It’s the Wild West.
Businesses are popping up everyday. Shopkeepers report $20,000-a-day sales figures. Until recently forbidden by their superiors, off-duty police officers were making a little money on the side working as security personnel for large vehicles laden with cash. No one is sure what’s illegal or what’s allowed, but in the meantime, everyone wants their cut of the profits.
It’s the Wild West. It’s Colorado. And right now, all of America and much of the world is watching to see how the U.S.A.’s first experiment with legal marijuana is going to play out.
For sure, there’s a lot of money to be made. Legal marijuana vendors in Colorado are expected to bring in over $600 million in 2014 on just the sale of bud and edible product (THC infused food or drink). As Colorado’s tax rate on recreational marijuana is 27.9 per cent (much higher than the standard 2.9 per cent sales tax), the state stands to collect an estimated $100 million in taxes by year’s end, more than twice what the state collected for the sale and use of alcohol in 2013. Of that $100 million, $40 million of those tax dollars have been earmarked to build and maintain schools.
With only 35 of Colorado’s 348 approved licensed retailers currently in operation, early calculations have the state earning over $1 million in taxes between January 1st and January 27th alone. What’s more, there are profits to be realized from the wide array of businesses that support or compliment the sale of marijuana - everything from marijuana bars to private party planners, from smoking paraphernalia to child-proof storage containers - none of which factored into the initial sales estimates, all of which will make money for the State of Colorado and individual business owners.
But, despite the enthusiasm of the Colorado contingent, a tension underlies this great experiment. While both Colorado and Washington have legalized marijuana, the federal government continues to classify the drug a Schedule I narcotic. Banks won’t deal with pot vendors for fear of being labeled money launderers. Business owners aren’t entirely sure that they can’t be raided by the DEA, despite assurances from Attorney General Eric Holder that the federal government won’t prosecute marijuana retailers in states who have voted to legalize. And it’s in these grey areas that the truly lucrative industries have arisen.
While there’s no denying that small business owners are making good money from legalization, if the success of Colorado proves enticement enough for other states to follow suit and recreational use becomes widespread, these are the industries positioned to become the future foundation of Big Marijuana. You might want to invest now.
5 #5 Payment Solutions
“Too much money” is rarely listed as a liability for most business owners, but in the case of marijuana retailers, both medical and recreational, it’s a very real problem. Banks are subject to federal oversight and, as the federal government still considers cannabis an illegal substance, marijuana vendors have had problems with everything from depositing the cash they’ve taken in to maintaining a bank account in the first place. Getting traditional point-of-sale devices that will accept credit and debit cards? Don’t be silly. Many of these businesses have been operating as cash only ventures - a risky move when your sales sit at $20,000 a day.
While the Attorney General has made statements that banks should open themselves to marijuana operators, the banks themselves are wary of the Department of Justice’s repeated flip-flopping on the issue. It published the Ogden memo in 2009, stating that, while selling marijuana remained a federal offence, it wasn’t in the DoJ’s financial interest to pursue small-time retailers and growers in states that had authorized their activity. It then countermanded that in 2011, telling banks that they were required to enforce federal legislation and that the Ogden memo was never meant to shield vendors and cultivators in violation of federal law.
In response to this erratic federal push and pull and the uncertainty it’s creating, an industry of intermediary devices has arisen. For a fee, companies such as Guardian Data Systems, Mediswipe, and Medical Marijuana Merchant Systems can provide a marijuana retailer with an option: a cashless ATM or alternative sales platform. These allow customers to pay using credit and debit cards, cutting down on the amount of cash handled and stored on-site. Unlike a traditional debit or credit machine, however, the system doesn’t code the transaction with the business name or the product sold, instead logging the interaction as a cash withdrawal which is then electronically transferred into the business’ bank account.
These devices are an elegant solution to a legislative problem, letting vendors and consumers sell and shop in the manner to which they have become accustomed, whilst adding a layer of plausible deniability on the part of banks who, let’s be honest, really do want the money. If legalization becomes widespread and the federal government continues to twiddle its thumbs, these devices could become staples in pot shops across the country, and the companies who distribute will become extremely wealthy.
