The appeal of the cannabis industry is powerful: Financial success while doing fundamental good in the world. Entrepreneurial opportunity for those traditionally excluded from the business world. Fame and prestige for industry leaders. The opportunity — and indeed the demand — to innovate.
It’s not a surprise that everyone wants to be a part of it. We are an industry growing in both scope and legitimacy, and there are a lot of new members. Veteran members have a responsibility to help them avoid the pitfalls. Here are the five most common mistakes companies make when entering into the cannabis market:
1. Thinking it will operate like other markets
Over the years, I’ve spoken with a lot of entrepreneurs eager to jump into the cannabis space, and they all have made the reasonable assumption that the fundamental rules of other industries will be at play here. Unfortunately, the regulatory landscape, particularly as it pertains to THC, is like nothing else in the American economy. No other ingredient is federally labelled Schedule 1 — reserved for highly addictive drugs with no medical value — yet is legal medicinally, recreationally, or both on a state level. Not only is it regulated differently from state to state, the regulations are constantly changing and are inconsistently enforced. The cannabis industry gets called the Wild West for a reason.
CBD companies are prohibited from making any medical claims, which can be frustrating since most customers interested in CBD are looking for therapeutic effects. Because of this, euphemisms come heavily into play in branding. Some companies employ a compliance officer to review all customer-facing verbiage.
If you are working with THC, you will not be able to write off any of your standard business expenses on your federal tax return. This leads companies to fractionate their businesses, with separate companies handling payroll, marketing, and retail, which adds complexity and more paperwork. Similarly, THC products can never be shipped across state lines, even from one legal state to another, since interstate commerce is federally governed. That means that every state in which you operate must have its own THC license, processing facility, and distribution network, even if the product being sold is identical. Not only is this unreasonable, it is also impractical and expensive. Depending on where you’re setting up shop, you will have different packaging limitations for text size, package size, even the colors you can use. Requirements for redundant and/or childproof packaging are wasteful and, again, expensive.
The other thing that differentiates the cannabis market from other markets is its demographic diversity. People from all walks of life, all ages, races, genders and income levels enjoy cannabis. Previous categorizations can be a guide, but often customer profiles don’t match the real world. You may be surprised by who buys your product–and who doesn’t.
2. Not getting it in writing
Because of the limited regulation of the cannabis industry, it’s tempting to seal deals on a handshake. That’s a mistake in any business, but the ramifications are amplified in this tumultuous landscape. When — not if — one of your partners fails to deliver on their commitments, it’s hard enough to enforce a contract to begin with, let alone in this transitional market. There’s not usually a lot of money to spare for legal battles, either. Take the time to write out the terms of your agreements, and spend the money to have them reviewed by a contract lawyer.
3. Not embracing redundancy
Sourcing is one of the biggest hurdles facing CBD companies. In the face of limited or non-existant regulation, choosing a supplier to provide consistent, clean cannabinoids can make or break your business. Even partners that start out looking great (spoiler: they all do) may end up failing you though logistical insufficiency or a change in leadership integrity. Redundancy is your insurance policy. CBD companies must find not one reliable supplier, but several. Don’t accept an exclusive relationship at the outset; work up to it through years of consistent performance.
4. Disregarding institutional knowledge
In a bid for legitimacy, many startups are hiring from industries outside the legacy cannabis market. That can be very useful for expanding the scope of cannabis applications and form factors, but without a holistic understanding of the plant, innovation can be dangerous. Accrued generational knowledge from growers and pre-legalization formulators can help you avoid costly formulation mistakes and contraindications. As a successful cannabis industry friend of mine puts it, “Always make sure you’ve got at least a couple old hippies on staff.”
5. Relying on hype
CBD is hot as can be right now, but it doesn’t take a prophet to know that at some point the bubble has to burst. Don’t worry, CBD will be around for a long time and likely become a health and wellness staple! That said, the buzz can’t sustain this volume; products cannot be successful long-term on the basis of the inclusion of CBD alone. Thoughtful formulations that look to ingredient synergy will still have something to pique consumer interest after the hype dies down. Look to the bleeding edge of the THC market to see what will trickle down to the CBD world in the next two years: terpenes, flavonoids, fresh frozen extractions, and herbal blends. Of course, this could all be nullified depending on the speed of the now all-but-certain rescheduling of THC. Cannabis is certainly not an industry for the faint of heart.