So, they’ve finally legalized recreational cannabis in your city and you’re thinking to yourself “hey, I know this industry, I LIKE this industry, so I might as well WORK in this industry!”
Congratulations, that is the first and most important step, because as they say, “do what you love and you will work another day in your life but you will also enjoy it”.
Now you have to choose what type of business you want to start!
The growing, processing, and sale of cannabis and cannabis-based products is now a rapidly growing industry. The global market is expected to hit $40 billion by 2021 — and that’s nothing compared to the staggering $75 billion projected for the U.S. alone by 2030.
To put things in perspective, that would amount to a more than tenfold increase from the modest $6 billion U.S. market in 2016.
Fast growth, though, does not always mean smooth sailing. If you are looking to enter this new and promising field, you will need to move fast and get ahead of the game, all the while avoiding regulatory pitfalls and common mistakes. That takes grit, business acumen, and in-depth industry knowledge.
If you are having difficulty choosing which type of business you want to work in, we recommend investing in some market intelligence so you can be confident of market size, sub-markets, and future growth potential.
Below is our comprehensive guide on exactly how to go about starting a cannabusiness and is designed to help you decide whether this kind of venture is really is your cup of tea.
It should also serve as a road-map that covers everything from brainstorming product ideas to registering your business and navigating legal hurdles so that you can confidently begin running your own company in an industry you love.
2020 Cannabis Industry Overview
Before diving into the specifics, let’s first take a step back and examine the bigger picture. What caused the unprecedented boom in the past few years? What does the market look like, and what does the future have in store for it?
Recent Industry Growth
Experts have dubbed the current cannabis boom “the green rush,” a tongue-in-cheek reference to the infamous Gold Rush of the 1840s.
The analogy is more than merely humorous. The market has truly skyrocketed over the past few years and is showing no signs of stopping any time soon.
The Fall of the Tobacco Industry
A host of complex socio-economic changes and policy decisions are at least partly responsible for the green rush. One such development is the steady decline of the global tobacco industry.
With the number of smokers worldwide decreasing year after year, investors and other key players are on the lookout for more lucrative opportunities.
As cannabis use increases and demand grows by the day, this young industry seems like a particularly attractive market with more than promising returns.
The Removal of the Stigma
The removal of the stigma linked to cannabis use is another defining cultural movement that has certainly helped its rise on the economic stage.
Many reputable academic institutions have published studies that indicate the beneficial properties of the plant.
What’s more, the positive portrayal of cannabis in mass media and mainstream culture has helped turn it into a household name.
Decriminalization and Legalization
Given all this, it’s no wonder that many governments want to capitalize on this emerging market by decriminalizing or legalizing marijuana altogether. This move is also furthered by the failure of the global war on drugs, which has hurt and divided communities and fostered inequality.
Governments hope that decriminalization will boost tax revenue, revitalize the economy, and redirect valuable crime-prevention resources where they are most needed.
Unfortunately, the U.S. is lagging behind the rest of the developed world. As of January 2020, marijuana is fully legal only in D.C. and the following states:
On the other hand, marijuana is illegal in:
- South Carolina
- South Dakota
All other states have introduced various levels of decriminalization and many allow medicinal marijuana.
For more detail about the specific cannabis laws in your state check out this interactive map that lists whether the herb is decriminalized, legal for medical purposes, legal for recreational purposes, or just carte blanche illegal.
Currently, the legal U.S. market is estimated at around $16 billion. In contrast, the illegal market is believed to be worth at least $40 billion. Clearly, there is a lot to gain if the illegal revenue is funneled into the legal economy.
The benefits cannot be overstated. Colorado, the first state to legalize the production and retail of recreational marijuana in 2014, is a great example.
In 2017 alone, the Colorado marijuana industry generated $2.4 billion in economic activities, amassed nearly $1.5 billion in tax revenue, and created 18,000 full-time jobs. What’s more, $100 million of that revenue was reinvested in state public schools.
As mentioned above, the U.S. market is set to reach $75 billion by 2030. The global growth is harder to predict in the long term as it is still unclear which jurisdictions will decriminalize or legalize marijuana in the next decade.
According to some estimates, however, the global legal marijuana market might reach $75.69 billion by 2026.
These numbers are staggering and indicate a thriving investment climate.
How to Start a Cannabusiness: A Step-By-Step Guide
Step 1: Pick Your Field
The “cannabis industry” is a misnomer. The reality is that there are many cannabis industries that prospective investors and entrepreneurs should consider carefully.
