The legal cannabis industry generated nearly $7 billion in revenue in 2016, a figure that is expected to more than double by 2020. Some of the arena’s most forward-thinking leaders–investor and entrepreneur Benjamin Bronfman, consultant Andrew Freedman, delivery service founder David Hua, and attorney Tsion “Sunshine” Lencho–talk with Gossamer‘s Verena von Pfetten about the sector as a hotbed of innovation.
Fast Company: You’ve all done a multitude of things. David, you’ve launched several companies. Andrew, you were in government. Sunshine, you’re a practicing lawyer, and Ben, you’re an entrepreneur and a musician. Why get into the cannabis space?
Ben Bronfman: For me, it was deeply personal. My family [which founded the Seagram Company] made its wealth in Prohibition, so there was this historical mirror. My mom’s side was African-American, and I saw that they were, in the United States, locking up African-American and Latino youths on this issue. I decided that I had to dive into this space. And once I got in, I couldn’t get out.
Sunshine Lencho: In law school, I took a wine-law class. There was a footnote on marijuana prohibition that I turned into a research paper. I realized that Prohibition was founded in very racist animus that you see perpetuated in law enforcement throughout our country, and we were repeating some of the patterns. I felt it was important that we create a space for people of color to come to cannabis and feel comfortable operating businesses in it.
Andrew Freedman: I’m more involved in the government side of entrepreneurialism. I was the lieutenant governor’s chief of staff in Colorado when we legalized recreational marijuana and basically became the project manager for starting up legalized adult use and medical marijuana in a commercial fashion. My new firm helps other governments figure out how to get this done, creating little startup communities within government itself.
David Hua: Yeah, so I’ve been smoking since high school. [Laughs] It’s really helped me in my life. I’ve been in software for the last eight years in San Francisco and I saw a pretty clear need for technology to help this industry.
FC: David, your delivery service, Meadow, was the first cannabis-based business to graduate from Y Combinator’s incubator. How did you pitch Meadow?
DH: They grilled us on a lot of the regulatory and compliance pieces. They had a lawyer in the interview, which was intimidating. During the class, though, it was just like everybody else–you’re an entrepreneur trying to build a company. We had more friends, I guess. Because in Y Combinator, you end up testing each other’s stuff.
FC: In the startup space, everything’s about scaling, how quickly you can grow. How has that come up against legislative obstacles across states?
DH: Well, for us, we’ve been using the Wayne Gretzky quote, “You don’t skate to the puck, you skate to where it’s going.”
FC: Andrew, how did Colorado lead the initial charge on recreational-use legalization?
AF: [There was tension] between the people who have been growing and selling and using marijuana versus people who were interested in a tax-and-regulate system. Colorado has done a number of things remarkably well. It listened to its citizens in a fast and efficient manner and created a marketplace. [However,] the barriers to entry into the market are high and tend to go to people who have access to capital already.
FC: If you want to start a marijuana-growing operation, you’re looking at…?
AF: Roughly a million dollars. You have to get a space, you have to get it up to code. The code is changing all the time and so you should probably have a lawyer on hand, and lobbyists. You need to get both a city license and a state license. Then once you start growing marijuana, it’s going to take you another four or five months to start seeing a profit come in from that.
FC: And you can’t get startup money from a bank loan?
AF: For the most part, you can’t. A few people have managed to along the way, but banking is naturally hesitant because they still have to report to the federal government, and marijuana remains a federal felony. So it’s mostly friends and family loans and private-equity loans. We did see arrest rates drop [in Colorado after the law passed]. But we saw it much more for Caucasians than African-American and Hispanic communities. Colorado said, “Here’s the data; it’s not great.” Things like community policing are a much broader issue than just marijuana.
FC: Sunshine, you have some direct experience in this area with your education and training organization, Supernova Women, right?
SL: We were based in Oakland, [California,] attending city council and public safety commission meetings, and despite marijuana being the lowest enforcement priority for our police, we saw that [law enforcement was] disproportionately giving citations to and arresting black males in the city. And we didn’t see anyone black attending these meetings where the city council was talking about ordinances that would have allowed for a locally regulated market. So we decided as a group–there were four of us–that we were going to read the regulations, write summaries, and have free events all over town so our community could come and learn what people who have hired lobbyists or have had the businesses that were considered lawful in the city of Oakland already knew. From there, we expanded to L.A., Sacramento, and Boston, and have created a network of people of color who are working in businesses, and also on the local and state levels, to figure out how to build an equitable cannabis industry.
BB: In New York State, there were 43 groups that went after five [marijuana-growing] permits. The average spend was $1.6 million. So roughly $70 million was wasted on a permit that went to five people. There is a major issue around fair equity in this industry. But on the biomedical [front], there’s a giant opportunity for young scientists of all colors and backgrounds to participate.
FC: When people talk about the cannabis industry, they often just talk about the product.
