Marijuana Business Magazine May-June 2019

Marijuana Business Magazine | May-June 2019 90 As California’s state-regulated marijuana market rolled out in 2018, a huge shift began in the two- decades-old industry, prompting thousands of companies to close up shop for various reasons. The market today is not an easy one to navigate, making success for small companies that much more elusive. To increase their chances of survival in the largest cannabis market in the world, newcomers should: • Keep in mind the minimum cost of entry, which is usually about $500,000 for a plant-touching, state-licensed business and could be much higher depending on the type of company. • Budget for a five-year operational runway of zero profits before you count on being in the black. • Take time planning. The market isn’t going anywhere. Better to get it right at a slower pace than to get in immediately. Familiarize yourself with all relevant industry regulations as well as state and local permitting processes. • Consider any possible revenue streams, such as licensing any intellectual property or royalty agreements in other state markets. • Take into account every possible license combination California has to offer in order to ensure you’re getting the right permit and taking advantage of options such as space-sharing facilities. • Take on investors, if necessary, but be wary of predatory lenders who may demand majority ownership stakes. Always read the fine print before signing any financial agreements, and take the smallest amount of investment necessary for your company to stay afloat. • Think about starting an ancillary cannabis business instead of a plant-touching one. The financial benefits are immediate—including banking access often denied to marijuana retailers and growers— and there is far less red tape. The reasons vary from company to company—ranging from an inability to obtain local or state permits to not having enough money to comply with expensive new state rules. But generally speaking, the world’s largest cannabis market hasn’t been hospitable to many existing players or new entrants. And, as of March 2019, roughly two-thirds of California’s cities and counties still had MJ business bans in place, making it all the more difficult for industry executives to find a home for their companies. Michael Katz closed his Los Angeles- based vape cartridge company, Evoxe Laboratories, in early 2018, after three years in business, because there was too much uncertainty surrounding California’s industry rollout, including how much it would cost him and his investors to do business legally. “All of the pieces of the puzzle were cost-prohibitive,” Katz said. “California just became a place where it was not advisable to keep putting resources into the market with all the uncertainty.” Instead, Katz hit pause on Evoxe and moved to Mendocino County. Once there, he focused on another venture he had co-founded, the Emerald Exchange, which sets up marijuana farmers markets and other events that promote cannabis brands and businesses. He’s hoping Evoxe can make a comeback on the plant-touch- ing side of the industry—and, as of March, he said that date wasn’t far off. A Familiar Story Steven Domingo has a similar case. He founded a marijuana-delivery business called WeDrop in Oakland in 2017, only to figure out the following year that the numbers didn’t add up. “I just saw a lot of regulatory hurdles and industry challenges. It just didn’t make sense financially,” Domingo said. Like Katz, he exited—at least tempo- rarily. Domingo relocated his operation to Sacramento, where property costs less and local marijuana business taxes are lower. He’s hoping to have a multilay- ered cannabis company up and running before the end of the year, including licenses for delivery, distribution, manu- facturing and cultivation. Domingo’s story indicates there are still openings in the industry for those interested in tapping them. But it’s not as simple as it used to be, and would-be cannabis business owners face plenty of pitfalls that can sink a company. Cannabis Casualty housands of companies have exited the California marijuana industry since it morphed in 2018 from a 20-year gray market into one of the most highly regulated cannabis business landscapes in the United States. Michael Katz folded Los Angeles-based Evoxe Laboratories in 2018 before focusing on the Emerald Exchange. Courtesy Photo