Some of them, such as cultivation and retail, are rather obvious, while others are somewhat counter-intuitive. To give you a taste of this diverse economic landscape, we will go over some of these in turn.
Currently, investors in cannabis real estate can expect high returns on investment. A 2018 survey indicated that 76% of real estate brokers report that cannabis deals price above market.
Real estate covers many areas of the legal cannabis industry and can involve:
- Retail development
Unfortunately, cannabis real estate is not just more lucrative than your average property deals — it is also more complex.
Cannabis real estate is subject to much stricter licensing and zoning rules. Depending on your state, these may restrict it to specific industrial areas only and impose particular fire, safety, and security requirements.
The pros though, are that given the extra legal hurdles, getting land zoned for cannabisuiness can pay large dividends as the supply is often not keeping up with demand in most cases, increasing asset valuations.
Still, the road is tough, as cannabis real estate must also typically be far removed from residential and recreational areas.
Furthermore, despite the high demand, the supply of real estate is still somewhat limited. That is due to both the strict zoning regulations and the plant’s limited legalization across the nation.
Finally, and perhaps most importantly, cannabis still classifies as a Schedule 1 drug under federal law. As a result, banks and institutional lenders, which are federally insured, cannot finance cannabis real estate projects.
Therefore, prospective investors would need to secure an upfront lump sum or private lending sources. Due to the plant’s legal status at a federal level, most insurers are also unwilling to insure cannabis legal estate.
-CBD/Hemp Cultivation & Processing
In the span of less than a decade, CBD became a mainstream media staple. CBD products come in all shapes and forms and are now so popular that the fledgling CBD market is projected to reach $20 billion in sales by 2024.
The 2018 Farm Bill helped fuel this growth. It removed CBD with less than 0.3% THC from the federal Controlled Substances Act and placed it under FDA control.
CBD lotions, tinctures and infused food and beverage products are becoming “mainstream” at a lightning pace, with CBD lip balm, gum, and sodas common place in grocery stores in legal states.
Despite this positive development, the CBD industry still faces serious challenges. All levels of the CBD industry are subject to strict regulations — from licensing, manufacturing, and processing to marketing and distribution.
For example, CBD cannot be marketed as having health benefits. Therefore, anyone looking to enter the industry needs to make sure that they understand all relevant local and federal regulations.
What’s more, like any new industry, the CBD market is still a regulatory gray area. The rules will almost certainly change and require constant vigilance.
Last but not least, just like with real estate, banks and insurers are still hesitant to get in the industry, making starting a CBD business a risky affair.
On the up side, given that CBD products must contain less than 0.3% THC means their path towards federal legalization and regulation is much shorter than that of it’s more psychoactive partner THC.
We fully expect CBD to continue to grow and become legal in most of continental America within 5 years due to the lower perceived “risk” involved in this highly agricultural commodity.
-Cultivation & Farming
In any industry, from palm oil to rubber, those who control the actual farms in which the raw materials are produced also are the highest up in the “value chain” and thus stand to reap significant financial reward.
Cultivating cannabis falls into three main categories: CBD/industrial hemp, mass produced commercial cannabis product (often refined to extracts), and more boutique grow operations, often referred to as cultivars, which specialize in growing high potency strains for medical and recreational use, often on a contract basis for a brand or dispensary.
You should only consider starting a cultivation business if you have prior experience in industrial agriculture. This industry presents unique challenges, including:
- If growing outdoors, choosing the best soil for type of cannabis grown
- Regularly monitoring the pH levels of the soil, which should be at pH 5.5–6.5
- Choosing between outdoor and indoor growing facilities
- Choosing between soil or hydroponic nutrient delivery systems
- Choosing between sun lamps, natural light, LEDs or a combination of multiple light sources
- Having sufficient space and adequate infrastructure for large-scale cannabis cultivation
- Having correctly zoned property for any given municipality or county in which growing is occurring
- Keeping the plants safe from pests, drought, excess humidity, and adverse weather conditions
- Ensuring that the growing facilities are secure and theft-proof as the crop has high black market value and is poorly tracked.
- Making sure that indoor growing facilities are energy-efficient but also guarantee adequate levels of light and effective air ventilation, irrigation, and humidity control
Besides, you would also need to know all relevant state and federal licensing, zoning, and other rules.
That being said, however, cannabis is a great crop that can yield rich harvests if cultivated properly.
Outdoor plants can grow up to ten feet or higher and could even serve as an excellent cover crop for smaller plants, such as carrots or tomatoes.
