3 Tips For Cannabis Start-Ups To Be Successful in Global Markets
Globalization is coming. Here's what you should know before you wade into the international cannabis waters.
Thinking about going global? You're not alone.
More than ever, I have been getting messages from all over the world asking me for anything from partnerships to investments in start-up cannabis ventures. Because of the demand, I’ve expounded here what makes a global cannabis start-up successful.
In order to prepare to be successful today, one must recognize a few important factors involved in this increasingly competitive landscape: history, government ambiguity, taxes, the unlicensed market, management approaches, and now, COVID-19.
1. Pay attention to warning signs
You must be aware of the current time that cannabis is in, as well as the history behind the largest companies' failures and closing grow facilities. As an obvious example, Canadian companies received incredible amounts of money and access to financing so quickly, that they overbuilt due to overly optimistic predictions of future demand.
Did these executives know that government approvals in Canada and the European Union would be slow going? Did they know taxes would be high and the unregulated market would also surge as decriminalization took hold? Did they predict the overall supply of Canadian markets would eventually lead to lower prices?
The answers to all of these are—yes. Of course they knew, but like most start-up companies, people are so focused on getting the money to build what they want, they ignore the flashing warning signs and drive right off the cliff. But that doesn’t mean to not continue with a company when you see the warning signs; it means you need to be more careful and more clever to build a successful start-up.
My two most critical pieces of advice are 1) Do not repeat the past when entering a new cannabis market by planning your projects in phases and 2) Find the most economical way to build the space so that you may recoup your investment before expanding to the next phase.
Paying too much to build in hopes of a better product is a major mistake, especially if it is your first grow. It’s like being given a Ferrari; sure you can drive it, but can you get the most out of it, and what does it cost to maintain it? The newest highly advanced greenhouses have been nothing but failures of technology, as well as filled with contamination issues that may never end. Start with a simple grow, develop your management style and work your way up to better systems and methods as you build out the next phases. Anyone can build something for crazy money, but how you make your money back is the key.
2. Study government regulations, local unlicensed markets
Whatever country you are looking to grow and sell to, you must be cognizant of the ambiguities of governmental rules. I have heard every new project of each new country coming on-line pitching that they will be selling their product to Europe and the U.S. Even European countries say “grow here but export to other European countries.”
Let’s be clear about this, Europe is far from open for business and the U.S. is even further from allowing imports into their market. If your current plan is to grow in another country to sell to Europe or the U.S., you are going to follow Canadian companies right into bankruptcy.
The local economy that you are growing in must support your sales, period. The U.S. and Canadian markets have seen the best examples of high taxes crushing businesses and proliferating the unlicensed market even further.
The unregulated marijuana market is old and very large. It will not just go away with legalization. Those unlicensed operators pay no taxes so they are loaded with cash. And they compete with the legal market just like any other business would.
They have their own stores that offer more than licensed stores. They have their own door-to-door salespeople, which is better than the legal industry. They have more advanced networks even than the legal industry. Pay attention to your local unlicensed market; you cannot beat them in the near term. Yes, newer and older demographics will gravitate towards the legal markets, but most people will be looking for the best deal. The best deal will not be with highly taxed and regulated companies. And think about Europe: with the open borders what would stop the inflow of unlicensed market cannabis? This is exactly what governments there are weighing when looking at when to legalize, not if.
3. Prepare to compete
The world is competitive, and so is cannabis. You have to treat the cannabis trade like any competitive business that participates in a legally ambiguous world. You need tight management to be successful. You also have to create a buzz and desire for your product, like any industry. Just because you are growing cannabis doesn’t mean you will sell it. And just because you are growing cannabis doesn’t mean you can grow good cannabis.
When you look at your projected numbers, if you see your optimal max production and the going rate of cannabis per gram/lb/kilo, just remember that profits are hard to come by in cannabis. If your margins are well above 25 percent, you must have missed something. If your profits are predicted based on perfect optimal production, then you will have to factor in failed testing, lower yields, and even contamination shut-downs over the life of a grow. I have yet to see a pro forma plan that came true.
Double the costs, half the income, and then double the time to get to each stage; that should get you closer to reality. And if you see a loss for the first year after opening and small profit the second year, you probably have accurate numbers finally.
Now if this all sounds negative for the times, take it as a cautionary tale of what is currently happening. Especially with COVID-19, private equity will be slow since equity markets offer better risk-return.
Your business will need to offer a great deal to attract money now. Be realistic and redo your models and your designs for simpler designs with more pessimistic predictions. Rely on local sales, and if those rules are not in place, then re-think your export strategy. And most of all, develop strong management with a smaller version of the great growth you want to build. You will have something to cheer for and your investors will love you if you can thread the cannabis market needle without turning into a cautionary tale.