At the time we were talking, twenty-two states had legalized some form of medical marijuana. Two—Colorado and Washington—were rolling out recreational use. It was just a matter of time, I told them, before other states moved forward with recreational use. When that happened, I envisioned building a Cannabis Ranch in those states as well.
Wait, someone from the New York team said: You don’t mean to apply for a license to grow in those states?
No, I said. I don’t have to. We’ll build the Cannabis Ranch and then we’ll go to the top ten license holders in the state and ask one to partner with us. They’ll sign a lease with us, but to do it, they must agree to grow to Green Man’s specifications and use the Green Man logo on all their products.
Entering other states as a license holder was already becoming tricky. I knew because we had tried. But it occurred to me that we didn’t need to play in that sandbox if all I was doing was buying, developing, and renting a state-of-the-art marijuana facility. The first license holder who was smart enough to sign with us would be ahead of the curve. He or she would have access to the first marijuana agritourism facility in the state that was linked to a nationwide chain of promotion.
Oh, the New York investors said, nodding. Then you become the brand.
Exactly.
Those deals took months to put together and taught me much about the benefits of cultivating patience. Staying present in each moment, with each breath. Breathe in, breathe out.
That summer I decided to take a few days off and fly to Cabo San Lucas, at the tip of the Baja peninsula, for a short vacation. I never seemed to get enough quiet time at the office those days. I’d discovered that I got more done with a laptop and a cell phone in Mexico than I did in Colorado.
My personal life had changed dramatically. Following my recent divorce, I was in a new relationship with a woman, Rebecca, who had two children of her own. We’d taken a trip that weekend for some quiet time alone.
I was sitting by the pool one morning when William and his team called. We went through some chitchat, and then I heard his advisor, Justin, pause for breath. The pause I was waiting for. The pause that said “You’ve answered all our questions and we need to share some news with you.”
“We’re ready to commit,” Justin said. “We’re ready to come in at $5 million. We believe you have a solid business and a great plan; we are excited to be part of it. How soon can we close?”
Yessssss!
We talked for a little while longer, discussing the steps necessary to close and the timelines.
The next morning, I was on the phone with the private equity firm in New York. The last time I’d seen its offices, I was standing in a temple of glass and steel high above Madison Avenue. The glossy prospectus on the coffee table in front of me said that one of the prominent members of their board of directors was a former state governor; another was a legendary athlete. The rap on companies like this was that it was sometimes easier to get $100 million out of them than what I needed: $4 million.
It took them a while to get my contact on the phone.
“Hey, how are you?”
“Fine. I don’t want to keep you,” I said. “I just wanted to let you know I got a commitment of $5 million from William yesterday.”
“We heard.”
Of course they had.
“Tell you what,” my contact said. “We’re ready to do business. We’re ready to come in at $4 million.”
Yessssss!
There was the usual promise of paperwork, the inspection of our documentation, the due diligence period. There were the obvious concerns about our current, all-cash position. The firm was prepared to hire an auditor on a regular basis to make sure the cash didn’t get out of control. If all went well, my contact said the firm could see helping us take the business public someday. And my contact thought the firm could manage an additional $1 million, earmarked for dispensaries I might want to buy along the way.
It was all good.
I hung up the phone and pounded the air with my fist.
“Did they say yes, too?” Rebecca said with a smile.
“Yes,” I said.
I had commitments for $9 million from two institutional investors.
Two commitments in twenty-four hours.
For a marijuana business.
All while sitting by a pool in Mexico.
It was a good day. A very, very good day.
15
The New Marijuana Economy
One night not long ago, I attended a political fund-raiser for the governor of Colorado hosted by a handful of ganjapreneurs, myself included, in downtown Denver. Those evenings are always glittering events. People dressed to the nines. Lots of handshakes, hugs, and photographs. Endless rounds of cocktails and equally endless rounds of speeches. But I have to admit that for part of the time, my mind was elsewhere. I was busy looking around the room, counting up how many of those people were cannabis entrepreneurs like me. These were people I’d done business with. People who ran major grows or dispensaries. People who had entered the field when it was still in its clumsy infancy, who had ridden the ups and downs and had emerged unscathed on the other side.
I had to marvel that our state’s top politicians would even want us there. Once, having known drug dealers show up at such an event would have been an anathema. A scourge. Something worthy of scandal. Such a person would have been shown the door, escorted out, or quietly arrested outside. And now our presence was welcome. We were, in fact, the hosts and had invited all the guests. Politicians wanted our votes, our support, and our donations.
I had another thought as well. I found myself thinking: The Steve Jobs of marijuana is here. I don’t know who he or she is, but they’re in this room right now. And, no doubt, somewhere in Washington state, at a similar party in the future, the Jeff Bezos or Howard Schultz of marijuana will be in attendance. In the coming years, the major players of this new industry are going to emerge, and they will surprise the larger world of business with their achievements.