-Manufacturing/Extraction & Processing
Whole cannabis flower only makes up a small fraction of the total market. Edibles, oils, extracts, tinctures and distillates are surging in popularity as casual/recreational cannabis use continues to expand. Ancillary businesses, like manufacturers of specialized extraction, distillation, processing and packaging equipment are also benefiting from the growth of this new green marijuana industry.
With the proliferation of blanket anti-smoking laws already covering all of America, it is only logical that smokeless alternatives will continue to grow to become major market segments.
We are already seeing some of this when it comes to financial investments by other legacy F&B companies. One of America’s largest alcohol importers bought a 38% stake in Canopy Growth, one of Canada’s largest cannabis growers. Beer giant Molson Coors has teemed up with cannabis grower HEXO to produce CBD infused beverages, and Anheuser Busch partnered with a large Canadian medicinal cannabis grower Tilray to produce CBD and THC infused drinks in Canada.
Expect other larger F&B players, particularly confectionery and candy brands to jump in to capitalize on their brand recognition once the federal government loosens it’s regulatory grip on banking, financing and payment processing.
Cannabis tourism or “cannatourism” if you will, is one of the most rapid growing segments because of the fragmentation in the legalization process, which is causing millions to travel to “oasis” states each year to tour grow operations, visit dispensaries and just spend money in localities that are 420-friendly.
Even once the market matures, tourism will remain a popular business model for all types of cannabusinesses, similar to how the tourism model is massive within the craft brewing/distilling scene which has been raging for over a decade now and doesn’t show any signs of slowing down any time soon.
Popular Types of Cannabis Processing Business Models
Cannabis refinement and oil extraction, together regularly just referred to as post-harvest processing, can be done using several business models, each with its pros and cons.
Tolling refers to the practice whereby growers pay extraction companies to extract the oil from their produce and then return it to them to sell on the market. This is similar to how refineries process crude oil, or how mills process corn/soy products. It’s not a glamorous or often talked about step in the business cycle but it is a very large volume stage with high profit potential.
The main benefit of this model (across industries) is that the grower pays the extractor a flat fee per gram. That way, the extractor is safe from the vagaries of the market, until and unless the grower goes bankrupt.
On the other side, tolling is a low-risk but also a low-return business model, as extractors cannot benefit from changes in oil prices. Still, those who “get in at ground level” now will be first in line when volume increases after legal reform and tolling is very much a volume play in more mature markets.
-Spot Market Sales
Extraction companies that use a spot market sales model buy cannabis plants, extract the oil, and then sell it wholesale. That way, they benefit from changes in the price of both cannabis and oil and hit better margins than under a tolling contract. These companies usually form partnerships directly with growers to get the lowest possible pricing on high volume orders as it takes a lot of plant material to be processed to procure relatively small volumes of extract/oil.
The dependency on healthy relationships with growers, healthy crops and large yields also means, of course, that profits may be unpredictable and even nonexistent in a volatile market.
White labeling is similar to the spot market sales model. The extractor buys the plants, extracts the oil, and then processes it into ready-to-use, unbranded products. Cannabis brands then buy these and put their own labels on them.
By providing an extra packaging service to retailers, extracting companies can increase their profits. It also reduces overhead and risk for startup businesses looking to dip their toes into this relatively young industry.
However, it’s not without investment costs, such as labeling and packaging, which require more investment upfront and are more cost-intensive than spot market sales.
Retail extractors buy cannabis plants, extract the oil, and package it into their own, branded consumer products. These then hit the retail supply chain.
This model comes with both the highest margins and the highest risks. It allows extraction companies to capitalize on the difference between wholesale and retail prices. It also allows companies to build a brand, which in time, can become a very valuable asset itself. Creating a brand while the industry is just unfurling allows companies to seize market share and establish themselves as trusted players in an industry fraught with fly-by-night companies looking to make a quick buck (we’re looking at you shady CBD brands!)
However, owning your brand from production to retail also requires extractors to invest in retail facilities, build brand awareness, drive demand, and compete directly with all other players on the market.
Ancillary industries are often unjustly overlooked by those looking to enter the cannabis business. This market is still a fledgling one, and as such, it needs the support of a full cohort of ancillary services. These include but are not limited to:
- Legal Services (navigating complex state & federal law)
- Research (newly legalized substance means plenty of new derivatives and applications to test)
- Accounting and HR (no business is immune to the chores of accounting)
- Security (high street value crops require extra security)
- Compliance (local, state, federal laws are continually changing, adaptability with compliance is critical in early growth stages)
- Advertising, marketing, and PR (a still young industry given advertising restrictions on cannabis but on that will surely blow up as legalization spreads)
- Tech, software, and IT (CRM, sales tools, inventory management, crop forecasting, social networks, web development, all will cater to this new high growth industry)
These and other gaps in the industry are still to be filled. The ever-growing demand for cannabis and its related products generates increased demand for ancillary services too.
