- In 2022, two states legalized cannabis in some manner, while another three voted no on legalization.
- Each state has its own laws governing the medicinal and recreational use of cannabis, and every business must follow the laws that govern the areas in which they operate.
- Cannabis remains illegal at the federal level, but enforcement against state-level businesses has largely been suspended and lacks congressional funding, making these markets effectively safe for the foreseeable future.
- This article is for entrepreneurs considering starting a cannabis business who must understand the regulations surrounding a complex and growing industry.
Each year, new legal cannabis legislation or ballot referendums open new markets in the rapidly expanding cannabis industry. For many entrepreneurs and small business owners, this represents an opportunity to pivot toward an international, high-growth industry with enormous growth potential.
We’ll examine what the cannabis industry’s growth and expansion mean for entrepreneurs interested in the space and explore some of the biggest business opportunities available.
The value of the US cannabis industry
The U.S. cannabis market is projected to reach $72 billion annually by 2030, according to industry research group New Frontier Data. This projection comes at a time when cannabis remains federally illegal despite the legalization of medical marijuana by 37 states, three territories, and Washington, D.C., as well as the legalization of adult-use (sometimes called recreational) cannabis programs by 21 states, two territories, and Washington, D.C.
As cannabis legalization movements expand into new states – and some members of Congress advocate for reform and even federal legalization – the cannabis industry seems poised to continue its breakneck growth as new markets open.
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State voting on cannabis legalization
Five states voted on some form of cannabis legalization during the November 2022 elections. Additionally, proposed legalization measures did not collect enough signatures to be added to the ballot in two states.
In November 2022, the Marijuana Legalization Initiative was a referendum on voting ballots across Arkansas. This bill would have legalized marijuana use for adults over 21 and allowed adults over 21 to purchase and use recreational marijuana with a 10 percent state sales tax. Voters did not pass the bill.
Maryland voted yes on marijuana legalization in November 2022, making the state at least the 20th to legalize adult-use marijuana. The law makes it legal for adults over 21 to possess up to 1.5 ounces of marijuana and grow up to two marijuana plants at home.
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Voters in Missouri voted yes on the Marijuana Legalization Initiative. This law permits retail sales of marijuana with a 6 percent tax and will also expunge the records of residents with nonviolent marijuana offenses.
In Nebraska, neither the Patient Protection Act nor the Medical Cannabis Regulation Act made it to the November ballot. Organized by Nebraskans for Medical Marijuana, the Patient Protection Act would, if included on a future ballot, let patients and medical professionals possess and use medical cannabis. The Medical Cannabis Regulation Act would create a regulatory committee to oversee the production of cannabis and give patients a path to reliable marijuana products.
In North Dakota, the New Approach North Dakota group collected enough signatures to get a cannabis-legalization measure on the November ballot. However, this measure failed at the ballot box. If passed, the measure would have legalized the use and possession of up to 1 ounce of cannabis, 4 grams of concentrated products and up to 500 milligrams of edibles.
An organization called Oklahomans for Responsible Cannabis Action was the driving force behind gathering signatures to support State Question (SQ) 818 and SQ 819. However, neither amendment made it onto the 2022 ballot, though both could in future years. SQ 818 is an amendment to the state constitution that would guarantee access to marijuana and legalize adult use, while SQ 819 would impose a 15 percent sales tax on cannabis products. SQ 820 is a third measure, from Oklahomans for Sensible Marijuana Laws. It would legalize marijuana for adults age 21 and over and include a 15 percent tax on all recreational purchases.
South Dakota residents voted no on the South Dakota Marijuana Legalization Initiative in November. The initiative focused on legalizing the possession, use and distribution of marijuana for adults age 21 and over.
Two states passed cannabis legalization measures in November 2022, and another three voted no on legalization.
Business opportunities in the cannabis industry
It’s easy to think of the cannabis industry as the cultivators that grow the plant, the manufacturers that refine it into products and the dispensaries that sell those products. However, while these elements are central to the legal-cannabis supply chain, the cannabis industry is much more complex and varied.
Cannabis businesses can be broken down into two broad categories:
- Plant-touching businesses
- Ancillary businesses
Here’s a closer look at these categories and business examples pertaining to each.
Plant-touching cannabis businesses
Plant-touching businesses include those that might come to mind when you think of the cannabis industry, such as breeders, cultivators, manufacturers and dispensaries. However, other plant-touching businesses might not be so obvious, including the transportation and delivery companies that bring harvested cannabis and finished products from point A to point B.
