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Cannabis Business 101: Everything You Need to Know

assorted cannabis oil containers with cbd, nugs, live resin and other thc extractions

Despite its restrictions at the federal level, the cannabis industry is growing like… well, a weed (sorry); and the steady wave of state-level legalizations of late – be they medicinal or recreational – has got investors from all over the world wondering how to cash in on this tech-savvy, analytic-friendly, and thoroughly booming industry.

In many U.S. states, cannabis and cannabis-derived purposes can be prescribed by physicians as an alternative to pharmaceutical remedies for conditions such as cancer, chronic pain, and mental health disorders. Recently, even the FDA has approved the CBD drug Epidiolex for use to treat certain seizure conditions. On top of that, a growing number of states have passed or are poised to pass ballot measures legalizing marijuana for recreational use, positioning it to be in the company of other legal “sin-taxable” products like tobacco, alcohol, and caffeine. In Canada, cannabis is legal for both medicinal and recreational purposes across the country.

There’s potential for cannabis in other industries as well. Hemp fibers, for example, are used in fabric, biofuels, green plastics, and cooking oil. The potential uses for hemp and cannabis outside the pharmacological realm are nearly myriad. Agriculture, manufacturing, tech, and services are all sectors that could see new adjacent industries with the growth of the cannabis industry.

The Growth Outlook

The next ten years is going to see rapid growth for the cannabis industry. It makes sense, sure, but studies by Arcview Market Research and its partner BDS Analytics, who expect the total revenue for the worldwide legal cannabis industry to be at $57 billion in 2027. Two-thirds of that number is expected to come from the recreational market, while the remaining third will be attributed to medicinal users.

North America will make up the majority of the legal market worldwide, increasing the market by nearly 40% over the next ten years to a staggering $47.3 billion. With projections like this, many investors feel the time is right to jump in, but in an ever-changing legal and political climate, it can be difficult to know when and where to put your money. What follows is an industry growth guide to all things cannabis

Is it legal, or not?

The short answer: Yes. Yes it’s legal, and yes it’s illegal – depending on where you’re standing (or doing business). In the United States, on a federal level, marijuana is classified as a Schedule 1 Restricted Substance, which is also the classification of more illicit drugs like LSD and heroin. Ironically, cocaine is in the less restrictive Schedule 2 category. Schedule 1 drugs, according to the FDA, have no medicinal value and have a high potential for abuse. Therefore, federally, the cultivation, sale, and distribution of such substances are all illegal activities. The biggest practical implication of this fact is that it is absolutely illegal to transport marijuana across state lines in the United States – even from Oregon to California (both of which have legalized marijuana for both medicinal and recreational use)

This restriction precludes the existence of any national marijuana corporations or firms in the United States, and the ones based in Canada only operate in the U.S. on a state-by-state basis in legal states. This does not mean, however, that companies in legal states are without protection. Specific federal legislation related to funding helps keep the DEA off of those business’ backs.

The Rohrabacher-Blumenauer Amendment – which has been added to each congressional omnibus spending bill since 2014 – prohibits the use of federal funds by the DEA to interfere with the medicinal marijuana laws of any state. The practical effect of the amendment is that cannabis consumers, companies and their employees, and patients in those states are immune from federal prosecution. The amendment must be renewed each year as it is a part of the congressional spending bill, and it is currently in effect. Congress is expected to vote on new legislation that would make the language of the amendment permanent during its next major session.

Will It Be Legalized Federally?

It seems so. Eventually.

Elizabeth Warren (D, MA) sponsored the STATES Act (S.3032), a draft bill that would add protection to consumers and businesses who in adherence to state cannabis regulations by amending the Controlled Substances Act of 1970. The President intimated that he would sign such a bill if it were passed. There is also an amendment that would open the Rohrabacher-Blumenauer protections more concretely to the recreational market by removing the word “medical” from the language.

So far, there are 33 states with some form of legislation permitting medicinal marijuana, 23 total states in which cannabis has been decriminalized, and ten where recreational use has been legalized. Even though a clear majority of the states have okayed medicinal marijuana, the specific laws vary in each state, so before considering any investment be sure to read up on the laws in the specific jurisdiction in which you are interested.

So, What’s On The Menu?

So much. That’s what’s out there in terms of variety of product. There is very little in the way of standardization when it comes to potency or product type.

This is mostly because each state has its own restrictions and regulatory programs. And within every one of those jurisdictions, the plants must be grown within their bounds. This means a lot of diversity from one grower to another. In fact, a recent movement by growers in northern California claims that, like grapes, the complex profile of the cannabis plant varies greatly with the geographical regions in which it is grown.

