Why starting a marijuana business is so hard

  • Starting a cannabis company can take $US1 ($AU1) million in startup capital to even get a license.
  • With weed still federally illegal, companies could face jail time if they don’t follow the rules.
  • But if they can play the game right, there’s lots of opportunity for success in a surging industry.
  • See more stories on Insider’s business page.

Following is a transcription of the video:

Narrator: Growing, harvesting, and selling weed legally is really hard in the US. From tracking to packaging, the laws are different in every state.

Adrian: There’s a lot of red tape that just doesn’t make sense.

Narrator: Licenses to start a farm can cost up to $US80,000 ($AU107,574) alone.

Jeannette: The regulations are really part of what layers on those costs.

Narrator: If marijuana companies can get it right, there’s a lot of opportunity for success.

Jeremy: It can become over a $US100 ($AU134) billion industry. That’s, like, approaching what the beer industry is.

Narrator: But if a business makes a mistake …

Jeremy: It can quickly slide from paying a fine to severe jail time under drug trafficking laws.

Narrator: We visited three marijuana companies across the US to see why the regulations are so tough to follow and how they’re keeping entire communities out of the industry. Marijuana with THC – or the stuff that gets you high – is now fully legal for medical use in 36 states and DC. Of those, 18 and DC have legalized it for recreational use. But it’s still illegal on the federal level. So every state has free rein on how to regulate it.

Nancy: That’s probably the most challenging thing about the regulations. There are many of them, and they differ state by state.

Narrator: And it all starts with the business license, the first barrier to the marijuana industry. Will and Adriana wanted to start a farm in California. But there, a license to grow can cost almost $US80,000 ($AU107,574), with an $US8,000 ($AU10,757) application fee. That’s a lot more than a liquor license in California, which can cost just over $US15,000 ($AU20,170) max.

Jeremy: So basically, anyone who can afford to get a license, they can get one, which makes it very competitive.

Nancy: The competition for licenses becomes extremely fierce and very expensive.

Jeannette: Some states do things like, in addition to the fee, require you to have liquid capital of $US250,000 ($AU336,169), for example. And who’s got $US250,000 ($AU336,169) in liquid capital? Few, few people. That begins to immediately lock out whole communities.

Narrator: Will and Adriana couldn’t afford California’s cultivation license. So they decided to put down roots in Oregon. There, a license and application fee costs between $US4,000 ($AU5,379) and $US10,000 ($AU13,447). And the liquor license? $US800 ($AU1,076). In both states, aspiring cannabis entrepreneurs also have to sign a lease on a property before they can apply for a license.

Jeremy: That is a property that you’re paying monthly rent on. It’s sitting there empty. You’re not making any money, but you know, your license application may not go through.

Adriana: We waited two years for a license.

Narrator: They got approved in 2020 and started their company, Magic Hour Cannabis, in Portland.

Will: These are so small.

Adriana: I know, it’s good for me.

Will: Does this look ridiculous?

Adriana: No.

Will: Nice and fitted.

Adriana: We finally waited these two years. We just waited four months for our plants to be ready to harvest, and were basically dwindling with no money. It was very scary. We didn’t know if we were going to go under before we even got up.

Narrator: So Will and Adriana applied for a grant through NuLeaf, a nonprofit that helps fund Black- and brown-owned cannabis companies.

Jeannette: Specifically to build intergenerational wealth for the communities most harmed by the war on drugs. Those two things come together, a high capital-intensive business, and then the lack of personal capital, personal wealth. And it’s a hard place to start for a Black founder in cannabis.

Will: We applied for the NuLeaf grant, and we were able to get $US10,000 ($AU13,447), which honestly, for cannabis companies, especially grows, is not that much. It gave us little more time to sell. We started making sales and gaining momentum.

Narrator: But the expensive regulations don’t just stop at the license. In Oregon, the government requires farms to have seed-to-sale tracking.

Jeremy: This is basically an effort to reduce, or at least understand, the flow of cannabis into the illicit market.

Narrator: The state tracks plants using tags with barcodes.

Adriana: As you can see, all these metric tags here are made out of plastic. You can’t reuse them. The tag takes me hours on end. And then you have to physically go and loop them around each plant. They cost around 50 cents ($0.67) a pop, which is really expensive when you have 1,100 plants in your facility.