What’s more, these industries are typically not subject to the strict cannabis-specific regulations and face much lower legislative hurdles.
If you are currently engaged in one of the above industries, then seriously consider expanding your portfolio also to include cannabis.
Step 2: Brainstorming Unique Ideas
After picking a field, you need to do thorough brainstorming and research to ensure that your business has a solid foundation.
Market and Competitor Research
Great market research is a must for starting any business. You need to weigh in:
- Current consumer demand
- The other brands currently on the market and their products
- General industry trends
We’ve researched and reviewed the top cannabis industry data intelligence and market research firms to help you cut through the clutter of deciding where to gather your information. Accurate data is critical when brainstorming a business because if you get demand wrong, it won’t matter how flashy your brand or how hard you work, you will still struggle to sell, so don’t skimp out on market research up-front!
Furthermore, understanding the unique challenges of the cannabis industry and the consumer base is crucial for the success of any business model. You should think of any unmet needs in the market and make sure you have an ideal client profile.
Use surveys and other tools to get to know and connect with your customers before, not after, entering the field.
Lastly, familiarize yourself with all aspects of the supply chain, including:
- Banking and financing models
- The regulatory framework
- Advertising restrictions
- The main stakeholders in the supply chain
Remember The Four Ps
Any entrepreneur or investor should consider the Four Ps, also known as the marketing mix, before embarking on a new venture. These are a set of tactical marketing tools that can help get a desired reaction from the target market.
The Four Ps are:
The products are the goods and/or services that you offer to your client base. Factors to consider here include the brand name and logo, quality, quantity, packaging, design, variety, and features of your products.
All these need to fit your client profile and target market. Furthermore, think of your products or services as solutions to your customer’s problems.
The price is, of course, how much customers pay for your product. Do not limit your brainstorming just to the pricing, however. Consider any discounts, deferred payment options, credit terms, and other financial plans and benefits you could offer your clients as well.
The place is, broadly speaking, the material base and infrastructure that help your products or services reach the end consumer.
Think beyond the physical location and consider transport, supply channels, coverage, inventory, and general logistics.
Finally, promotion refers to the tools you can use to promote your products. Think about PR, advertising, and sales promotions — the opportunities are endless.
Use the Four Ps to devise an in-depth, effective marketing strategy. Your aim should be to both reach your goals and offer something of value to your clients.
Write a Business Plan
The last step in your brainstorming should be the drafting of a business plan. While a business plan is not mandatory, it can be very useful. That is all the more so in the cannabis industry, with its regulatory quicksand and burgeoning market.
A business plan is a summary of your overall strategy. Ideally, it should include:
- An overview of the company and your team
- An analysis of the industry, your main competitors, and target market
- Your financial goals and funding sources
- A marketing and sales plan
- A business development plan that includes scaling and future growth projections
- An exit strategy
It is crucial to draft a plan that is customized to your chosen field, whether it is cultivation, retail, or CBD extraction.
Furthermore, you should always write with your audience in mind. Do you intend to use your plan to pitch investors or potential teammates and co-founders? In either case, make sure to optimize both the writing style and content accordingly.
Step 3: Planning
Next comes the planning stage. Things get more specific here.
Make Sure You Understand Cannabis Regulations
While understanding the relevant legal framework is key to the success of any business, it is even more important when it comes to cannabis.
As mentioned above, the area is in a state of flux, and the regulatory landscape is expected to keep changing in the foreseeable future.
Therefore, arm yourself with good knowledge of both the local and federal cannabis laws.
It might also be a good idea to consult a lawyer or another legal professional that specializes in the field.
Secure Funding, Business Loans, or Investors
With banks refusing to hand out loans to cannabis ventures, you need to make sure that you can pay a lump sum upfront.
Alternately, a wiser option would be to get a private business loan or some other form of investment.
Get Business Insurance
A good insurance policy is essential to any business and is practically indispensable when entering such a new and highly unregulated field.
Unfortunately, many insurers are hesitant to work with cannabis businesses, so make sure to do your research well.
