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Regulation Is Squeezing Out Potrepreneurs, Clearing the Road For Big Cannabis

As the legal marijuana industry tilts more toward deep-pocketed investors, can small businesses hang on?

Regulation Is Squeezing Out Potrepreneurs, Clearing the Road For Big Cannabis
[Photo: PRILL via Shutterstock]

For Julie Dooley, marijuana is a business and a cause.

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A 46-year-old mother of three, Dooley is the cofounder and president of Julie’s Baked Goods, a purveyor of cannabis-infused snacks. She has celiac disease and wanted to create gluten-free products that would relieve her pain without damaging her intestine. Dooley’s Denver company released its first product, granola mixed with cranberries and almonds, in 2010 and now sells about 6,000 units a month, employing 11 people.

Even in Colorado, where medical and recreational marijuana are both legal, the cannabis business involves its share of hassles. Initially, Dooley’s license cost $1,250 and required a 25-page application. Renewing it, she said, cost more than twice that and required investing about $25,000 in the company’s kitchen, including a security system with 24-hour video surveillance. She wouldn’t have a business today if her husband weren’t a manufacturing specialist, she says.

As hard as she’s worked, Dooley’s experience has been relatively easy for a medical marijuana business in this country. Marijuana remains illegal federally, which leaves every state which allows the product to figure out its own regulations. Colorado was one of the first states to legalize recreational marijuana, and its regulations help ensure that cannabis companies have to pay close attention to the regulatory landscape to ensure they’re in step with the law. “I know every city councilman,” Dooley said. “I don’t want to.”

Colorado has plenty of small potrepreneurs like Dooley. Marijuana advocates talk up the value of their businesses to create jobs, pay taxes and help the sick. But at last week’s National Marijuana Business Conference in Las Vegas, the future of pot looked much less like an archipelago of mission-driven small enterprises than an emerging mega industry to be dominated by large companies.

Big Cannabis is coming. Increasingly, state regulations for legal marijuana are tilted toward outfits with deep pockets. Venture capitalists are looking for the brands that can ramp up and be everywhere overnight. (Just this week Privateer Holdings, a private equity firm, and the family of reggae legend Bob Marley announced that they will release Marley Natural, a cannabis brand inspired by the singer.) And people who are working to start small businesses–who often believe cannabis as a social or medical good–wonder if the gold rush is going to pass them by.

The day before Las Vegas marijuana convention began, a firm called The ArcView Group held a more exclusive event in a hotel ballroom a few miles from the Las Vegas Strip. The company connects its more than 300 member investors with promising cannabis-related startups. In less than two years, CEO Troy Dayton said ArcView has facilitated investments of at least $17 million in 34 companies. ArcView members include professionals working for Wall Street banks and large venture capital firms, he said, though they often attend in an independent capacity.

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The day of panel discussions and company pitches began with a welcome from Dayton, who was buoyed by votes legalizing recreational cannabis in Oregon, Alaska and Washington, D.C. “Before we get into figuring out how much money we can make,” he acknowledged the “people sitting in prison right now for this plant.”

One attendee was Andrea Goldman, a senior executive at a major financial firm which she declined to name. She is also part of a cannabis investing vehicle called the Budding Enterprise Fund. The firm has yet to make any investments, but she expects that cannabis startups could eventually be acquired by “big pharma, big ag, big tobacco, because they’re going to be interested.”

For Dooley, regulation is a constant burden and a threat to her small business. But for the larger businesses working in a gray market like cannabis, regulation can be beneficial: it legitimizes their work in the eyes of the public and keeps out small competitors.

Nevada’s High-Roller Game

Early this month Nevada, which has legalized medical marijuana, issued preliminary business licenses to growing operations, factories (businesses like Dooley’s), dispensaries and testing facilities. Industry leaders compared the closely watched process to obtaining a Nevada gaming license. It required applicants, among much else, to demonstrate liquidity of at least $250,000 per license–that’s $500,000 if an applicant wanted a factory and dispensary–not including startup costs.

