‘Pot for profit’ laws attract entrepreneurs

Mitchell Hartman Jan 4, 2013

‘Pot for profit’ laws attract entrepreneurs

Mitchell Hartman Jan 4, 2013

A big change will sweep the nation’s drug-law landscape this year, and it has some big business implications.

Colorado and Washington voters have legalized marijuana for recreational use. State officials face deadlines later this year to establish rules to regulate pot stores and farms, quality-control, tax collection. And would-be ‘pot-trepreneurs’ are looking at potential profits.

The GreenLink Collective is a nonprofit medical-marijuana dispensary near downtown Seattle. Starbucks headquarters is a muffin-throw away. Jake George manages the store and shows off his wares:

“This is a strain called UW Purple,” George explains, opening a mason jar full of plump, greenish-purple marijuana buds. “It’s kind of famously known for being a strong indica that doesn’t put you to sleep. You can see really nice hints of lavender in there. There’s a fruity and rich smell with a hint of pine.”

George is a medical-marijuana crusader (he’s also a patient with a prescription), and he’s quick to point out the health benefits of cannabis for cancer, chronic pain, depression, and other ailments.

But the marijuana business is clearly ripe for a recreational boom. One need just glance at the mind-bending munchies on display at GreenLink, from edible-cannabis-product producers like the Sweet Nirvana Bakery.

“We have a fridge that’s loaded up with everything from a brownie, to peanut-butter bliss bars,” says George. The cooler’s also got cannabis-infused teas and other drinks. On the counter, there’s a manufacturer’s display of gumdrops, fruit-shaped candies and the like. “A lot of it’s driven around candy because it masks the flavor very well,” says George.

Washington State regulators may take exception to that ‘candy’ category — after all, pot sale and consumption will only be legal for adults. It remains totally illegal under federal law. Still, Washington and Colorado will allow companies to produce and distribute pot for the first time ever. Other states could follow.

“What was passed in Colorado and Washington really is unprecedented,” says Beau Kilmer, who co-directs the Rand Corporation’s Drug Policy Center and recently published a book, Marijuana Legalization: What Everyone Needs to Know. “The law would allow private companies to come in and actually begin producing marijuana for profit.”

Here, Colorado has a head start — because, unlike the 17 other states plus the District of Columbia that permit medical marijuana (including California, for instance), Colorado opened up medical-pot sales to regulated for-profit businesses from the start.

Denver dispensary owner Jeremy Heidl and a partner are already developing new products aimed at recreational users. The OpenVape is a pen-sized liquid-extract cartridge, sporting strains like Chernobyl and Epic Blueberry.

“It’s a vaporizer,” says Heidl. “We’ve found great success — it is a concentrated form, and it just takes away the stigma of smoking marijuana.”

Keep in mind: The cannabis product category isn’t like liquor and tobacco, to which it’s often compared. Those are heavily regulated legal products. Much of the domestic pot supply is grown and processed in clandestine greenhouses and labs, then distributed underground.

The result, says Beau Kilmer, is easily-disguised cannabis products packing plenty of hallucinogenic punch.

“Marijuana that can be put in a pipe or a vaporizer, edibles and teas,” he says.

All of which will have to be regulated and taxed by states that legalize. Which offers a wide-open field of opportunity to entrepreneurs.

“My phone has been ringing off the hook with investors interested in participating in our angel investor network,” says Troy Dayton. He runs the ArcView Group, a cannabis-industry consulting firm in San Francisco.

“Mark Twain said that during a gold rush, it’s a good time to be in the pick-and-shovel business,” says Dayton. Meaning, it’s sometimes better to sell supplies than drill for gold: The business is steady and carries less risk. “Cannabis is still federally illegal,” Dayton continues, “so there’s even more of a reason to be on the pick-and-shovel side of things.”

In the case of the investors that ArcView is trying to link up with entrepreneurs, that means businesses that don’t deal directly in leaves and buds. Dayton calls them ‘ancillary’ businesses:

“Potency and purity testing, labeling, packaging, advertising and promotions, information management like point-of-sale and inventory control, banking and financial and legal and insurance and security. . .” he says.

In a recent study, the libertarian Cato Institute estimated that nationwide marijuana legalization would save $9 billion in law enforcement costs — although drug-treatment spending might go up if drug-use increases. Taxing pot sales would add another $9 billion to state revenues.

Estimating the total size of the emerging pot market is difficult — in part because it’s heavily embedded in black- and grey-market illegal drug trafficking.

Seattle entrepreneur Brendan Kennedy runs Leafly.com, a marijuana-information website, and is also raising investment funds at Privateer Holdings, a cannabis-oriented private-equity firm. Kennedy speculates that the domestic marijuana market is currently generating $40 billion in revenue. That’s mostly from illegal pot production. (And it’s worth noting: experts predict that domestic marijuana prices may fall in coming years, if legal marijuana produced in states like Colorado and Washington flows illicitly into the national retail pot market.) Still, the $40 billion figure would rank the value of domestic marijuana production on par with major legal crops, like soybeans. 

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