Cannabis-Specific Payment Processors
It is not only bank loans that are off-limits — so are all other types of traditional banking services. That is due to the conflict between state and federal laws, as the latter still classifies marijuana as a Schedule 1 drug.
Fortunately, a series of measures taken in Congress make sure that the government does not enforce anti-cannabis laws in states where it has been legalized.
These measures, however, are temporary and subject to renewal, which leads to uncertainty in the market and among banking institutions.
Luckily, where banks have retreated, alternative payment processors have stepped in. There are plenty of large, nationwide payment processors for cannabusinesses that are willing to take on extra financial and legal risk, which is reflected in the service charges.
That is why it is a good idea to shop around and compare different options because once you get locked in, switching can be about as fun as switching cable companies..
Comparison shopping for payment processors consists of a simple process that looks something like this:
- Identify list of merchant account payment processors that legally operate in your state (there are local, regional and national options to suit the scale of your business)
- Narrow the list down to those that offer services you need (credit card processing, wireless payments, mobile point-of-sale systems)
- Contact your finalist list and ask about their credit card processing fees (rates in non-cannabis industries vary from 1.7-4%, however “high risk” merchants may pay 5-8%)
- Narrow your list to two processors that meet your criteria and have the lowest long-term fees, then call each and try to play them off each other for a discounted rate (think cable TV/car negotiations, everything in the payment processing industry is usually negotiable)
Cryptocurrencies are also popular in the industry and are definitely worth considering.
Step 4: Hiring
Getting the best people on your team could ensure the lasting success of your business. As uniquely important as they are, though, staffing decisions in the cannabis industry are also uniquely challenging.
The field is relatively new, which leads to high demand and a low supply of qualified candidates at all recruitment levels.
Besides, as the industry is still in a regulatory gray zone, you may be at a higher risk of lawsuits and financial loss resulting from poor staffing decisions.
That is why you should recruit carefully. Key positions to consider include:
- Cultivation staff
- Lab staff
- Dispensary managers
- Legal support
- Delivery staff
Last but not least, make sure that you know your state’s cannabis laws and licensing rules. These often have specific requirements for staffing and recruitment issues.
Industry-Specific Job Boards
A further challenge to hiring in the industry comes from the still-present social stigma. Some mainstream recruiting platforms refuse to partner with cannabis businesses.
Fortunately, the past few years saw the rise of cannabis-specific recruiting platforms and HR agencies. These could make your staffing choices easier and less stressful.
Cannabis Training Programs
Many academic institutions now offer cannabis training programs. You may want to look for employees or partners with cannabis-specific accreditations. Alternatively, you may sign up for a course yourself.
Step 5: Marketing
Finally, let’s talk about marketing.
Due to the illegal status of cannabis at the federal level, all major social media platforms (Facebook, Instagram, LinkedIn, Pinterest, Snapchat, Twitter, and YouTube) strictly restrict marketing and advertising of both cannabis and its ancillary businesses.
As a result, cannabis businesses that post marketing content on these platforms may get their pages, profiles, and ad accounts shut down without notice. That could be initiated by the social media platform itself or by competitors flagging your content.
So to avoid wasting time and money, make sure any content you post on social media is strictly educational and informational.
Get to know the cannabis content policy of the platform and stay away from promotional material. That includes:
- Listing your pricing
- Posting images or videos of people using your products
- Inviting users to contact you to learn more about your product or services
- Posting your contact info if consumers can use it to place an order
Alternatively, you may post your content on one of the many cannabis-friendly social media platforms that have sprung up in recent years.
Branding and PR
With social media being mostly off-limits, brands are turning to other forms of PR. While traditional advertising is just as tightly regulated as social media platforms, there are many other tactics you could use.
One strategy involves generating earned media and organic reach by getting people to recommend and talk about your content.
The best way to achieve that is by consistently publishing great content on your blog, website, social media, or other publications. Industry and trade periodicals could be a great choice here.
You could also reach out to social media influencers. Just pick someone whose audience resonates with your message and who understands the rules for disclosing material connections with businesses.
Sponsored content is a great PR strategy too. That is similar to earned media campaigns but typically features a higher publishing frequency. It allows you to build brand awareness by sharing valuable information in credible publications.
Depending on your budget, ambition, and skill level, you could publish articles or create entire landing pages.
The cannabis industry is a dynamic and exciting field that holds a lot of promise. As with any emerging market, the early birds might get the worm if they bet on delivering quality products and services backed by a sound financial and business strategy.
Carefully planning all aspects of your cannabusiness is the key to success. Hopefully, this guide has been useful in giving you an idea of where to start.