At the Boston CBEConnections cannabis industry conference at the Revere Hotel on September 12, Kris Krane, co-founder and managing partner of 4Front Ventures, presented an overview of cannabis business licensing in the U.S., focusing on how to succeed in a limited license environment and offering insight into the process state by state.

“You have to keep this in context,” he said. “Licensing in the cannabis business is not about one monolithic industry and there is not one model for the market because it can’t cross state lines. So not all states are equal. You can have a very large state like New York which does well with restrictive qualifying conditions for licensing, compared to California, another large state, that has a relatively permissive set of rules.”

Licensing for this industry is a different animal that we have never seen before because of the vertical integration requirement. “That is unique to the cannabis industry. If you own a clothing store, you don’t have to grow the cotton. So this vertical integration is a massive undertaking that is not required of any other business.”

He identified the different licenses available: unrestricted (no caps on number of licenses granted by the state); restricted (strict cap on number of licenses); mixed (cap on certain license types); and defacto (no official cap but effectively has one).

He cited Nevada as an example of a state that has a cap on dispensaries but not cultivators or processors. Massachusetts medical program has no statewide cap, but municipalities can restrict the number, leading to an aggregate cap.

Connecticut is one of the more restrictive states, with just nine dispensaries licenses granted representing one license per 400,000 residents. In contrast, Nevada has 55 dispensaries licenses granted, for a ratio of one license per 52,727 residents.

“Many of states break up licenses into various districts, like Pennsylvania, which has six districts,” Krane said. “The southeast district includes Philadelphia, which means there is intense competition there. It also does lead to lawsuits claiming that there was some degree of favoritism, but those suits will generally be unsuccessful.”

The most common process for getting a license is the competitive process. Arizona uses a lottery system, with little or no requirements about qualifications to be a licensee. Washington uses a mix of lottery and a competitive process – winners are picked at random but must meet high standards.

Krane next explained the best and worst markets for potential licensees. California, Colorado and Oregon are at the top of the list, presenting great opportunities to the enterprising dispensary owner but one where the market may become overly saturated, making it hard for smaller operations to survive.

Other robust markets, including Nevada, Maine, and Rhode Island, feature limited competition and potentially good revenue per license.

States such as Pennsylvania, Ohio, Arkansas, North Dakota, Michigan and a few others use a difficult and slow application process, but have the promise of big growth potential.

At the bottom of the list were Connecticut, New Jersey, Delaware, New York, Minnesota, Vermont, West Virginia and Louisiana, each with their own set of challenges that making getting a license difficult, for a smaller potential consumer base.

He says, as time goes on, the quality of the applications have gotten better and better in some states. “The quality has gone up,” Krane says. “Look back at Massachusetts. In round one, in 2013, there was a clear difference in the top third, the  middle third and the bottom third in terms of quality of applications. Fast forward to Pennsylvania. The differences between application graded number 4 and application graded number 130 was relatively small, but there was a big drop off after that,” he says. “You have so many well-qualified applicants now that it becomes almost arbitrary who wins. You can even make a case that someone two-thirds down list is still qualified.”

When submitting background research for a license, he advised, a license applicant should consider the community where the business will be located and work with the local law enforcement and the local fire department, outlining plans for security and fire emergencies.

At the conclusion of his presentation, Krane advised not waiting on the licensing process in the hopes that more will happen later, because the state may choose new winners from their original pool.

He advises working to get as many licenses as is feasible and is allowed by the state; striving to provide the best products and services possible, no matter how many other choices consumers or patients have; and planning ahead for the nearly inevitable expansion in the number of licenses available.