Where the 'Gold Rush' Turns Green: the Profit in Legalized Marijuana
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The California Gold Rush era (1848-55) was about people wanting to make their fortunes by mining precious minerals or finding their “Texas tea” on the ground. Today, there’s a new player in the hood. And her name is Mary Jane.
That sound you hear isn’t just stoners getting high, but rather the rush to the four states (Alaska, Colorado, Oregon and Washington, plus the District of Columbia) where recreational marijuana is now legal.
But the subject here isn't about legalization. It's about an industry migrating from an illegal to a legal, and sometimes profitable, industry, while many inconsistencies – both legal and financial -- remain.
It's also about the need to pay attention to an industry with the potential to make us re-think how we see entrepreneurism and how the product in question could veritably change the face of business.
Recently, I spoke to Robert Hunt, someone who has done his fair amount of research on the topic. Hunt, the president of Teewinot Life Sciences, was a guest on my Play.it podcast (Episode 81) and talked about the profitability in sales of recreational cannabis, the current shift in trends and the discrepancy that exists between federal and state/local laws.
Cannabis, he said by way of background on this fledgling industry, was a part of the pharmacopeia until it became a controlled substance in 1930 and was designated a Schedule 1 drug in 1973 by President Richard Nixon. Recently, the Drug Enforcement Agency (DEA) refused to have it removed from the list of most dangerous drugs, despite a popular push to legalize it.
Come this November, however, there will be nine states that will have cannabis legislation on their ballots -- five of which (California, Arizona, Maine, Nevada and Massachusetts) will regard recreational use, and four more (Arkansas, Montana, North Dakota and Florida), medicinal use.
As a businessperson myself, I have two questions: Is the sale of cannabis a profitable business enterprise? And what lessons can we learn from the states that have already legalized marijuana?
The financial issues of cannabis
In states like Colorado, where cannabis was legalized in 2012, tax revenues started slow but saw a healthy growth: Almost $113 million in sales tax revenue was paid into state coffers in 2015; and in 2016 that figure will likely exceed $140 million.
Colorado, in fact, has seen huge financial benefits from the sale of cannabis, with those funds going towards schools and education. As Rob told me, this trend is expected to continue in other states, as more move toward legalization. “California generated around $2.7 billion in sales last year," he said. "When they integrate its new MMRSA laws [for medical marijuana safety and regulation], then they’ll also lead in both sales and tax revenue.”
While states moving to legalization, or already there, have been able to put their cannabis-generated funds to good use, there are still some financial discrepancies that remain uncertain, especially in banking.
Federal laws prohibit banks and credit unions from taking marijuana money. Accordingly, those businesses can’t get loans, and customers have to pay in cash. Currently, about 40 percent of cannabis businesses in Colorado lack bank accounts, and despite a number of ways to circumvent the system, the Federal Reserve and the National Credit Union Administration remain powerful roadblocks.
This puts these businesses at odds with both the Department of Justice and the U.S. Treasury, which have said they won’t prosecute financial transactions from dispensaries, but will closely monitor them for any wrongdoing.
Despite the obstacles, however, the industry is slowly coming on board.
As of March of this year, there were 301 banks and credit unions willing to handle “pot money” -- a jump from just 51 in 2014. As public attitudes toward cannabis evolve, so has the business sector. But that sector still needs to play catch-up.
The business of cannabis
It’s hard to ignore the massive shift in policy. Corporations like Microsoft have noticed and are getting involved. Breaking corporate taboo, the tech giant teamed up with a “weed financing start-up,” creating cloud apps that are able to track plants from “seed to sale,” while remaining in full compliance with existing laws.
While such a move may be easier for Microsoft, which is based in Washington State, where the sale of cannabis is legal, many in corporate America still see the industry as a turn-off. I can say that until recently, I was in full agreement with that statement.
Yet my position has shifted somewhat, and I’ve learned that it is not an either/or issue. There’s plenty of in-between to keep everyone busy trying to figure out what the next steps are, and synchronizing the business and legal aspects.
My interview with Hunt also gave me some insight about the profitability of dispensaries and some sound advice for entrepreneurs looking to invest in this business.
Like the gold rush or oil booms of the past, one thing to note is that fortunes were not made by those doing the mining or the drilling, but by those who saw the opportunity of the industry as a whole.
As with any other business venture, you have to do some research first and make sure that it meets your conditions, whatever those are. Mine are simple: to make money, have fun and grow professionally. So, that said, here are some key takeaways from my interview with Rob:
- There’s no such thing as an “average” dispensary. Profitability will depend on the state it operates from. On the conservative side, a dispensary in a competitive market or a restrictive state may see only a couple of hundred thousand dollars in annual top line revenue, whereas one in a relaxed market with limited competition might see revenues in the millions. In net profits, those amounts could be much lower, due to 280e tax restrictions
- The industry’s goal is the same as every other: to make money
- There’s still plenty of skepticism to invest in the cannabis industry. Lack of knowledge, inconsistent laws and the continued status of states without a legal cannabis program are the main reasons people stay away from the industry.
Whatever side of the fence you're on regarding legalized marijuana, expect to see plenty of changes in a number of states in the next couple of months. There are still plenty of details to iron out, but keep an eye on this industry. One never knows where there might be an opportunity to innovate; and some of the best ideas sometimes come from someone looking to buck the system.
You have to think big and outside the box! And the cannabis industry is definitely outside the conventional corporate box, though I don’t think it’ll remain there long.
Come November, there might not even be a need to head west. Entrepreneurs will be keeping their eye on this industry much closer to home, if the voters decide this new "rush" is going to be the new normal.