DH: There are two sides. One where you touch the plant and one where you don’t. Ancillary services like ours, which provide technology, [don’t]. But without a clear understanding on how people that do touch the plant operate, it’s really difficult to provide the right tools. There are some misconceptions in this industry. You may think that there’s a lot of money flowing in, but there’s not necessarily a lot of profit coming out. If you’re going to touch the plant, you can’t deduct your business expenses. Getting a bank to give you a bank account is quite difficult. IP, branding–you can’t really get trademarks on all of this stuff to protect what you’re building. These are things people should know.
FC: What do you see as the fastest-growing opportunities in cannabis?
AF: First of all, this is an agricultural commodity, and so the profit margins are going to go to zero really quick. The first [bit of advice I give to people] is please don’t get in on the grow side. I mean, unless you have, like, a billion dollars and have literally the largest farm in California or Colorado. But we see two big opportunities, and the first is data. There is something called a seed-to-sale tracking system. In Colorado, that’s a radio frequency identifier tag that’s put on every plant. Hua is also working on a track-and-trace system on top of that. No other crop is tracked that way, on an individualized level. You’re talking about millions of pieces of information, and the first people who can figure out how to layer analytics on top, get the right APIs going, get involved both on the regulatory side and financial side, and kind of embed themselves as necessary data products in the space, I think they’re going to do very well.
BB: And in terms of health data, it’s extraordinary. Opioid deaths are dropping by 25% in states where medical cannabis is legal, which is incredible. That kind of data needs to be researched to understand chemically why that is. The United States decided that the National Institute on Drug Abuse will be the one that oversees medical cannabis, which is why we don’t get any good research. But this plant does extraordinary things, and we’re really just at the beginning of starting to learn about it. This industry, frankly, is getting held back a lot in the U.S. We had to start the International Cannabis and Cannabinoid Institute in the Czech Republic because we couldn’t do the research in the U.S. If [cannabis] had only recently been discovered, it would be hailed as a new medical discovery–I mean, it’s extraordinary. It’s nonlethal. You cannot take too much of the stuff. It will not tell your body to stop breathing. I mean, that’s important when you think about how we’re having this massive opioid epidemic.
SL: I am a lawyer, but all of my cofounders touch the plant. It was really important that we have an organization that’s composed of women who touch the plant so that we can actually educate and inform the people who want to start their ancillary businesses from a place of expertise. When we started this two years ago, [California governor] Jerry Brown had just passed the Medical Cannabis Regulation and Safety Act, which started the timing for regulating medical use. We had people figure out how to get into gray space in Oakland and elsewhere, where they were able to at least show to the dispensaries, which were licensed, that they were operating a manufacturing business in a certain manner, which wasn’t licensed, because none of the manufacturing businesses in the state of California were licensed on the state level [until January 2018]. With the paperwork that these manufacturers put together at one of our events, they are now distributed in the Bay Area. That’s a great success story.
BB: People forget that in this country people are committing federal disobedience and breaking federal law to bring this industry into the foreground. The reason my company doesn’t work in the United States is because I have high aspirations for the space and worry about what it’s like to be an African-American manager going into the space. To break federal law and to do it when you’re African American, it’s a big deal.
SL: I tell people, “You can go do this. Here’s how you’re going to join us in this movement,” and they look at me: “Well, you have to deal in cash, because I can’t bank. And you know we get over-policed.” Part of the beauty of the cannabis community—and Hua can speak to this—at least in the Bay Area where I live, is that we support each other, and there’s a rapid response to law enforcement intervention, to people being wrongfully prosecuted and [not being paid by] dispensary owners, which happens, particularly when you look like me. The California wildfires destroyed an entire season, pre-harvest. [These are] people who have little to no savings, who don’t bank, who probably buried money in their yards and don’t have insurance, who paid for local licensing and were saving so they could pay for state licensing in January. So it is a huge loss, and I know that our state government is trying to figure out how to transition. You do see these boutique firms coming to events. Hua hasn’t talked about this, but Meadow hosts Bay Area community education events for another organization I used to work with, the California Growers Association. At those events, you’ll have people who are trying to inch into the services side of things meeting up with people. But you need paperwork, accountants. If you don’t educate your state and local officials on what section 280e of the IRS tax code does to your profits, you will find yourself going out of business, even if you have some revenue. Because that check goes straight to the federal government. That’s another thing that we try to do with Supernova, to get them to understand, yeah, you see the numbers in the press, but those are revenue numbers, those are not profit numbers.
AF: As hard a problem as we’re having with banking, it’s about 10 times harder with insurance. There are always secondary markets where you can pick up further insurance, [but] the riskier it is, the more you pay. We will not see a great insurance answer for marijuana until it is legal on a federal level. You won’t see protection against wide-scale fire or acts of God.
DH: The wildfires have been a pretty tragic happening. From the community standpoint, we’re trying to work with people to secure large plots of land and then find farmers who have been affected. Other farmers donate clones, materials, and have them restart–under one big canopy.
This story was adapted from the Fast Company Innovation Festival.
Verena von Pfetten is the chief brand officer of Gossamer, a cannabis lifestyle brand co-founded with David Weiner, former chief creative officer of Digg.