How to Start a Cannabis Business
Not too many years ago, the biggest obstacle when thinking about how to start a cannabis business was that the product was illegal. Today, with most states green-lighting the sale of medical and recreational marijuana, the weed itself isn’t a problem.
Instead, entrepreneurs interested in getting involved in the cannabis industry must navigate a labyrinth of state-by-state licensing guidelines, changing regulations, legal compliance, hesitant banks, and a U.S. Federal policy that still officially considers possession of marijuana a crime punishable with jail time. Oh—and you have to have pretty deep pockets, too.
But with projected global sales of cannabis expected to top $33.6 billion by 2025, according to Investopedia, the upside benefits of running a successful cannabis company appear auspicious. For a high-level overview of the key aspects of starting a cannabis business, including getting an insurance policy tailored specifically to the insurance needs of cannabis companies to properly cover yourself and your business, read on.
How to Start a Cannabis Business: From Market Research to State Licensing
As with any other business prospect, launching a cannabis business requires the typical steps of all startups. You’ll want to cover the basics of cannabis businesses as well as follow the best practices of startups and management.
Cannabis Business Market Research
You’ll want to research the market to determine exactly what area of the cannabis industry you want to enter (do you want to grow it yourself? get in on cannabis 3.0? start a delivery service? open a dispensary? move your canna-butter hobby to a professional kitchen?). Ideally, your market research should help you determine what products and services are missing in the marketplace and identify areas where you can specialize.
Cannabis Business Plans
Next, you’ll create a business plan that includes how to structure and run the company. One element that’s critical to your cannabis business plan is how you intend to fund your startup. Launching a cannabis business is notoriously expensive (and it should be, as it does involve real lives, after all). But with licensing and equipment costs alone running into the six-digit territory, you’ll need to have a solid financial plan and deep-pocketed partners.
One area where the cannabis industry differs from more traditional business startups is the mandate for special inventory management software that tracks cannabis plants from tiny shoots all the way to when they’re purchased by consumers. Called “seed to sale” software, it’s available from various vendors who can help you set it up and integrate it into your company’s workflow. It’s a good idea to start researching seed-to-sale software early so you can plan for the cost and choose a product that best suits your business, as there are many options available.
Once you have these basics secured, you’ll be looking at physical locations to plant your headquarters, choosing and registering your business name, and getting the required licenses to run a cannabis business in the state in which you’ll be doing business. Every state has different rules and requirements for marijuana sales, but each state where it’s legal has a .gov website that explains the entire procedure and associated costs of obtaining proper licenses.
Funding Your Cannabis Business
The startup costs for cannabis businesses are a major deterrent for many folks. Depending on your cashflow, you have a few different options for funding your cannabis business:
Start Cannabis Business in a Newly Legal State
The competition won’t be as fierce as in states with a longer history of marijuana legalization, such as California and Colorado. Your investors may have already saturated states that have been legal for a while and may be interested in entering a new state with less competition and more opportunity.
Choose a State with Lower Application and License Fees
The cost of applying for a license and getting your business certified varies wildly by state. According to Cannabis Business Times, Maine, for example, uses a caregiver model and charges $300 for an application fee. Florida, on the other hand, requires businesses to operate as medical marijuana treatment centers and charges $60,000 for the application to open a center.
If you are part of a traditionally overlooked or underserved group (women and minorities, for example), now is a great time to look for seed money from organizations trying to level the playing field, such as The Initiative, located in Portland, Ore., and Fluresh in Grand Rapids, MI. These groups also provide support and mentoring.
If you’re wondering why you keep seeing celebrity names like Seth Rogan, Jay-Z, and even Martha Stewart launching new cannabis product lines it’s because name recognition is critically important to the success of startups – especially for an emerging industry like cannabis. While you may never rub shoulders with the likes of Snoop Dogg, you should still take advantage of opportunities to get your name out there, meet people, and make connections.
A number of cannabis-focused business networks have launched over the past few years, adding a professional polish to this business sector. They include Vangst, Weedlife, and Leafwire.
Becoming an active and engaged participant in the cannabis community is a smart way to learn from others, suss out strategies, and even find employees. You can also use these networks to establish yourself as a thought leader in the cannabis industry or in your specific niche. Gaining an online following is a super smart way to help your business’s name recognition and stand above the fray.
Managing Risk in the Cannabis Business
Starting any business is risky. But the risks of starting a cannabis business are many – and they’re not always obvious. For those eager to make a name for themselves in cannabis, the risks just add another layer of challenge that can fuel their passion. Though it takes time, energy, and of course, money, it’s absolutely critical to perform a risk management assessment to identify where the risks are in your particular company.
A risk management assessment will look at several key areas of risk, including compliance risk (how closely your business adheres to regulations), operational risk (the everyday events related to running the business), financial risk (debt and expenses), and even reputational risk (the public perception of your company). Risk management is closely tied to insurance coverage because insurance underwriters must assign a monetary value to each risk to properly insure against them.
Because risk management is so specialized in the cannabis industry, it’s a wise idea to work with a risk manager with experience in the risk evaluation process in your specific niche and in the state you want to do business in.
Insurance for Your Cannabis Company
Depending on the type of cannabis business you’re starting, the insurance coverage you need will vary. For example, if you’re opening a self-funded dispensary or delivery service with employees, you’ll need a worker’s comp policy in addition to your other coverage. But you probably won’t need an Errors & Omissions (E&O) policy, which is the type of insurance that covers advice and services. On the other hand, if you’re running a cannabis testing lab or employing doctors, you’ll need to add E&O to your coverage policy to protect against potential claims of negligence or errors and omissions. And if you’re planning to grow your own plants to sell, then you’ll need crop coverage to protect against risks associated with cultivation.
Why Finding the Right Insurance Pros Pays Off for Cannabis Startups
Clearly, insurance coverage for cannabis businesses is not your Dad’s insurance policy. The good news is that just as the cannabis industry has progressed by leaps and bounds in a relatively short amount of time, so has the insurance industry. New products, services, and tools are available that address the specific needs of whatever type of cannabis company you can dream up.
