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The California-Colorado Cannabis War

One’s got the biggest market for legal pot, but the states with smarter regulation could have the edge.

The California-Colorado Cannabis War
[Photo: Flickr user Doc Searls]

Oakland-based Auntie Dolores is a well-known brand in the country’s biggest legal cannabis state. The company has been making cannabis-infused edibles, like brownies and pretzels, for California’s medical marijuana users since 2008. Its products, which include gluten-free and vegan options, can be found in 150 dispensaries around the state.

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But running a cannabis business in a California can be a very difficult balancing act. “Our laws are just so out of date in terms of how the industry has evolved,” says CEO Julianna Carella, a former professional dancer. The system it established “doesn’t work in an environment that has this many dispensaries and this many patients.”

In 1996, California became the first state to sanction medical marijuana and in 2013 annual sales approached $1 billion, according to a report by ArcView Market Research, making it the country’s largest legal cannabis market. But industry executives complain that the Golden State has yet to implement the kind of statewide regulatory framework that would give clear guidelines to a business like Auntie Dolores.

While dispensaries operate openly in California, the law only explicitly permits cultivation and distribution by non-profit “collective, cooperative cultivation projects.” The guidance is vague on how these organizations should specifically function. The questions that arise are as basic as how to transport plant matter to factories and ship finished products to stores

California’s approach is “very gray and we try our best to stay safe and not have any issues arise while we’re trying to get the product to the patients that want it and need it,” Carella says.

Voters in four states and the District of Columbia have chosen to legalize marijuana and more than 20 allow some access to medical marijuana, but the federal government still considers it an illegal drug with no medical uses. This has led to a confounding legal and regulatory situation as cannabis companies—emboldened by their industry’s apparent support from voters—strive to build brands, create higher value products, and expand into new states.

The situation makes California a less attractive state for companies in this fast-growing industry, despite the size of the market. It’s widely expected that Californians will get the chance to vote on legalizing recreational (what many in the industry call it “adult use”) marijuana in 2016.

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Photo: Flickr user Martijn

Colorado Dreamin’

In Colorado, where medical and recreational cannabis is already legal, the state licenses growers, processors, and dispensaries. It also requires radio frequency identification (RFID) technology to follow every pot plant “from seed to sale,” much like companies in other industries track their inventory. This aims to prevent plants from leaking onto the black market but also assures businesses that they are using legal plants. By contrast, in California last year there were dozens of raids on grow sites and dispensaries.

Michael “Dooma” Wendschuh spent the early years of his career in Los Angeles, where he cofounded the company Sekretagent Productions. (Wendschuh and his partner are probably best known for co-writing the first Assassin’s Creed video game, which launched a wildly successful franchise.) When he began exploring opportunities in cannabis, he decided he had to move to Colorado. He’s now a cofounder of ebbu, a Denver-area company that is using pharmacological techniques to develop products designed to deliver predictable and reliable highs, much in the way people know what to expect with alcohol and caffeine. Ebbu expects to brand these products with words like “Energy” and “Chill.”

The company also plans to conduct trials to ensure product safety, like pharmaceutical companies run clinical trials for new drugs. Wendschuh says he would have loved to establish ebbu in California but the state’s lack of a clear regulatory environment made it untenable.

“While California is the largest addressable cannabis market in the USA, the risks associated with setting up there outweighed the benefits,” he wrote in an email. “Until California drastically overhauls and begins enforcing its marijuana rules, there’s no way an angel-funded technology company like ours could set up shop in their state.”

The company is based on the premise that there’s far more variation in cannabis than in other consumer products. When a consumer walks into an adult dispensary she encounters a bewildering number of strains with names like “Girl Scout Cookies” and “Durban Poison.” Even consumers devoted enough to know the difference aren’t always satisfied with the consistency.

Within the industry, there’s some skepticism about whether ebbu can, as Wendschuh says, tame the plant. Here the company stands to benefit from cannabis’s odd legal status. Since cannabis is federally illegal, the industry’s products are unregulated in important ways. As is often the case with nutraceuticals, there’s no law that will require ebbu’s “energy” product to make users feel energetic.

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But the placebo effect remains a force in this industry and ebbu says its offerings will become more precise with time. “We approach product development like an app for your phone,” Wendschuh writes. “We release initial products, and continue to improve those products iteratively and indefinitely.” He casts ebbu as a component of other brands, much in the way semiconductor companies like Intel power consumer tech products.

Walled Gardens

There are now established cannabis brands available in Colorado and California, but expanding to other states where their product is legal is presenting a whole new set of challenges. Since marijuana is federally illegal companies can’t transport the drug from, say California, to neighboring Nevada, which is making its own bid for cannabiz supremacy.

Auntie Dolores plans to address the problem by creating branded kits and sending them to partners in the other states. Take the company’s pretzels: “There’s 28 ingredients in that product,” says Carella. “We’re going to send 27 of them and cannabis will get added on their end…There are so many competent producers out there but they don’t necessarily want to take the time to start a whole new brand from scratch.”

But it’s still a challenge. According to Travis Howard, principal of the Boulder, Colorado consultancy Shift Cannabis, companies that go the kit route would be wise to ensure that courts in their partner states will enforce contracts for companies that are breaking federal law.

Numerous edibles companies are developing their own variations on the theme of finding out-of-state partners. One of the more glaring ironies is that the ambiguous legal environment is forcing (or enabling, depending on your view) those in the cannabis industry to broaden their footprint far more rapidly than if a company could just have one factory and ship to wherever their product is legal.

California allows medical marijuana but the law has nothing to say about companies like Auntie Dolores that have products available in 150 dispensaries. It’s hard to blame a company for maximizing the opportunity. “It’s all workarounds, to be honest,” says Carella. “We don’t have a legal framework with which to work in, yet the demand for the product is so strong that we just keep going.”

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Clarification: California law allows dispensaries to operate as “collective, cooperative cultivation projects,” not collective or cooperatives, as previously written.

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