US entrepreneurs have already launched and successfully grown their recreational cannabis businesses. It wasn’t a flawless transition in some states from illegal to legal, they made mistakes and focused on underperforming strategies or on not hiring the right experts.
The bright side is, you can learn from their pitfalls, ensure your business has a competitive advantage and that you are prepared for the major shifts the US cannabis market experienced.
Since the South African Cannabis Industry will undoubtably have 24 months to wait until any legalisation progress is made, you can start preparing your cannabis related business and strategising how to incorporate the following lessons:
Lesson 1: Don’t be the first
Under normal circumstances you would want to be the first to break grown on a new industry, because the early bird doesn’t have competition yet, develops a relationship with customers and is the only supplier until another business gets up and running.
So then why shouldn’t you be first? The answer is “There is a difference between pioneers and settlers. Pioneers got arrows and settlers got land,” says Christian Hageseth, founder and CEO of Denver’s Green Man Cannabis, a retail and grow operation well-known for its connoisseur grade craft cannabis, and forONE Cannabis, a cannabis business franchise.
“I’m much more interested in being a settler in the cannabis industry. You don’t know how regulators or banks are going to react as legalisation changes, so it’s beneficial to not be the first to market.”
Lesson 2: Make a proper transition from the black-market to the legal market
In the US Market those transitioning from black-market to the legal market found there were rules and regulations they weren’t even aware of, which made it difficult for them to stay compliant. If you’re undertaking the same transition, there are a few things you’ll need to keep top of mind:
- There will be regulations and legislations that you aren’t aware of that you need to be compliant with.
- You will now be operating in a tightly-regulated space with tax and banking restrictions, business owners can find themselves entirely unprepared for the pressures of keeping a legal operation in the red.
- You’ll need to keep detailed financial and accounting records to ensure your business remains compliant and sustainable.
Lesson 3: Hire the right experts
Navigating the still-forming cannabis industry can be challenging. In the US cannabis industry entrepreneurs thought they could navigate it themselves or were scammed by con artists pretending to be experts.
To ensure your business remains sustainable and compliant here is some advice on what to look for in your experts:
“It’s in your best interest to find an accountant who has been through an audit or two with a marijuana company. If you don’t file your taxes the right way from the start, your business can get very far behind,” says Hageseth.
“Your business will greatly depend on the legislation in your market, so work with a lawyer who is well versed in several cannabis markets and regulatory frameworks in order to best protect your business,” says Chloe Villano, founder of Denver-based Clover Leaf University.
Ensure you’re hiring a legitimate expert
A common misstep made by US entrepreneurs is hiring amateurs posing as experts. Scammers see the opportunity to benefit off your business by misrepresenting themselves as experts in the cannabis industry.
Keep on the lookout, they’ll tell you everything you want to hear, but don’t have anything to deliver or back it up. Do your due diligence to ensure your business is working with a competent advisor and isn’t being misled by a scam artist.
Lesson 4: You don’t need to grow or sell weed to make money
In the US, the price of marijuana skyrocketed just after it was legalised. According to Forbes the average wholesale cost of cannabis in Colorado dropped from $3 500 per 0.45kg’s at the start of legalisation in 2013, to roughly $1 012 per 0.45kg’s in 2018.
This is because sellers were adjusting their prices based on demand. As more competition enters the market, experts are predicting the price of cannabis to plummet. In Oregon, marijuana is already selling at $50 per 0.45kg’s, which is driving some cultivators out of business.
If you consider the above trend, growing and selling weed directly could be one of the least profitable approaches. In the US, there are very high barriers of entry to growing and selling cannabis that include applications, lawyers, security compliance, tax fees, audits, your inability to claim business expenses, and the constantly changing regulations.
For example: On 1 July 2018 in California, the packaging and testing standards for cannabis were changed. Every dispensary had to throw out all of their products that didn’t meet these new regulations. This cost entrepreneurs millions in inventory and a few weeks later the state changed the regulations back.
You can still make a profit from the marijuana industry, without actually selling or growing it yourself.
Lesson 5: What you need to know about pricing
As mentioned above, with the rising demand for cannabis, in the US market, the price shot up. “The main thing we found wasn’t that you couldn’t get product, it’s that you couldn’t get product cheap,” said Dave Cuesta, now the chief compliance officer for Native Roots, the largest dispensary chain in Colorado.
In 2014, he was an investigator for the Marijuana Enforcement Division, he says: “You could walk into a store that sold both medical and recreational, and you were paying $30, $35 for an eighth on the medical side, and it was $60 or $70 on the recreational side. People were just adjusting their pricing to manage supply.”
Since this is likely to happen within the South African market as well, you can implement a strategy to have more supply than your future competitors. This will enable you to undercut the market when the demand for both medicinal and recreational marijuana increases.
Lesson 6: You’ll need to be adaptable
As mentioned previously, in the US regulations fluctuated until the government could determine the best way forward. Since this will also be a learning curve for parliament you’ll need to be able to pivot or agilely handle each change as it’s thrown at you.
Here are a few examples of changes the US entrepreneurs had to navigate:
For example: Content producers in California face fees and legal penalties if they mention any unlicensed cannabis brands.
Another example: Brands in Colorado, Washington and California that used the event High Times Cannabis Cups to move their product, suddenly lost a major source of income when vending was no longer allowed at the event.
A further example: In Washington DC, marijuana events that were legal last year are now being raided and people are being arrested.
If you don’t move with the industry you’re either going to be left behind or find yourself being fined or imprisoned for breaking the law.
Lesson 7: Raise more capital than you need when starting out
Considering how often regulations changed in the states in first few months, even the first few years, you’ll need to be able to afford to handle any changes that your business comes across.
“Always raise more money than you think you need and don’t expect business to come easily. In fact, expect everything to go wrong, because the regulations will change often, and your plan will become obsolete,” explains Villano.
Changing regulations can cost you an entire crop or all of your painstakingly designed, unique and innovated, costly packaging. Ensure you remain agile and be flexible enough to handle any unexpected costs that come along.
By implementing these top lessons and seeking the expertise of financial and legal professionals, you can successfully navigate the cannabis industry. To run a sustainable business that will achieve long-term growth your venture will need to jump the cannabis industry’s unique hurdles, maintain compliance and avoid costly and often business-ending fines.