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Cannabis Startups: Exploring the Opportunities and Challenges

Posted by Early Growth

June 25, 2015    |     5-minute read (923 words)

EGFS’ first-ever panel event for cannabis entrepreneurs attracted 100 participants. The speakers were: Ambere St. Denis of Crimson Business Insurance; David Ehrenberg, CEO of EGFS; David Kram, Founder and CEO, Relieve; Evan Horowitz, Cofounder of Weed Club; Brian Holmes, Managing Director at First Ascent Associates; Tucker Cottingham, Attorney at Bend Law Group; and moderator Gina Cooper, CEO of Cooper Strategies. I cover the highlights below. Also stay tuned for the video of the session on an upcoming episode of ABC Family’s Startup U:

What cannabis businesses need to know about getting insurance:

  • Carriers exclude many types of coverage and apply strict definitions to events that are covered. For example, armed robbery is a big risk for cannabis companies, but insurers typically exclude it from coverage. In the same vein, be sure you know what the difference is in your insurer’s definition of robbery versus burglary. And beware of not conforming to specific requirements your insurer lays out for covered claims. Insurers will mandate that your security system meet specific criteria such as having a double chamber system, a monitored security system, a safe, and that you check IDs.

What specific liability issues are there for companies not touching the product?

  • The good news is that these types of businesses pay lower premiums. On the other hand, they are subject to lots of inspections. Coverage for one-off negative experiences can be added to basic policies but watch out for exclusions and be sure to thoroughly estimate how much coverage you need.

Tax and compliance issues for cannabis businesses:

  • Getting over the banking hurdle is the first major issue. Banks have been extremely reluctant to bank cannabis businesses due to concerns regarding the risk of federal prosecution, uncertainty over regulators’ reactions as well as intensive documentation requirements. As a result, many businesses operate on a cash-only basis. This is hugely problematic for reasons of basic safety as well as for operational efficiency, record-keeping, and financial management.
  • For a deep dive into the current dynamics, please read our recent whitepaper: Legal Cannabis: Poised for Growth, But Banking And Tax Hurdles Remain Chokepoints.
  • The lack of banking support and risk of asset forfeiture by federal authorities leads many owners of cannabis startups to accept cash transactions or to try to fly under the radar with electronic options.

VC investment in cannabis businesses

What do VCs in this space look for in cannabis startups?
  • They look for the same thing they look for when evaluating companies in other industries: traction in users, members, revenues.
  • In terms of specific segments within the larger cannabis space, Brian pointed to delivery systems being an especially hot space for investment.

Legal issues specific to cannabis businesses?

  • The central legal conflict affecting cannabis businesses is that cannabis remains illegal at the federal level. Congress passed the Controlled Substances Act (CSA) banning cannabis in 1970. In recent years, 23 states have legalized marijuana (mainly for medical use, though 4 of those also allow recreational use) putting them in direct conflict with federal law.
  • That said, businesses touching the plant face different regulatory concerns than those that don't.
  • Do basic blocking and tackling; check references, conduct background checks, etc.

What’s next for the industry?

Ambere — “Companies can spend less money by seeking professional advice and support from the get-go rather than waiting to bring in professional services later to clean up mistakes.”

Kram — “On demand services and marketplace models are hot.” Advice: boards of advisors are the biggest help to founders. With the industry changing every day constant learning is most important.

Evan — “Women are the hottest thing in weed right now." Why? “Female heads of household are the ones making medical decisions for the family.” What's not: “the lack of political leadership [on the issue] from Congress.” Tips for founders: “Do background checks on potential business partners.” Being based in a state with full legalization offers benefits in starting up. Even so, be prepared to have to find workarounds for things like getting your logo and trademarks.

David — Advice: Even though cannabis remains illegal at the federal level, that does not mean you can slack when it comes to tax and accounting compliance. Not knowing your obligations related to tax compliance and not keeping good records can expose business owners to significant financial penalties. Don’t try to muddle through this on your own. Seek out professional financial help early and often.

Parting Shots

Right now the biggest challenge cannabis entrepreneurs face in getting into the space is, not surprisingly, the federal government’s stance on legalization. That said, all our panelists underscored the changes taking place and agreed that it is only a matter of time before cannabis is treated like any other product in terms of regulation.

Deborah Adeyanju is Content Strategist & Social Media Manager at Early Growth Financial Services (EGFS), an outsourced financial services firm that provides small to mid-sized companies with day-to-day accounting, strategic finance, CFO, tax, and valuation services and support. Prior to joining EGFS, Deborah spent more than a decade as an investment analyst and portfolio manager with leading financial institutions in New York, London, and Paris. Deborah is also a Chartered Financial Analyst (CFA) charterholder.

What challenges is your cannabis startup facing? Tell us in the comments section below or contact Early Growth Financial Services for financial and accounting support.

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