This diversity applies to potency as well. Due to the organic nature of cannabis, and the fact that it is grown under variable conditions, different growers will produce different yields, though the product may be the same. For example, one grower may grow Dutch Treat that tests at 21% total THC, whereas a grower on the other side of the state may produce Dutch Treat that’s only 18%.

Competition has done its job in vertically integrated markets, however, in keeping prices consistent, despite varying products and potency.

Horizontally integrated markets are much more laissez-faire when it comes to pricing. These markets typically have a wider variety of techniques and technology for processing, and product is more broadly available.

When it comes to products, beyond just raw flower or pre-rolled joints, there are many types of extracts, distillates, and edible products that are available.

Typically, cannabinoids – the active chemicals in the cannabis plant – are extracted using one of a few different methods. BHO (Butane Hash Oil) and SCE (Supercritical CO₂ Extract) are the two most common. In states like California, where the program is highly established, BHO is more common.

SCE is becoming more popular because it is all-natural and does not require the use of butane solvents like BHO. Instead, high-pressure CO₂ is used to extract THC and other cannabinoids. In many states that have more recently adopted cannabis programs, it is the exclusive method for distillation. The process involves heating and pressurizing the raw flower (called carboxylation) then placing it into supercritical (ultra-cold) carbon dioxide before agitating it. During this process, a full spectrum extract – called such because it includes all of the active phytocannabinoids – resembling a thick tree sap is produced. It can be sold in its sticky, gooey raw form, or processed into other products like capsules or vape cartridges.

Shatter

BHO is used to make a hardened extract called shatter. Shatter is typically very potent and is used with a vaporizer. Shatter is also used to make derivative products like wax, crumbles, pastes, and others.

Ground Flower

In some states, the only way marijuana in its flower form can be sold is in “pods,” which are cups for specialized vaporizers. In the ground form, marijuana can also be made into pills, which can be taken orally.

Solvents

Carboxylated flower can be cut with alcohol as a solvent. This creates tincture products for oral use as well as for topical use in cocoa butter.

What About Strains and Such?

Hold on to your hats. The field is about to get even more diverse. In addition to the multitude of product types available, there is an even wider variety of strains to choose from, and the list is getting bigger all the time.

There is not a strict hierarchical structure when it comes to strains, but for the most part, the strains straddle a spectrum between two genetic types of cannabis plant.

The Indica, The Sativa, And the Hybrid

Cannabis Sativa (Sativa) plants and their cousin Cannabis Sativa forma Indica (Indica) are the two main types of plants to be considered here. As a general rule, Sativas, which are from South America originally, are taller, have longer leaves, and usually result in a “head” high for the user, giving energy and inspiration. Indicas on the other hand come from Asia. They are shorter with wider leaves, and usually result in a sedative body high for the user.

Hybrids are exactly what you would think – plants bred to have properties somewhere in the middle of the spectrum between Indica and Sativa. Most of the marijuana that is commercially available in legal states today are hybrid in some form or another. Without any standardized genetic testing available, it’s difficult to say with any certainty that you’re getting a “true” indica or a “true” sativa. More likely, what’s being marketed as an indica product is a hybrid that is 80/20 or more indica dominant.

Because of the variation of state laws and state geography, and the fact that products sold in a state must originate in that state, different growers will often try to differentiate themselves and aid their marketing by coming up with clever names for their strains. Wonder Woman, Girl Scout Cookies, and Skywalker are all examples of strains that are widely available, but as mentioned earlier, an eighth of Girl Scout Cookies bought at a Portland, OR dispensary may vary widely in potency and even flavor profile from an eight of the same strain bought in Portland, ME. Some companies (especially those that deal in concentrates) market their products without regard to strain and are not obliged to publish any genetic or strain information.

The Buzz About CBD

CBD is a cannabinoid that, unlike its counterpart THC, is not psychoactive. It can be made from either marijuana or industrial grade hemp. This is important because non-psychoactive industrial hemp is legal in many US states and is an established agricultural industry in Canada.

CBD is already used in many states as an alternative treatment for medical conditions like anxiety and inflammation. This summer, a CBD drug, Epidiolex, was the first to be approved by the FDA to treat rare epileptic seizure conditions. In some legal states, CBD is being infused into everything from coffee and energy drinks to dog treats. Experts expect the CBD industry to hit $2.1 billion within the next two years.

