May 31, 2020

Entrepreneurship: California Marijuana Start-Ups, Shut Out From Banks, Turn to Private Backing

Companies like Big Rock, which has invested more than $10 million in the cannabis industry, are playing an important part in funding the industry’s growth. “Starting up a testing lab or a dispensary is extremely capital intensive,” said Stephen Kaye, Big Rock’s chief operating officer. Private firms can make decisions and move large amounts of money quickly, he said. He receives pitches every day from entrepreneurs, and is especially interested in medical research.

For Jody Hall, an entrepreneur in Seattle, joining an investment company has freed her to focus on her core business, rather than the myriad regulations that accompany its operation. Ms. Hall, who runs a conventional cupcake business, started a new venture, GoodShip, two years ago to make cannabis edibles. She found that she was spending “way too much time” getting advice from lawyers on what was or wasn’t allowed. Ms. Hall recently sold GoodShip to Privateer Holdings, a private equity firm, and is staying on. The cash infusion has given her more time to develop products, she said, and has accelerated her plans to expand to California.

While states are collecting hundreds of millions of dollars in tax revenues from marijuana businesses, and a rising number of Americans favor legalization in some form, Attorney General Jeff Sessions’s firm opposition to it poses a risk to cannabis-related companies. He could “shut the industry down tomorrow,” said Micah Tapman, co-founder of the Canopy cannabis accelerator and venture capital fund in Colorado.

Of course, there are other challenges. Evolving rules and regulations, like new packaging requirements, can add unexpected costs to processors and retailers. Companies forced to deal only in cash can run into safety and theft issues. Many small growers emerging from the black market “have no idea how to run a commercial-scale facility,” Mr. James of Marijuana Venture said.

Despite the hurdles and uncertainty facing the industry, Mr. Larson of Gateway has remained optimistic. “People are gaining confidence as legalization spreads, and the growth is going to be huge,” he said.

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