Now, you might well mock such a gathering as an assemblage of highly privileged people. Of course the big shots are going to welcome major marijuana businesspeople to the fold. They’re eager to get a hold of your tax dollars! They want your money, dude!
Yeah, I get it.
But I also think that you don’t have to look far to find evidence that Colorado’s stance on marijuana has mellowed, not just for us entrepreneurs but for everyone.
In fact, the night of this party, my head was still coming to terms with a story a friend had told me at lunch. A neighbor had called the cops to complain about a strange smell emanating from a home in my friend’s neighborhood. When the cops arrived, they found two young men who were growing more than 170 plants on the premises. Each had a red card showing that his physician had approved them for a higher plant count, should he choose to grow his own. However, under the new recreational marijuana laws, they were only permitted to grow six plants each for personal consumption, and the city of Denver does not allow more than a total of twelve plants in any one home. You might say that three separate authorities—the physician, the state, and the city—all conflicted with each other.
In the past, the discovery of such a home grow would have brought out the feds in riot gear. The young men would have been arrested, indicted, found guilty, and done hard time. You will recall that when I was first interviewing growers in 2009, I met a young man who had just been released from prison after eight years. That young fellow’s life was ruined because he had dared to grow this plant.
What was the result of the bust my friend told me about? The cops confiscated (and destroyed) all but twelve plants, issued the men a ticket for a smell violation—yes, there is such a thing—amounting to a few hundred dollars, and bade them a fine day.
Another person I know
had a fascinating experience. He was going through security at the Denver airport. After his carry-on had gone through the X-ray screener, the security officer asked to open his Dopp kit, in which he kept all his toiletries.
“What do you have in here?” the airport screener asked.
My friend froze. Before he’d left home, he’d forgotten to remove certain items that he knew he was not allowed to travel with.
“I’m sorry,” he told the officer. “I have some marijuana and a big tube of toothpaste in there.”
What was the response? The security officer confiscated the toothpaste—it was over the TSA’s three-ounce size limit—and sent him on his way.
I am not kidding.
What a difference a decade makes. What a more reasonable, humane response.
If you’re a hard-ass, you might well say that the people in both these stories got off easy. They should have been arrested and thrown in jail. To which I respond: Really? In a world that’s mired with war, famine, poverty, disease—problems that are taxing the resources and intelligence of all nations—don’t we have more important things to do than busting people who want to get high?
I think it’s safe to say that the next decade will be filled with more surprises as we witness the rise of our new marijuana economy. None of us has a crystal ball, but here are some predictions going forward that I feel comfortable making.
Consolidation Is Inevitable
As I write this, it’s estimated that there are about five hundred dispensaries in the state of Colorado. In five years’ time, there will be fewer than three hundred dispensaries, operated by fewer, larger, and more capable marijuana companies. It’s only logical that stronger firms will buy out the locations of smaller firms, assume their licenses, and rebrand those locations. This pattern will occur throughout the United States wherever marijuana becomes medically and/or recreationally legal.
Starting new retail locations from the ground up is time-consuming, and smart entrepreneurs will want to cut to the chase. Why go through the laborious process of applying for a license from the state, searching for retail space, building out that location, hiring new employees when you can simply buy out your smaller competitors?
The great investor Warren Buffett defines capitalism as “the ability to deploy capital.” To my mind, this means acting in the most efficient manner possible to get a good return. Buying out the competition looks like an expensive way to go, but if you spend $100 million on a few dozen dispensaries, rebrand them, resulting in a more visible chain now worth more than $300 million, you have gained more by taking the more expensive route.
You’ll also sidestep the headaches that come from starting a new location from scratch. In one case, while trying to enter the market in the ski town of Frisco, Colorado, I lost precious months trying to establish a new retail location, only to have the city council call a meeting specifically to rezone in order to eliminate marijuana dispensaries. We spent months and lots of money on that deal before the city council changed the ordinance. If you buy an existing operation, precedent is on your side.
Licensing Will Become Tougher and More Expensive, Favoring Early Players
The current cannabis industry is like Little House on the Prairie—small log homes and farms with a dusty Main Street dotted with shops and churches. The future of cannabis will ultimately look like a massive twenty-first-century megalopolis.
Corporatization of the marijuana industry has already begun.
When I got into the business in 2009, I was just coming off a financially devastating corporate bankruptcy and had little capital to invest. Luckily, all I had to do was send in my paperwork to the state, declaring that I was a caregiver, and then start shopping around for warehouse space with a friendly landlord. Back then the cost of starting a new grow or dispensary was in the neighborhood of $10,000 to $1 million, depending on what you were willing to risk. Today, if you want to start a dispensary in Aurora, a pleasant suburb of Denver, you must demonstrate access to more than $400,000 in liquid assets just to apply for a license to sell or grow.