The Dispensary Experience

For the most part, if you go into a dispensary in a legal state, what you find may surprise you. It won’t be some sort of opium den out of a bad ‘80s action movie. Nor will it be a skeevy, cartoon-mushroom-poster covered head shop from every stoner movie ever made. Instead, what you will see is most likely going to be something more like a boutique that caters to a more high-end clientele. The shelves are clean, and the display cases are well lit with enticing samples of buds and other products on display, along with pricing and potency information. Many shops have employees that resemble Apple “geniuses,” complete with button-down uniforms and iPads for loyalty rewards and product info.

Some stores, such as Locals Culture House in Spokane, WA, for example, have looked to high-end brands like Starbucks and Apple for their retail environment. With wood-paneled walls, elegant, well-lit displays, and a staff that act more like weed sommeliers than retail clerks, the store is a boutique specializing in “craft cannabis.”

And then there’s NuWu. The 16,000 square foot dispensary on the Las Vegas strip is the biggest in the world – a true megastore that boasts over 170 display counters throughout its sprawling facility.

Security is tight in the dispensaries. Most require video surveillance, security guards, and other precautions to keep product out of the hands of those who are not authorized to have it. In the case of medicinal dispensaries, most will have a reception area that is locked away from the main dispensary, and the medication must be locked away in a similar manner to a pharmacy.

Both NuWu and the much smaller Locals Culture House are in horizontally integrated states, and they are a far cry from what you will find in vertically integrated markets. There you will find a much more bland environment – simple displays of plainly packaged products. The products themselves could be anything from pills and cartridges to edibles and topical creams, but they are not being marketed the way they are in the horizontally integrated states. Still, these are products that patients need, so the lack of flashy packaging and lifestyle experience isn’t much of a deterrent.

In recreational states, though, you’ll typically see brightly packaged jars and bags of marijuana buds, pre-rolled joints, packaged concentrates such as wax, shatter, and even old-school hash. You’ll also most likely find a smattering of accessories such as pipes, rolling papers, and vaporizer systems that can range from $50 to $1000, depending on the complexity.

Perhaps the most important part of the dispensary experience, however, is the customer education. Those weed sommeliers I mentioned earlier are called budtenders, and they are more often than not consumers or patients themselves. You will usually find them consulting with customers about different products, and making recommendations based on the patient/customer’s needs. Newbies and long-time cannabis users alike find the advice of the budtenders to be invaluable.

Some facilities also hold clinics, seminars, and classes to educate their customer base on marijuana-based treatment for a range of medical conditions.

One issue that many vertically integrated or newly legalized markets often face is that of availability. Until a system has been in place for a while, the lack of dispensaries and other infrastructure can mean product shortages and long lines, with some patients waiting over an hour to be served.

In some of these situations, home delivery is a better option for patients who already know what works for them. They can consult with budtenders over the phone if they need to be updated on new products or availability.

Who’s Making Waves?

The Marijuana Index – a site that tracks 374 different securities on both Canadian and U.S. exchanges across a variety of sectors like retail, biotech, AgTech, cultivation, hemp products, and consumption devices, as well as the financial portfolio management of cannabis companies – shows the big players right now to be Canadian firms when it comes to market capitalization, growth, and volume. Firms like Aphria, Aurora, Canopy Growth, Cronos, and Tilray, which are all into both retail and cultivation, are just a few of the firms in the land of hockey and maple syrup making an impact right now.

Canadian firms have a significant advantage in the global market right now due in part to their heavy investment in U.S. companies, and their ability to navigate the international banking system to work with banks in legal U.S. states.

The reason this works to the Canadians’ advantage is that the parent companies can transact directly with non-cannabis businesses in the U.S. via their parent banks in Canada. For example, a locally owned dispensary in a legal state is largely restricted when it comes to banking with any institution insured by the FDIC. An all-cash business, the local company has to rely on complicated workarounds to purchase critical goods and services for their business, whereas a dispensary owned by a Canadian company can use international banking to avoid all of that complexity.

Agriculture

Canada doesn’t completely own the market, though. Of particular note to the savvy investor is the peripheral businesses associated with cultivation. AgTech products like fertilizer, hydroponic gear, and other grow technologies are all doing quite well along with the main cannabis industry.

