A Growing Market Sparks Up: Cannabis Opportunities for Entrepreneurs

Atop the pile of mail on my kitchen island, I see “CBD for everyday wellness” calling from the back cover of the Bed, Bath & Beyond circular. For only $29.99 (minus my $5-off coupon) I can enjoy pure, THC-free essential oils from SpaRoom that promise relaxation and well-being. From these essential oils for wellness, to prescription-based medical marijuana, to recreational pot, cannabis offers huge business potential and both startups and big businesses are drawn to the market opportunity.

Recreational marijuana is now legal here in Massachusetts and it seems that everywhere you look, people are excited to create business ventures around it. But, like any other business endeavor, research, planning, and discipline are essential – maybe even more so given the legal and regulatory issues involved with cannabis. Starting a “cannabusiness” can provide passionate “ganjapreneurs” a chance to get in on the ground floor of a burgeoning market, but it’s critical to jump in with your eyes wide open.

As of now, marijuana is fully legal in 10 US states plus Washington DC, and 33 states have a legal medical cannabis program (this map shows marijuana legality by state). From a business perspective, it’s tricky as some states allow medical marijuana, some allow only medical CBD oil, and in others it is still fully illegal. However, businesses are eager to participate in the cannabis industry at every level and many analysts believe that the US will fully legalize marijuana in the next several years, given that legislation such as the Marijuana Justice Bill to end the federal prohibition on marijuana has been introduced.

First, a bit about Cannabis Terminology … What’s What?

For the uninitiated, here’s a quick glossary of terms:

  • Cannabis, also known as marijuana, is a psychoactive drug from the Cannabis plant used for medical or recreational purposes. Cannabis can be used by smoking, vaporizing, within food, or as an extract. (There are a ton of slang names for cannabis too, including pot, weed, grass, reefer, ganja, bud, etc. In fact, media outlet Ganjapreneur has a whole terminology guide.)
  • Medical Cannabis (or medical marijuana) can refer to the use of cannabis and its cannabinoids to treat disease or improve symptoms; however, there is no single agreed-upon definition.
  • THC (tetrahydrocannabinol) is the principal psychoactive constituent of cannabis, the part that produces the high.
  • CBD (cannabidiol) is one of some 113 identified cannabinoids in cannabis plants; CBD accounts for up to 40% of the plant’s extract. If CBD oil contains only CBD as the active ingredient and not THC, it provides therapeutic benefits without the high. Clinical research on CBD includes preliminary studies of anxiety, cognition, movement disorders, and pain.
  • Hemp is a strain of the Cannabis sativa plant species that is grown specifically for the industrial uses of its derived products. In addition to cannabis, the hemp plant is used for food (hemp seeds and hemp seed oil) and its fiber.

What are the Real Benefits of Cannabis?

First let’s focus on CBD. In 2018, the World Health Organization published a report that showed there are no public health risks or abuse potential for cannabidiol, or CBD. As summarized in this Forbes article, the WHO team determined that CBD has “been demonstrated as an effective treatment for epilepsy” in adults, children, and even animals, and that there’s “preliminary evidence” that CBD could be useful in treating  Alzheimer’s disease, cancer, psychosis, Parkinson’s disease, and other serious conditions.

What about THC, then? According to the National Institute of Health’s website, THC can increase appetite and reduce nausea. THC may also decrease pain, inflammation (swelling and redness), and muscle control problems. Although marijuana is not FDA-approved, scientific study of the chemicals in marijuana has led to two FDA-approved medications in pill form, dronabinol and nabilone, used to treat nausea and boost appetite.

Some proponents feel that a combination is best and that CBD and THC work synergistically within the body’s endocannabinoid system in a way known as the entourage effect.

Opportunities from Every Angle

Due to increasing legalization, cannabis is a burgeoning industry and new business opportunities exist from almost every angle. Businesses can focus on the recreational or medicinal benefits – or both. At the same time, there are dozens of ancillary services that are needed to support the cannabis industry.

There’s so much more to the business than growing marijuana. Business News Daily categorizes opportunities as “plant-touching vs. ancillary businesses.” As the name suggests, plant-touching businesses handle the cannabis plant itself, either cultivating, distributing, processing, or selling it. Entrepreneurs should realize that these types of businesses face the strictest regulations and may need to navigate complicated licensing processes before they can get started. Also, as the business grows, big industry players will tend to dominate. In Canada, where recreational marijuana is legal throughout the country, the top four licensed producers are set to corner approximately 70% of the country’s regulated recreational market, says Marijuana Business Daily.

Ancillary businesses provide all the supporting functions for a cannabis business. These include data platforms, ag-tech companies, legal representation, compliance technology, point-of-sale systems, payment processors, digital marketers, event planning, public relations, software, accountants, and more. They are the same kinds of functions and services needed to support any other business in any other industry. Ancillary businesses are also the least risky kinds of cannabis-related businesses since cannabis regulations for businesses only apply to growers, processors, and sellers. Because ancillary marijuana businesses aren’t burdened with all the red tape and high taxes, they tend to have higher profits as well.

In a Boston Globe article, Jay Youmans, a founding member of the Massachusetts Cannabis Business Association, says, “We’re really trying to destigmatize this industry and [have] folks understand this is no different than any other industry. We create jobs. We hire local people. We’re regulated very heavily, and we take this job really seriously.” Youmans said the local [Massachusetts] cannabis industry is expected to rake in an estimated $1.5 billion in sales annually. At the industry’s full force, he expects there to be 20,000 jobs in or related to the market.

Nationally, CNBC reports that job creation is expected to grow as more states legalize marijuana. Manufacturers and distributors (both recreational and medicinal) saw a massive 44% gain in job creation in 2018, with 64,389 new positions, for a total of 211,000 jobs directly related to the industry and 296,000 in all related areas combined (according to industry site Leafly in a report it compiled with Whitney Economics). To put this into perspective, there are now more legal cannabis industry workers than dental hygienists in the United States. The Leafly report also shows $10.8 billion in legal cannabis sales in 2018. Interestingly, the U.S. Bureau of Labor Statistics does not count cannabis-related jobs in its figures because the substance is still considered a Schedule 1 narcotic at the federal level.

The Significance of Hemp Legalization on a National Level

For entrepreneurs that are looking at business opportunities on a national level, CBD products may be the way to go for now. Many big name retailers from CVS to Sephora to Neiman Marcus to Walgreens have either entered, or expressed an interest in entering, the CBD market. This interest in CBD has been propelled by changes in the Farm Bill.

In late 2018, President Trump signed the 2018 Farm Bill which removes hemp (with 0.3% THC or below) from the Controlled Substances Act. According to Hemp Industry Daily, this is the most significant change to American drug policy in five decades. Federal drug authorities will now have to treat hemp like any other agricultural commodity, such as wheat or potatoes, and hemp farmers will no longer face legal or regulatory burdens of it being classified as an illegal drug, such as difficulty getting crop insurance or barriers to obtaining loans.

The tide is turning. This Bloomberg article gives several examples of the shift, including a 10,000 acre farm in Yuma County, Arizona, that had originally grown organic spinach and lettuce and has now transitioned to hemp. According to the Brightfield Group, hemp legalization propels what was originally projected as a $2 billion market by 2022 into a $22 billion hemp-derived CBD market instead, which could double the projected market value of the entire cannabis industry.

At MIT, our student venture accelerator, delta v, provides a capstone educational opportunity for student entrepreneurs that prepares them to hit escape velocity and launch into the real world. We’ve had some entrepreneurs start to explore businesses in the cannabis market. In my next post, we’ll talk to one of those startups and get more entrepreneurial insights on the cannabis market.

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