Narrator: They go on every plant when they’re young.

Will: This is considered the baby room.

Narrator: And the tags stay with the plants through harvest.

Will: These are even turning purple. So that’s one indicator that the plant is quote-unquote “finishing up.”

Adriana: We just come down here to the very bottom of the plant, chop it off, and then we’ll hang this up here. We have to individually weigh every single plant according to the tag number that we got. I’ll read him the tag – 05579 – Weigh this – 183 grams – and then go onto the next one. It’s a pretty tedious process, but for regulations, we have to do it.

Will: So we weigh it wet, we weigh it dry, and then we weigh the waste from each plant and enter that in. It’s making sure that every single part of the plant is accounted for. It’s a pound of that Gelato, baby.

Narrator: And then there’s a whole other set of regulations for turning marijuana into edibles. Based in Denver, Wana Brands is one of the top THC gummy makers in the country. It launched two years before Colorado legalized recreational marijuana.

Nancy: I like to say it was kind of the Wild West in Colorado back in 2010. There really were not a lot of regulations in place.

Narrator: That’s founder Nancy Whiteman. She’s expanded Wana into 11 different states. But remember, cannabis is federally illegal, so it cannot cross state lines.

Nancy: Which essentially really removes our ability to scale.

Narrator: So in every state it enters, Wana has to partner with licensed growers and manufacturers. Those partners grow and make the product locally using Wana’s recipes and brand name. Then the companies share the revenue.

Jeremy: The issue with that is they don’t have as much control over the supply chain as they might like. If, say, their grower in California is less high-quality than the grower in Colorado, what does that do to the brand? It’s sort of very hard to control that.

Narrator: In each new state it enters, Wana also has to follow different manufacturing and packaging laws. For one, the THC symbols stamped on the gummies come in all forms.

Nancy: In Colorado and several of our other states, has the pictures of fruit on it. Certain states have decided that looks too tempting for children, so you can’t have fruits. You can use color, but you can’t use fruit.

Jeremy: Different states will have different dosage requirements. In Oregon, one dose is 5 milligrams. In other states, one dose could be 10 milligrams.

Nancy: When you start having these variations in every single market, that’s where it becomes extremely costly.

Narrator: Those regulations follow all the way to the last step: delivery.

Adrian: Hey, hey. Thanks so much. You have a good one.

Narrator: When Adrian Wayman moved to Portland in 2016, he had to fight hard for his company to even exist.

Adrian: There was no type of license for delivery-only retailers. I immediately started going to all of the public hearings for the rulemaking, basically to plead my case and let them know, like, hey, I love that delivery’s an option, but these proposed rules, no one can run an efficient business. So let’s move this, get rid of this. And luckily, they decided in my favor.

Narrator: Because of Adrian’s lobbying, Portland passed a law allowing cannabis delivery in 2016. Adrian then opened Green Box, a delivery and subscription service.

Adrian: I’ve been selling weed since high school. Got arrested for it, was on probation, did the whole nine. When I was getting fingerprinted for my license, it was just really weird, because I was like, man, the last time I’ve gotten fingerprinted, I was going to jail for selling pot, selling weed, and now I’m getting fingerprinted to get a license to sell it legally.

Narrator: When Adrian first started delivering, only $US100 ($AU134) worth of cannabis was allowed in the car at one time.

Adrian: Our average order is over $US100 ($AU134), so that just wouldn’t make any sense.

Narrator: Adrian again lobbied and got the limit raised to $US3,000 ($AU4,034).

Adrian: I don’t like being told no. I hate restrictions. So I got an order, pull it up on my phone, and this is basically a box of pre-rolls. This one is going to Northeast Portland. Here’s my manifest for the state tracking. That whole drawer is just all manifests, just from deliveries. I have to keep them for three years.

Narrator: Each of those manifests lists out exact turn-by-turn directions that Adrian has to follow on a delivery. Jeremy says that’s because regulators want to make sure no marijuana products go out the back door.

Adrian: That’s just not practical. When I’m building my manifests, Google Maps may tell me the quickest time at that point, but an accident may happen, and I may have to detour. And if I do not follow those directions, I have to go back and update my route. I do understand that it needs to be regulated and tracked. But I do think some things are just a little ridiculous or just not practical.

Narrator: But those tough regulations can’t be ignored.