Consumption Devices

Companies like PAX Labs, a consumption device and accessory company often compared to Apple within the vaporizer industry, are also growing steadily. A PAX Labs subsidiary, JUUL Labs has a valuation of around $15 billion thanks to its disposable pod system and its presence in the nicotine vaping industry. The JUUL Labs pod, like the PAX Era, is high-tech and getting more popular by the minute. Some devices like the Era are even Bluetooth-enabled.

There are also cannabis-specific packaging industries and other key support industries that are poised to benefit significantly from the growth of the overall cannabis industry.

The Role of Big Tobacco and Big Pharma

The soft drink and alcoholic beverage industries are believed to be poised to throw their hats into the marijuana industry ring, but most of the buzz there is based on the idea of adding CBD to beer and soft drinks. Coca-Cola has been watching with interest, and Constellation Brands, of Corona Beer, Robert Mondavi, and Svedka Vodka fame bought into Canopy Growth in Canada to the tune of $4billion recently.

As for tobacco, there has been no major movement as of yet in the Western hemisphere, but Imperial Brands, the UK company behind cigarette brands Kool and Winston has recently announced that it, along with Casa Verde, a seed investment firm associated with rapper Snoop Dogg will invest $10 million in medical marijuana research in Britain.

Big Pharma is also a contender. Though they have yet to participate directly, the approval of Epidiolex, the CBD based drug recently approved by the FDA for treatment of seizures, indicates that it won’t be long until pharmaceutical companies start to ramp up their interest in the industry. Other drugs, such as Sativex and Marinol, both THC based drugs are being developed in both the U.S. and the U.K to treat a range of maladies from M.S. to HIV and cancer.

Tech Sector Players

The big guys, HP and Microsoft, for example, are working with smaller companies like Flowhub and Kind Financial, which deal with POS and consumer tracking. Manufacturers of LED light systems also see a benefit from the more widespread use of hydroponic systems.

Then there are the obligatory app startups. Weedmaps and Leafly lead the way in this blossoming part of weed-tech. Weedmaps is tailored toward helping consumers find the nearest dispensary, while Leafly offers additional service like strain and dispensary reviews, product descriptions, educational videos and articles, and news feeds.

There is also big data to consider. Cloud services and machine analytics definitely have a place in this new cannabis-friendly frontier. The ease with which data can potentially be managed is a big help for getting past regulatory roadblocks, not to mention all of the logistical solutions big data can provide for distribution, inventory management, and delivery.

The Problem With Banking

Operating a cannabis business in a legal state presents many challenges on a logistical and operational level, which in turn creates a nice little niche into which companies that provide solutions to those challenges can thrive. Banking is one of the biggest such challenges.

As I hinted at before, the FDIC insures most every bank in the country, and, as a federal institution, it is illegal for member banks to serve cannabis businesses. Cannabis businesses usually end up working with private banks, chartered by the state, like GRN Funds. The Seattle based bank processes over half a billion dollars worth of deposits for cannabis businesses throughout the West coast. Recently, they’ve also become active in Florida.

The other problem with banking in the marijuana industry is the fact that on the retail end, it’s mostly a cash-based operation. In many medical states, however, an app called CanPay processes payments for patients at dispensaries. The patient’s bank information is registered with CanPay, and at the point of purchase, a QR code appears that the patient can use to process the payment.

Risk vs. Reward

While it seems like a green gold rush, there are risks to investing in a cannabis business. It has less to do, though, with legality from an individual risk standpoint, and more to do with the long-term future of the industry.

Federal legalization, for example, could actually hurt many of the independent businesses in legal states right now. Those businesses are benefiting from the fact that big tobacco and big pharma have stayed out of the game thus far. Decriminalization or rescheduling marijuana on a federal level could change that.

Many of the small and independent businesses in such a scenario might fall victim to price-setting by large corporations, or even acquisition. While this is a valid concern, in states with horizontally integrated markets, competition has already produced some incredibly cheap weed, but that hasn’t stopped the so-called “craft-cannabis” brands from thriving, too. It is likely that the market will change when federal legalization happens, but it will also adjust.

In the short term, however, the next five years continue to look like a boom for the cannabis industry, and the peripheral sectors that service it.

A Final Note

One other thing to consider is the fact that cannabis businesses can’t take deductions on their taxes for expenses since they are technically in violation of federal law. There are also restrictions on advertising and location, which can vary in severity depending on the state. Social media, for instance, by and large, is off limits in most cases because of language in the terms of service that prohibits illegal drugs.

The near future of cannabis definitely looks bright for investors, consumers, and patients alike. In nearly every sector there are multiple ways to get a piece of the action, and the ground-floor opportunities are happening right now.

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