As more entrepreneurs and investors clamor to get into the growing marijuana industry, few people are talking about the future of marijuana startups. Specifically, what happens to startups when recreational marijuana is legalized across most states or across the entire country? What happens when big businesses go all-in on the marijuana industry?
I’m talking about when large companies with deep pockets like ADP gets into payroll processing for marijuana businesses, and Dell gets into the marijuana tech space. What happens to all of the startups carving out earnings in those areas (or hoping to do so) right now?
Whether a marijuana startup has received venture capital through Series A, Series B, and additional raises or has yet to find an angel investor, all of the startups in the marijuana industry have something in common. The day will come when they’ll need an exit strategy. In other words, one of the first questions an investor should be asking marijuana startups today is, “What’s your exit strategy?”
Today, there are 1,001 marijuana startup companies listed on AngelList and 1,058 investors with money already invested into those companies or looking for marijuana startups to invest their money in. Bottom-line, there is no shortage of marijuana startups, and it’s highly unlikely that they’ll all survive in the next three or five years. It’s even more unlikely that they’ll all survive when big businesses enter the industry or when marijuana is legalized in additional states or at the federal level.
Innovation Could Be the Marijuana Startup Killer
Interestingly, many of the steps startups are taking to bring innovation and wider acceptance to the marijuana industry might actually hurt them in the long-term. Again, there are two primary reasons for this:
- Innovation that removes the stigma of marijuana could bring legalization more quickly.
- Businesses that bring innovation from other industries to the marijuana industry could be usurped by larger businesses.
Let’s take a closer look at what each of these factors means.
First, startups are launching products and services that enable wider audiences to use marijuana by offering more ways to consume or inhale it. Rather than smoking a joint, bowl, or bong, consumers can now vape, drink, eat, dab, or apply marijuana.
Gum, candy, throat lozenges, lotions, tinctures, and more are making marijuana more user-friendly. As a result, the stigma that has surrounded marijuana for decades is disappearing. People are seeing the benefits of using marijuana in new ways that disassociate it from the drug culture.
Second, a growing trend in the marijuana industry is for startups to enter touting their new products or services as “the Uber of marijuana,” “the ADP of cannabis,” and so on. In other words, marijuana startups are bringing innovations from other industries to the marijuana market, but there is a very big problem looming in their futures. What happens when Uber and ADP enter the market? Those companies have more money, and if they can do “it” better than the startup can, the startup will be in very big trouble.
Startup Survival Skills
To survive in the marijuana industry in the long-term, startups need to do three things:
- Be better than any company offering similar products or services (even if those products and services are in a different industry).
- Be unique so demand for the startup’s products or services continues after widespread cannabis legalization.
- Be prepared with a solid exit strategy.
A marijuana startup’s exit strategy should clearly map out what happens as the cannabis industry grows. By identifying the threats and opportunities that could arise in the future, the startup will be financially and operationally prepared to thrive rather than fail. Whether that exit strategy focuses on continued growth and market leadership or acquisition, the secret to long-term success is to having all of the pieces in place now.
One of the key principles of business and marketing is to own your niche. A marijuana startup must find its focus, identify its niche, and dominate that position in the marketplace. When a brand name is instantly associated with a word in consumers’ minds (and that word aligns with the company’s goals), the startup will hold all the cards. When the market grows, legalization occurs, and big businesses come looking for ways to get into the marijuana industry, the startup with an exit strategy and laser-focused market positioning will be empowered to choose its most profitable future.
The Future of Marijuana Startups
Today, more Americans agree that marijuana should be legalized than disagree. The image of marijuana has shifted significantly in just the last few years as the truth about marijuana risks and benefits is communicated to more people.
It’s possible that this industry could also follow in the footsteps of the alcohol industry where craft breweries are the hot niche. Savvy marijuana startups are already benchmarking industries like alcohol and coming up with plans to leverage innovations and best practices. These are the startups investors should be looking at.
The future of marijuana startups will be failure, acquisition, or growth and dominance. It’s up to each startup to choose the future they want to prepare for.