Although the cannabis industry shows remarkable potential for market growth over the coming decades, it also faces a number of unique challenges to profitable investment. The U.S. cannabis industry is federally illegal, has a wide variety of unique state and local regulations, and also faces business challenges such as limited access to banking and 280E Tax Code regulations. Hundreds of millions of dollars have already been lost by investors in the space.
Before investing in the cannabis space you must know the when, where, how, and who of the investments your are vetting.
Knowing the when and the where refers to the timing of your investment and the specific regulations where the business will operate. Some medical marijuana markets for example are not ready for large scale investment. With about 90 percent of the nations medical marijuana patients suffering from chronic pain, if your state’s regulations don’t include this as a qualifying condition, there will likely not be enough patients to grow a business.
Two examples: The medical marijuana businesses in New York and Minnesota have lost millions of dollars each year as they await greater patient access. You need to understand the nuances of your specific market before investing.
Next you will need to know the how’s of your potential investment. How will the business make its money? Is it a hands-on or hands-off company? How will the companies cannabis products be produced? Will they be cultivated indoor, outdoor or in a greenhouse? How will the business effectively scale? How will the operators structure their business to overcome the unique challenges of the industry?
While knowing the when, where, and how of an investment are essential, knowing the who is the most important. Even with the best guidance it takes a strong team to execute the tasks necessary to operate a successful business. We have found that operators with strong business skills and experience are necessary in cannabis businesses.
While master growers have an in-depth understanding of how to cultivate the cannabis plant, operating a cultivation operation requires much more than this specific knowledge. We have found that horticulture nursery managers and other large scale agriculture producers have experience managing large teams and systematically producing large quantities of agricultural product.
These four “must-knows” are critical for a successful startup to understand, and help investor’s confidence. The best advice in this young and growing industry is to do the required due diligence early, and seek out networking opportunities with people already operating in this space.