Here are some plant-touching cannabis businesses:
- Breeders: Breeders are focused on the proliferation of existing cannabis strains and developing new strains through selective breeding. They are responsible for developing the seeds cultivators use and identifying and propagating the highest-quality genetics for future plant generations.
- Cultivators: Cultivators manage immense growing facilities, which are generally indoor operations stored in large buildings such as warehouses. They engage in various cultivation methods to grow healthy, high-quality cannabis plants that are harvested and often sold wholesale to processors or dispensaries.
- Manufacturers: Manufacturers, such as extractors, are responsible for processing harvested cannabis flower into finished products, such as concentrated extracts, edibles and topicals. Manufacturers make the various cannabis products available on dispensary shelves possible.
- Dispensaries: Dispensaries are the cannabis industry’s distribution hubs, operating much like retail stores in other industries. Dispensaries vary in their approach to the point of sale. Still, they typically maintain a staff of knowledgeable people who can help guide patients and consumers to the right products based on their needs and preferences.
- Transportation and logistics providers: Without a transportation network, the cannabis industry couldn’t survive. Fleets of trucks bring cannabis flower and products from sellers to buyers and deliver the equipment cannabis businesses need to continue operations. This also includes direct-to-consumer delivery services, which are legal in certain states.
Plant-touching businesses are the most heavily regulated companies in an industry already characterized by immense oversight. To open a plant-touching business, entrepreneurs typically must secure a cannabis business license through an application process, which can be lengthy and expensive with no guarantee of success. Application licensing processes vary from state to state, and there is typically a cap on how many licenses are available, similar to how liquor licenses work.
Some states require “vertical integration,” in which one company manages all cultivation, processing and dispensary businesses. Other states employ a specialization system where licenses for each operation type are kept separate and are often awarded to different companies.
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Ancillary cannabis businesses
Ancillary cannabis businesses comprise all the other types of companies in the cannabis industry. These companies support plant-touching businesses but aren’t necessarily involved in breeding, growing, refining or distributing cannabis products. They can include professionals like lawyers and marketers, as well as companies that produce packaging or machinery that can improve plant-touching businesses’ processes.
- Professional services: Lawyers, business accountants and digital marketers are professional services familiar to businesses in all industries that must observe local and state business regulations. They’re also crucial for cannabis businesses. Given the significant regulatory constraints and highly varied framework of rules from state to state, these professional advisors must have additional expertise in the cannabis industry.
- Packaging: Businesses that produce packaging rarely touch the plant directly. Instead, they focus on regulatory compliance, shelf appeal and branding. Packaging companies must consider business needs – such as how to appeal to consumers and demonstrate company branding – along with regulatory considerations. In many states, colorful packaging or certain branding approaches are considered illegal.
- Equipment: Plant-touching businesses require various equipment types to get things done. For example, manufacturers use large machines to extract compounds from harvested cannabis flower to create cannabis oils and waxes. Similarly, cultivators might want to flash-freeze their harvested flower for preservation during transportation.
- Construction: Cultivation facilities and dispensaries often must be built with strict adherence to state laws and regulations. For this reason, there’s significant demand for contractors well versed in developing these facilities.
- Security: The cannabis industry relies on security for regulatory and practical business reasons, so there is often a need for security equipment and video surveillance systems. Regulators often require that specific areas be viewable by security cameras in cultivation and dispensary facilities; they may also require certain lighting and systems for monitoring the premises. Additionally, many cannabis businesses are forced to operate largely in cash because of the financial constraints posed by the ongoing federal prohibition of cannabis, making them prime targets for robbery.
- Investment: Because cannabis businesses are largely precluded from standard financing options, private financiers – such as venture capitalists and angel investors – have entered the industry to provide funding. Family offices – private wealth management advisory firms specializing in serving high-net-worth investors – are common sources of financing for cannabis businesses, and investors have relished this high-growth industry. Investment options are especially important for plant-touching businesses that face application fees in the tens of thousands of dollars and require substantial capitalization to gain approval.
While many people are excited about starting a plant-touching cannabis business, ancillary businesses arguably offer a lower barrier to entry. Ancillary businesses still face significant regulation compared with many non-cannabis businesses, but they don’t have to vie for a license through a complex and costly application process.
Start an ancillary business by pivoting your existing business strategy toward the cannabis arena. For example, an experienced digital marketer could easily translate their skills to the cannabis space.
Growth potential for cannabis businesses
Cannabis businesses face challenges beyond those faced by startups in other industries. Navigating these challenges in the early days of your business and building a foundation that allows you to grow and adapt as regulations inevitably change will be crucial to your success in the cannabis industry.
