How to start a cannabis startup

January 22, 2020

As marihuana becomes more popular worldwide with legalization, so do cannabis startups. So let’s take the opportunity to check what the state of these plant-centered businesses is and the entire new industry they’re building into 2020 and beyond.

Market change from medical to recreational

Moving in use allowance from medical to recreational across diverse territories has been a key changing factor for cannabis startups without a doubt. This change is actually the perfect example of a profitable startup opportunity being raised thanks to external legal factors across a particular location, and how that can be a great lead for a successful startup. 

Now, is the investment in firing up a cannabis startup as lucrative as it sounds? Let’s find out. 

How much did U.S. cannabis startups raise in 2019?

$2.3 billion is the latest figure given by Business Insider as the amount of funding VCs brought to the U.S. table last year, for the cannabis industry only. This means a $0.8 billion increase from the prior calendar year. 

Bear in mind that cannabis startups in most U.S. locations have been dealing with slow responses to changing legislations. Boston, as an example on the East Coast, had a couple of years of delays since its first talks of legalization. Either because of legal or political reasons, or even practical licensing and implementational ones, it took more than a year before their first shop could open doors. The truth is states and cities, along with their respective operational bodies, have to get ready to welcome masses of new recreational buyers in select locations. 

California’s case is a bit different in this sense, and that’s partly why there’s about 40% of VC investment in cannabis startups being geared inwardly in this state. 

What happened to Eaze?

Speaking of Cali, we need to bring up the news in regards to one of the most promising cannabis businesses in the U.S. Founded as part of the first companies of its kind in the Golden State back in 2014, Eaze is a private company in series C of funding. It announced considerable layoffs, however, as a means of seeking financial stability. 

Having once been one of the first to raise big bucks in the pot world, and with a total raised exceeding $160+ million, this startup is now facing hard times staying in the business apparently due to leadership issues that are coupling with business model failures and banking hardships. 

The lesson here is that, whether dealing with commercial marihuana or not, every startup still needs to keep its fundamentals in check. So, let’s go over what you need to consider if the cannabis business is tempting you. 

What you need to know if you're opening a cannabis startup

  1. First, as Grand View Research has stated, “The global legal marijuana market size is expected to reach $66.3 billion by the end of 2025.” So investors have a solid 5 more years to truly make the most profitable return of any cannabis startup opportunities. 
  1. Growing marihuana is not all there is to consider for a cannabis startup. On the contrary, data analytics have been known to help create the perfect strain that’ll make consumers happy, for example. Pharma and biotech companies have long been focusing on cannabinoid-based drugs, as well. There are lots of technologies that can be combined in the business to make leaps forward. All in all, growing or retail is not all you can look into as you consider your cannabis market options. 
  1. Consider that investing or starting a business in cannabis is setting foot in a regulatory landscape that has a great deal of flux. In fact, at a federal level, the plant is still illegal and labeled as a drug by the Drug Enforcement Agency (DEA). This market also has a very short history. And all this adds a few layers of risk to your business, as well as the impossibility of listing it for stock exchange, for instance. On the plus side, you can also help your business scale if you focus on location choices, really knowing your market’s ins and outs to perfection, and having a solid financial model.
  1. Forget about Kickstarter for a bit. There’s cannabis-specific investment crowdfunding to which you can resort to fund your startup. Look up CannaFundr, Fundanna or CannaCrowd as a few examples.
  1. As timing means so much in business, take into account how acquisitions and mergers are at an all-time high in the cannabis industry. While the current legality across some states in the U.S. either decriminalizes cannabis or makes its use okay for either recreational or medical purposes, also factor how starting a business in such a moving market must mean applying great caution when selecting your upcoming co-founders or business partners. 
  1. As with any business, start conceiving your business plan and creating a cannabis startup pitch deck, which will be quite different from many other more-commonly structured, and less heavily-regulated businesses. You’ll need tons of knowledgeable legal guidance to adhere to strict legal restrictions while navigating your areas for business-making, for example. You’ll also need to keep up with constant changes of diverse kinds, more so in the legal aspect. 
Image contains a key customers/competitors

Final considerations to a cannabis startup

With everything we’ve mentioned above, the only remaining considerations to starting a cannabis business would be to plan ahead of time really well before making any crucial moves. 

If cannabis becomes your main product for retailing, for example, there’s a setback to it being illegal at a federal level. In terms of funding, for instance, you might not be able to resort to the same financing options with big banks as other companies would. 

So make lots of room to do research and truly consider whether investing your time, efforts and capital in the marihuana business is the next best step for you in your startup career. 

Weigh its pros and cons thoroughly, get legal and financial counseling, and make sure you take into account how common business options differ from those in the cannabis world. 

If you decide to go up for it, however, look out for VCs interested in the booming cannabis industry for your funding, if needed. 

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