Adrian: They come about twice a year to check in. They will pop up and knock on your door. And it’s the scariest thing ever. It’s just very stressful.

Narrator: If compliance officers find that rules aren’t being followed, a lot of bad stuff can happen.

Nancy: At the least severe, you’re probably going to get a reprimand and perhaps a fine.

Jeremy: Remember, it is cannabis. It is illegal. So if you are caught growing a supply of unlicensed cannabis, then you’re talking about a felony, and then you’re talking about jail time. And so that’s a delicate dance to try and make sure that they’re staying on the side of regulations no matter how rapidly they’re changing. They’re risking themselves personally and financially.

Narrator: All these unavoidable regulations make starting a weed business really expensive. Forbes reported startup costs could be as high as $US1 ($AU1) million for a dispensary. And raising that kind of capital can be hard.

Adriana: We can’t traditionally go and just get a small-business loan.

Jeannette: Because of it being a federally illegal substance. So banks won’t loan for that reason.

Jeremy: They can’t take credit cards, because it’s federally illegal. They’re doing business mostly all in cash.

Jeannette: So you really got to get your business funded from your personal wealth or from your network wealth.

Nancy: Those situations begin to favor people who’ve traditionally had good access to capital.

Jeremy: And oftentimes that correlate with being white.

Adriana: It is very white male-dominant. And there’s no reason that that is what it should be.

Narrator: Only 2% of cannabis entrepreneurs are Black. Yet Black Americans were most affected by marijuana’s illegal status in the past.

Jeremy: There is kind of a clear throughline from the war on drugs. According to the ACLU, Black people are four times as likely than whites to get arrested for cannabis use, despite using at very similar rates across age groups, across different states.

Narrator: Those in favor of federal legalization believe it could close the capital gap and ease regulations.

Jeremy: With full-scale federal legalization, there would be loans available for minority entrepreneurs. So if you’re a minority entrepreneur and you aren’t connected to these wealthy private investors, you can actually get a loan on pretty favorable terms from a bank.

Narrator: In July 2020, Sen. Chuck Schumer proposed legislation that would legalize marijuana federally. Jeremy says at the core of that legislation is equity.

Jeremy: To give the economic benefits of legalization to people who generally have not received those benefits in the past, i.e. minority entrepreneurs, Black and brown people.

Narrator: That would include …

Jeremy: A certain percentage of the licenses for those people specifically.

Jeannette: Expungement of cannabis crimes. Cannabis taxes must go into reparative justice for Black, Indigenous, and Latinx communities.

Narrator: The bill would also mean the FDA would standardize regulations in every state.

Jeremy: That could be as simple as the labeling or as complicated as how much THC is allowed per unit.

Nancy: Please, God, give us a universal THC symbol so we don’t have to have that across every single state.

Narrator: Marijuana could also then cross state lines.

Will: If we were able to export, our sales would definitely open up even more.

Adrian: One thing that I really wish would be allowed is inventory in our vehicle. Something like our hottest items in the trunk and the safe ready to go.

Narrator: But Jeremy doesn’t think federal legalization will pass within the year. There’s been pushback on the bill.

Jeremy: A lot of people are really unable to divorce themselves from the stigma that drugs are bad. Cannabis is a drug, so why are we saying it’s OK? No. 1 is simply highway safety.

Narrator: There’s no such thing as a cannabis breathalyzer yet.

Jeremy: A lot of police unions are really worried about what it’s like when people drive high. There’s no standard to say like, OK, you’re high after you’ve had two puffs. Everybody has a different tolerance. THC binds to your fat cells. A blood test after the fact, it might tell you you smoked last week. Another key hurdle is around teen use. There is a lot of troubling research that cannabis does really impact the development of adolescent brains. In terms of developing mental conditions like anxiety, depression, even suicidal ideation.

Narrator: But studies in states with legalized marijuana show teen use is actually down.

Jeremy: Because it’s just not really cool anymore, right? Like, their mom is buying it. 93% of Americans polled say at least medical marijuana should be legal. So with any hot-button issue with that much public support, it’s only a matter of time. I think there will be a lot of push and pull that will likely take us probably through the end of Biden’s term, if I had to kind of put a timeline on it.

Narrator: So until then, these entrepreneurs will keep working within the complicated regulation system, hoping to stay afloat in the growing big business of legal weed.