Here are some common challenges growing cannabis businesses encounter and some tips for overcoming them:
Developing the right partnerships
It’s challenging, if not impossible, to go it alone in the cannabis industry. The partnerships you develop at the early stages can make or break your fledgling cannabis business.
Scott Rudder, president emeritus and founder of the New Jersey CannaBusiness Association, said that how you establish your company in the beginning is critical to its long-term success.
“The best way to do it right now is hiring a consultant who can help develop your plans with you,” Rudder told Business News Daily. “You need to develop partnerships and relationships across the country to give your team a competitive advantage – the right processes, the right [standard operating procedures], the right security plan. Get the right local attorney and local CPA … with experience in cannabis.”
It’s also likely that the regulations that apply to your cannabis business are subject to change, as the industry is a new and evolving space and public officials are regularly working to revamp and revise rules and regulations. Jessica Gonzalez, a cannabis and intellectual property attorney at Hiller, PC, advised aspiring cannabis entrepreneurs to engage with an experienced attorney who can look ahead.
“Given the fluctuations in regulations across the country … the best way for folks to keep apprised of what their state requires is to have a lawyer who is able to interpret the regulations and statutes,” Gonzalez said. “We all recognize in cannabis that the industry is always changing, so as … entrepreneurs, we need to be ready to pivot at a moment’s notice.”
Banking, financing and insurance challenges
Banking is a particular pain point for cannabis companies, especially if their business name reflects the industry. Because the federal government still considers cannabis an illegal, Schedule I drug under the Controlled Substances Act, many banks are hesitant to work with cannabis businesses for fear of losing their FDIC status or inviting money laundering charges related to drug trafficking, despite cannabis’s legal status in many states.
“In any other industry, you could open a business bank account and name your LLC or corporation anything you wanted, and it’s not an issue,” Gonzalez said. “But if you go to the bank and you have ‘cannabis’ in your name, you may have a lot of trouble finding a banking partner. I’m not saying to lie to your bank about what you’re doing, but … by having ‘weed’ or ‘cannabis’ in the entity name, you’re cutting yourself off at your knees. I always advise folks when creating an LLC or corporation to stay away from those names because it inhibits banking options and insurance options as well,” she added.
Advertising and marketing restrictions
State regulations and private company policies limit how cannabis businesses can advertise themselves. Advertising cannabis on the radio, television or billboards is often banned, and many local marketing channels, including Facebook, make it tough by prohibiting the purchase of sponsored content for cannabis businesses.
These limitations mean many cannabis businesses must rely on a combination of content marketing and more organic social media content, email marketing campaigns and in-person marketing opportunities at trade shows and industry events. Networking and word-of-mouth referrals are essential tools in a cannabis business’s marketing toolbox.
Stigmatization of cannabis
Cannabis still faces the stigma of being associated with stoner culture. In reality, however, cannabis patients and consumers come from a broad range of backgrounds. Avoid reinforcing the stereotypes associated with cannabis, like the head-shop vibe or the underground associations linked to nearly a century of prohibition.
Instead, work closely with community stakeholders and elected officials to be a responsible community member. Doing so will go a long way toward gaining any necessary regulatory approvals and reaching your target customers, who are likely more turned off by the stigmatized trappings of the past than you might think.
“There are outdated historical stereotypes of who cannabis consumers are,” Rudder said. “They are moms and dads, lawyers, pipefitters – it covers the gamut of who cannabis consumers are. The foundation of cannabis is as a medicine, and it will be for a very long time. It’s very important for people to understand … the science side and medical side of the industry.”
It’s crucial to provide customers with the information they need. “The consumer, whether a patient or adult-use consumer, is getting smarter and doing their own research,” Rudder explained. “When people start asking questions, you need to have those answers.”
Cannabis businesses face many challenges. It’s crucial to launch your company with these challenges in mind by creating the right business plan and forming valuable partnerships.
Getting started in the cannabis industry
Starting a new business in the cannabis industry isn’t for everyone. It requires a lot of patience, time and money. It could even take a significant investment to get a business license. But the industry has more support than ever, with roughly 90% of Americans supporting legal cannabis. When it comes to the product, growing cannabis requires real estate and an expert team of botanists to ensure your crop is getting the maximum yield. Then you must find the right partners and keep up with ever-changing regulations. And all that’s before you get to a storefront.
However, it’s possible to stay ahead of any foreseeable problems. With the right partnerships in place, you’ll have a team to support your dream. And with some savvy business budgeting practices, you’ll be prepared for all potential business startup costs. Once your operation is up and running, you can be at the frontier of a lucrative new business model.
Max Freedman contributed to the reporting and writing in this article. Some source interviews were conducted for a previous version of this article.