Kurt Barrick, CEO of a consultancy with the wonderful name VonDank, assisted clients with Nevada applications: One particularly complex multiple-license entry reached 962 pages, he remembered. The Nevada application asks for, among much else, extensive technical and financial information. One businessperson who participated in five successful applications said the process cost $1.4 million–not including the liquidity requirements–bringing in legal, accounting and lobbying services.

The application process is so fraught that in August, The Las Vegas Sun reported that Jay Brown, one of the most influential lawyers in the state, would charge his clients who successfully obtained licenses 9 percent of the business’s net revenue for the first 10 years.

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Leslie Bocskor, founding chairman of the Nevada Cannabis Industry Association, calls the process “merit based.”

“Nevada has a history of setting up regulatory frameworks for industries that were once viewed as taboo,” he says. Bocskor, a dapper former investment banker with a long door-knocker beard and the bushy eyebrows of a Victorian magician, is raising a $25 million fund to invest in cannabis companies. While some investors who are interested in the space stick with auxiliary services, to avoid breaking federal law, he says his Electrum Fund will back companies that “touch the plant.” (In general, companies face less regulation and less risk the further they are from the plant, which can makes those spaces more attractive to small business people.)

Bocskor said the restrictions are designed to help keep out “bad actors” and ensure that the industry will not embarrass the state. He predicts that the state will become a Silicon Valley of cannabis where researchers develop ultra-refined strains of pot and exploit the plant’s medical potential. One hydroponics CEO estimated that the Las Vegas market alone could be worth up to $1.5 billion annually.

I asked Bocskor if the cannabis industry would also expect the same tax breaks that he said gaming and mining already receive in the state. “Once it’s big enough it will be asking for all the same accommodations,” he said. “But that’s seven or ten years out.” He added that marijuana’s illegal status nationally would give the state more leverage to tax cannabis.

Other states have also created rules that restrict entry into the cannabis industry. This year Connecticut issued four growing licenses that required each qualifier to put $2 million in escrow. A press release announcing the licenses said Connecticut is the “first state medical marijuana program based squarely on the pharmaceutical/medical model.”

A frequent argument for tough restrictions boils down to ‘We can’t allow just anyone to start a pharmaceutical company in their garage.’ Cannabis activists counter that medical marijuana is immensely beneficial and has been used safely (if illegally) by millions of people. As experts debate, the results for entrepreneurs are clearer: Where legal marijuana is treated as something that should only come out of a pharmaceutical company, small storefront businesses won’t have much of a chance.

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“The Cannabis Capital of The World”

Nevada is a small state by population, but it’s been making big bets lately. “Las Vegas is going to be the cannabis capital of the world,” Bocskor said.

It’s a familiar refrain for Nevada, a state with economy that’s highly dependent on tourism today, but wants to build the drone capital of the country and the batteries for an anticipated wave of Tesla buyers in the coming years.

When it comes to pot, the thesis is that legal cannabis in Nevada will become one of the signature experiences for Vegas tourists. It’s no stretch to grasp that getting stoned could enhance a night at a celebrity chef restaurant or Cirque du Soleil. (The impact on slot machine revenue is dispiriting to contemplate.)

Nevada law allows recognized medical marijuana consumers from other states to buy it in Nevada, the most permissive “reciprocity” component of any state. Nevada voters will decide on full legalization in 2016 if state lawmakers don’t allow it first.

The combination of customer access and Las Vegas exposure could be a huge advantage for brands like Marley Natural with national aspirations. Pot growers have honed their craft to the point that powerful pot is well on its way to becoming a commodity. If Vegas can establish itself as the place where many tourists take their first legal hit with a reputable brand, it could establish itself as the marijuana industry town.

It’s a billion-dollar business opportunity, but some activists and small businesspeople see where the industry is going as a raw deal for them and a missed opportunity for a country with a steadily declining rate of entrepreneurship. “Big business and big government are doing this under the guise that they have to control all this,” said Jane West, who started Edible Events, a cannabis event planning company in Denver. “It’s all about big money now.”