Over the past half century, few economic areas have been as mismanaged and maltreated as the global cannabis industry. The industry still lies stifled in its infancy, with the so-called ‘war on drugs’ having demonstrably proven a cross-generational failure in solving many of the real public health challenges in the battle against substance abuse - cannabis is simply the case substance in point. Relatively speaking, cannabis is in fact quite a safe drug to use recreationally, to say nothing of the vast and growing body of evidence supporting the use of medical marijuana in treating a wide array of physical and psychological ailments.
Luckily, with laws around legalization and decriminalization changing quickly across much of the United States, and even legalized nationally in countries including Canada, the future of cannabis looks far brighter than its past - though the good herb is still no easy row to hoe. Building a cannabis startup is no simple task for any founder - littered with ambiguities across geographic and jurisdictional landscapes, the trail to building many legal cannabis businesses is filled with added challenges. But for those persevering entrepreneurs passionate about improving access to cannabis-based products of all kinds, the plant’s possibility is still vast and largely untapped.
In an AMA conversation with cannabis industry insider Kimberly Kovacs, CEO of the Arcview Group, a leading capital investment firm in the cannabis space, Founder Institute explored some of the challenges facing cannabis startup founders specifically, as well as gained an investor’s view of the current industry landscape and latest trends.
Pre-Covid Cannabis Industry Trends: Complexities
Cannabis is complicated. Growing industrial hemp for agricultural fiber is now federally legal in the United States; but growing flowering cannabis is not. Federal regulation of cannabis in the United States still stems from the Controlled Substances Act of 1970, signed into law under the Nixon Administration, and falls under the enforcement jurisdiction of both the FDA (Food and Drug Administration) and DEA (Drug Enforcement Agency).
- Licensing
- Today, 11 states across the US have now legalized cannabis for full/recreational use
- Medical use of cannabis is now legal in 33 US states
- Safe Banking Act
- Cannabis (active ingredient THC) is still federally illegal; but the US federal government can allow banks to operate as if it weren’t, so long as they follow KYC (Know Your Customer) and other key anti-money laundering provisions
- The Safe Banking Act protects investors from potential liability or blowback from cannabis industry risks
- Interstate Commerce - It is now governors of individual states in the US that are just beginning to band together and coordinate the first cannabis commerce between states
Finally the industry is starting to see some loosening around the regulation of basic research within the cannabis space. But even more complexities remain, in areas including insurance, compliance, and that can show up on P&L statements—THC is still treated a bit as a business pariah, with far less less tax write-offs than allowed in most other businesses.
COVID Cannabis Market Disruptions:
During the onset of Covid-19, cannabis was quickly deemed an ‘essential business’ in most of the markets where medical cannabis is legal. The new designation speaks to the substance’s many positive use cases, and its efficacy in helping people deal with some of the stresses and challenges associated with pandemic and life at home in relative lockdown or social isolation.
- Delivery is a hot market right now where cannabis is already legal, because consumers don’t want to touch cash, or interact with their once over-the-counter ‘bud tenders’ in the same close proximity as pre-covid.
- Data analytics is increasingly important to cannabis. To see where the rapidly-developing industry is going, ERP (Enterprise Resource Planning) systems are becoming a necessity. Big developers have avoided the cannabis industry in the past, but will probably be coming in, and looking to acquire upstarts in the space.
- Point of Sale is hugely important to cannabis’s transition through the COVID era. Developing APIs in a tech stack that position a cannabis payments or point of sale business for acquisition is smart opportunity. AI and blockchain opportunities on the contract and compliance sides of the business are also hot areas of interest, according to CEO of the Arcview Group Kimberly Kovacs.
- Edibles have now surpassed flower in terms of growth of products within the industry. There has been a marked decrease in vaping and smoking of flower since the onset of the pandemic, largely because COVID is a respiratory illness and so inhalation of cannabis is seen as less appealing now by consumers.
- New market segment growth is shifting older, towards the Baby Boomer generation, many of whom may be trying cannabis products for the first time.
Cannabis Industry Opportunities & Market Predictions
On October 21st Steve DeAngelo, founder of the Last Prisoner Project and known as the “Father of the Legal Cannabis Industry” joined FI for a live, interactive audience fireside chat on the topic of 'How to Design Business to Create Change in the World.' Watch below to gain insights from this cannabis industry activist and visionary.
Barriers are lower in the CBD space (*versus THC, CBD is the primary non-psychoactive medicinal constituent of the cannabis plant), as CBD is much less regulated. However, the CBD space it is very crowded and competitive.
CBD is only 1 of ~150 cannabinoids found in the cannabis plant, and therefore likely to be less interesting (as the most already-explored molecule) as the industry moves forward.
Other HEMP (non-THC) market opportunities include:
- Topicals
- Feedstock (animals)
- Ingestible hemp products are NOT yet approved federally - brands that want to move into the space are launching topicals first and positioning themselves to move their brands into ingestible products when regulation inevitably adjusts
- Fuel (a renewable biofuel)
- Fiber (prominent examples include Levi’s jeans)
- Plastics / Rubber
Global trends (markets outside the US) - some of the first markets to move away from the 70s era prohibition include:
- Israel (basic research)
- Canada (fully legal commerce)
- China (hemp production)
Social Justice & Racial Inequities from legacy of the War on Drugs
- The Last Prisoner Project - helping individuals incarcerated under old laws
- Licensing for applicants who have been formerly incarcerated for cannabis crimes should go to the top of the list
- MCBA - Minority Cannabis Business Association
Additional resources, to learn more:
- Arcview Market Research & BDS Analytics
- National Cannabis Industry Association (NCIA)
- Leafly Magazine
- Marijuana Policy Project (MPP) - If you’re going into this regulated market, make sure you really truly understand the regulations
- Arcview’s Women Investor Network is creating alignment around ‘products with purpose’ that appeal to the needs and concerns of women consumers specifically
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See the most recent news from our Grads at FI.co/news, or learn more about their stories at FI.co/journey.
