Cannabis Startups: Exploring the Opportunities and Challenges

Posted: Mon August 03 10:00 PM PDT  
Business: Early Growth Financial Services (EGFS)
Tags: cannabis businesses, cannabis insurance, cannabis vc, cannabis fundraising

EGFS’ first-ever panel event for cannabis entrepreneurs attracted 100 participants. The speakers were: Ambere St. Denis of Crimson Business Insurance; David Ehrenberg, CEO of EGFS; David Kram, Founder and CEO, Relieve; Evan Horowitz, Cofounder of Weed Club; Brian Holmes, Managing Director at First Ascent Associates; Tucker Cottingham, Attorney at Bend Law Group; and moderator Gina Cooper, CEO of Cooper Strategies.

Here are some highlights....

What cannabis businesses need to know about getting insurance

Carriers exclude many types of coverage and apply strict definitions to events that are covered. For example, armed robbery is a big risk for cannabis companies, but insurers typically exclude it from coverage. In the same vein, be sure you know what the difference is in your insurer’s definition of robbery versus burglary. And beware of not conforming to specific requirements your insurer lays out for covered claims. Insurers will mandate that your security system meet specific criteria such as having a double chamber system, a monitored security system, a safe, and that you check IDs.

What specific liability issues are there for companies not touching the product?

The good news is that these types of businesses pay lower premiums. On the other hand, they are subject to lots of inspections. Coverage for one-off negative experiences can be added to basic policies but watch out for exclusions and be sure to thoroughly estimate how much coverage you need.

Tax and compliance issues for cannabis businesses:

Getting over the banking hurdle is the first major issue. Banks hve been extremely reluctant to bank cannabis businesses due to concerns regarding the risk of federal prosecution, uncertainty over regulators’ reactions as well as intensive documentation requirements. As a result, many businesses operate on a cash-only basis. This is hugely problematic for reasons of basic safety as well as for operational efficiency, record-keeping, and financial management.

For a deep dive into the current dynamics, please read our recent whitepaper: Legal Cannabis: Poised for Growth, But Banking And Tax Hurdles Remain Chokepoints.
The lack of banking support and risk of asset forfeiture by federal authorities leads many owners of cannabis startups to accept cash transactions or to try to fly under the radar with electronic options.

VC investment in cannabis businesses

What do VCs in this space look for in cannabis startups?

They look for the same thing they look for when evaluating companies in other industries: traction in users, members, revenues. In terms of specific segments within the larger cannabis space, Brian pointed to delivery systems being an especially hot space for investment.

Legal issues specific to cannabis businesses?

  • The central legal conflict affecting cannabis businesses is that cannabis remains illegal at the federal level.
  • Congress passed the Controlled Substances Act (CSA) banning cannabis in 1970. In recent years, 23 states have legalized marijuana (mainly for medical use, though 4 of those also allow recreational use) putting them in direct conflict with federal law.
  • That said, businesses touching the plant face different regulatory concerns than those that don’t. 
  • Do basic blocking and tackling; check references, conduct background checks, etc.

What’s next for the cannabis industry?

Ambere — “Companies can spend less money by seeking professional advice and support from the get-go rather than waiting to bring in professional services later to clean up mistakes.”

Kram — “On demand services and marketplace models are hot.” Advice: boards of advisors are the biggest help to founders. With the industry changing every day constant learning is most important.

Evan — “Women are the hottest thing in weed right now.” Why? “Female heads of household are the ones making medical decisions for the family.” What’s not: “the lack of political leadership [on the issue] from Congress.” Tips for founders: “Do background checks on potential business partners.” Being based in a state with full legalization offers benefits in starting up. Even so, be prepared to have to find workarounds for things like getting your logo and trademarks.

David — Advice: Even though cannabis remains illegal at the federal level, that does not mean you can slack when it comes to tax and accounting compliance. Not knowing your obligations related to tax compliance and not keeping good records can expose business owners to significant financial penalties. Don’t try to muddle through this on your own. Seek out professional financial help early and often.

Parting Shots

Right now the biggest challenge cannabis entrepreneurs face in getting into the space is, not surprisingly, the federal government’s stance on legalization. That said, all our panelists underscored the changes taking place and agreed that it is only a matter of time before cannabis is treated like any other product in terms of regulation.

Early Growth Financial Services (EGFS)
Early Growth Financial Services (EGFS) is an outsourced financial services firm that provides accounting, CFO, strategic finance, tax, and valuation services and support to small to mid-sized companies at every stage of the development process. EGFS currently supports 10-15% of all venture-backed companies in the US. With on-the-ground operations in 9 markets -- from Silicon Valley to Chicago to NYC -- EGFS supports the finance function for 500+ clients including TechShop, Indiegogo, OUYA, ZenDesk, Klout, RocketSpace, Open ERP, and more! EGFS earned the #13 spot in Silicon Valley Business Journal’s 2014 Fast Private Award, the #797 spot on the Inc. 5000 for 2014, and the #3 spot in the Inc. 5000 for fastest growing company in San Jose.


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Mon August 03 10:30 PM PDT
Thanks for putting on this informative event! The questions from the audience were laser-focused, and I made great connections as a result of Early Growth Financial Services' Team effort.