real estate or a variety of other unconventional solutions.

“I even heard about a man who bought a train car to fill with cash and bury in his backyard,” Tayer recalls.

In the face of such daunting adversity, only a select breed of entrepreneurs persevere. Terrapin Care Station, a revered and still expanding brand of dispensaries and retail marijuana products owned by Chris Woods, serves as a quintessential success story. With several prominent locations in Colorado, Chris attributes his prosperity to three core principles: social responsibility, sharp compliance with regulations, and shrewd quantitative skills. “We work hard to engage and give back to communities,” Chris explains proudly before continuing, “Meanwhile, we practice responsible growing and educate the public to acquiesce the concerns of those opposed to the process.”

However, even some who possess the aforementioned winning attributes cannot succeed in the industry simply because cannabis is still illegal in their states. Despite the tide of state-level legislation and mandates from over half of the population to legalize marijuana, federal action will take time to unfold due to the scale of the task and various legal complications. Consequently, the legal gray areas complicating the marijuana industry are likely to remain for the time being, making entry into the realm of businesses directly handling the herb inherently risky. But with the emergence of numerous headaches and technical issues throughout the marijuana supply chain comes a plethora of opportunities for businesses dealing indirectly with the industry. Inventive entrepreneurs are already at work, growing their creative remedies into successful ventures. This second wave of entrepreneurs wisely taps into the industry’s deep pockets without confronting the legal hurdles plaguing those who directly handle the product.  

    The evolution of the indirect sector of the marijuana industry is occurring in co-dependence with the industry’s main branch. For example, specialized insurance companies like Cannasure have emerged in response to the large desire for marijuana insurance. These unique insurers are able to charge higher premiums to account for the considerable risk they incur. They also often require businesses to install elaborate surveillance systems to prevent burglary and usually refuse to cover government seizures under their insurance policies.

CanopyBoulder is another unique member of this second wave of entrepreneurs. This company is an incubator specifically geared towards assisting businesses with ancillary services and products in the marijuana industry. They provide capital and mentorship to marijuana related startups with ideas ranging from grow software to consumer safety and beyond in return for a single digit equity stake in the business.

Ultimately, these companies show the legal marijuana industry works similarly to any other industry. Success comes from forming a unique solution for a common problem.

“Those venturing into the marijuana industry are sharp, aggressive, and financially intelligent – but more importantly, they are big risk takers,” explains Tayer, identifying one factor that stands out in the marijuana industry — risk. But even this distinction is becoming less pronounced. As the dust begins to settle, large companies are tentatively venturing into the industry.

This summer, Microsoft announced its partnership with Kind, a California start-up that developed software to track marijuana from seed to sale — a sign that the volatile “green-rush” is metamorphosing into a legitimate industry. Tayer reassuringly explains that, “It was a bit like the wild west out here, but it’s starting to settle down.”