Expect a similar pattern to occur throughout the United States. Cities and states will welcome marijuana companies, but they’ll do it on their terms. They’ll want the revenue, but they’ll have little patience for small-time operators. Their preference will be for firms that are well heeled, organized, responsible—firms that will be able to start earning and remitting taxes as quickly as possible.
I’m dismayed to say that many states are currently awarding medical marijuana licenses only to associates of those in power. If these entrepreneurs aren’t smart about their hiring and cultivation practices, they stand to lose big when their states move to recreational use and national brands become dominant. Serious marijuana connoisseurs will always gravitate to quality. Those who rush into the business thinking it’s a guarantee for a quick buck will lose their shirts.
Brand Extension through the States Will Follow Consolidation
Why is it that you can walk into a liquor store and buy one bottle of fermented grape juice for $15 and another bottle for $200? Both of those bottles contain the same intrinsic product, don’t they? Well, they do and they don’t. Understanding the difference is the key to understanding how the marijuana industry will evolve.
When our grow facility was robbed and we lost some of our product, I was forced to buy some buds wholesale from other growers in order to meet my dispensary demands. Guess what? Our customers not only knew that something had changed about our product—they complained about it! We had been in business only a few years at the time, but our customers had already become loyal to the taste and quality of our product.
Right now marijuana is a commodity, like cotton, pork bellies, and oil. In general, most buyers don’t really know or care who’s growing, packaging, or selling the buds on the market. But that will inevitably change—and quickly.
All this consolidation has an end goal: establishing brand recognition. The firms that establish a consumer affinity—the magic combination of quality product, locations, packaging, pricing, and service—will own the largest slice of the pie.
Some of these brands will extend across state lines. Imagine you are flying from Pennsylvania to Las Vegas. You spot a package of Green Man SkunkBerry for sale in a Vegas dispensary. You remember enjoying the quality of that product and strain during a ski trip you took to Colorado last winter. Because of brand loyalty, you spring for that package over all other strains available. Nearly everything we buy in our lives is brand centered. Marijuana will follow. The brands that come out on top will reach the largest audience.
How that will happen is still up in the air. Currently legal marijuana cannot leave the state in which it is grown. But there are lots of different ways to grow a business. Starbucks is vertically integrated; the parent company roasts the beans and sells them out of stores that it owns and operates. McDonald’s franchises. Budweiser sells its product to distributors who sell to stores. Ultimately, the market will decide which model makes the most sense.
Recreational Marijuana Will Expand Dramatically by 2020
As I write this, medical marijuana is legal in twenty-five states and the District of Columbia. But not all bureaucracies governing those medical systems are created equal. Some work well, others don’t. Moving to recreational would simplify matters enormously. By 2020, we could see ten to fifteen states making the leap to recreational marijuana. There will always be opposition, but reasonable voters and legislators only need to see evidence that it can be done prudently. States like Colorado and Washington are amassing convincing data every day on the positive impact of legalization on a state’s economy and welfare. This data will persuade other states to legalize recreational marijuana.
Marijuana Dosing Will Become Standardized
The marijuana we grow today is nearly eight times more potent than what was smoked at Woods
tock. When most people first smoke our marijuana, they take one to two hits, tops. Smoking an entire joint would be like drinking a half case of beer. The evolution of marijuana sales will not be toward stronger marijuana but to consistently dosed servings. Consumers will want to know that they can smoke one joint and not be a complete wreck, just as consumers know that 1 ounce of spirits, 5 ounces of wine, and 12 ounces of beer all have approximately the same intoxicating effect. Similar standards will be created for marijuana dosing. Those guidelines should be created and adhered to by the industry. We should not wait to be forced to do this by a government agency. We know we need this and should proactively make it happen.
Marijuana Must Become Legal on the Federal Level—and Will
The New York Times and other major newspapers have already called for legalization of marijuana, citing scientific evidence that the risks are negligible when compared to tobacco and alcohol. At the moment, marijuana legalization isn’t a priority for federal lawmakers. Both Congress and the White House appear to be quietly watching which way voters swing on the issue and how state legalization efforts impact voter resistance. Everyone’s against it, until they’re not. We just need to wait for the tipping point. Ultimately, the lure of tax money, the demands of sick patients, and the evidence that recreational rollouts have gone all too well will prove too overwhelming to ignore. That’s when DC will take comprehensive action to address federal marijuana laws. That’s when lawmakers will change regulations at the numerous federal agencies that have written the failed drug war rhetoric into their charters.
Banking and Tax Laws Must Change—and Will
The banking and tax issues need to be resolved immediately. But sadly, as long as the cannabis industry consists primarily of small firms, we can expect to be ignored by Congress. When enough billion-dollar, private equity firms or large corporations are investing in marijuana, Congress will be unable to ignore the industry any longer. But we can’t wait for that time.
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