4 #4 Private Lending
The pot providers of the 21st century are a different breed. Gone in large part are the hemp leaves and the hokey Cheech and Chong iconography. Today’s marijuana vendors have niches, budgets, and business plans. But, no matter how well-researched and financially sound a start-up may be, if it’s tough to get or keep a bank account as a pot seller, imagine trying to get a small business loan.
To bridge this funding gap, private equity firms and angel investment networks have begun to crop up. Groups like the HT Growth Fund (backed by the popular cannabis-themed publication High Times), The Arcview Group (an investment collective), and Privateer Holdings (an investment firm) believe that once other states, especially those with cash flow problems, see the money Colorado brings in, the legal marijuana market will explode. When it does, these groups want a piece of the strongest, most ambitious companies in the field.
Membership in these groups can be costly - The Arcview Group requires an investment of at least $50,000 and payment of a yearly fee of between $3,000 and $5,000 to be a member - but the payoff may be worth it. In 2011, Privateer acquired a website called Leafly, which lists pot strains, their effects, and where they can be bought within the user’s vicinity. At the time, the website was not profit generating. Today, based on traffic numbers, the website brings in roughly $100,000 a month. On the strength of this acquisition, Privateer was able to raise $7 million in further investment capital during its 2013 funding round. The firm expects to clear at least $25 million in its next capital search.
As the market for legal marijuana grows, these groups represent one of the only funding options for many business start-ups, which means their influence is bound to grow. For those with $50,000 to spare, it could prove a lucrative investment.
3 #3 Specialty Insurance
We have insurance for everything these days - house insurance, car insurance, life insurance. Even insurance companies have insurance to insure their insurance policies. But for many marijuana vendors, business insurance is a non-starter. If they can’t get the bank to give them a business loan or a bank account, no established financial institution will take the risk to insure their illegal inventory.
To cater to this need, marijuana business-specific insurance companies have begun to form. For a healthy fee, companies such as Cannassure will insure people at every stage of production in the marijuana industry - from growers to food manufacturers - against theft or fire, for workers compensation, and beyond. These policies are a welcome safety blanket for vendors that keep large amounts of cash on hand and question how much protection authorities will provide them against reprisals from the illegal drug market.
As the number of legal marijuana-related businesses begins to flourish, companies like Cannassure can sit back and watch the money roll in.
2 #2 Testing Labs
If Colorado is going to make recreational marijuana legal, then it’s also going to make sure that that marijuana is safe. By October 2014, the state government will require that all cannabis merchants have their wares laboratory tested to check THC levels, as well as to screen for the presence of e.coli, salmonella, and pesticides.
For edibles, the testing will be required even sooner, as of May this year. Seeing an opportunity, businesses such as CannaLabs are trying to establish themselves as the go-to testing facilities for medical- and non-medical-grade marijuana products.
Should other states decide to legalize, it’s all but guaranteed that they too will attempt to regulate product quality, and business for labs with product experience will boom.
1 #1 Branding
The tobacco industry spends billions of dollars each year on marketing and branding. A fortune goes into convincing someone that they’re a Virginia Slims woman, not a Dunhill kind of girl, and by and large, most of that convincing is strictly image-based. As the marijuana industry grows in importance and power, the potential money in marijuana marketing is massive.
Leafly, self-proclaimed to be the largest cannabis strain resource, lists 696 distinct strains of marijuana, each of which claims to have different potency and effect. That’s potentially 696 distinct products to market and sell. While some marketing agencies may be leery of becoming involved with such a legally ambiguous industry, agencies such as Cannabrand are getting in on the ground floor of this marketing cash cow.
If Cannabrand and their ilk can get a solid foot hold on the entire legal marijuana market, we could be looking at a new generation of marketing giants, built on the back of the cannabis business revolution.