The Legalization of Marijuana: Opportunities for Entrepreneurs
In April 2017, the federal government introduced the Cannabis Act (Bill C-45) to legalize and regulate the production, distribution, sale and possession of Cannabis. The legislation has not yet been enacted, but legalization will open up significant new markets for startups. This is a unique opportunity, as the Canadian economy does not often spawn an entirely new industry very often.
Most case studies on marijuana startups come from businesses that operate in the United States, where medical marijuana is available in 20 states, while recreational marijuana is legal in Colorado and Washington. Although there are significant differences in the opportunities for finance between companies which operate in the United States in comparison to their Canadian counterparts, there are still important lessons for Canadian entrepreneurs seeking to enter this industry based on the countless marijuana startups in the USA that have attracted interest from investors.
There are many reasons why investors who have never backed a cannabis company before are now looking at investment in this field as increasingly viable. First, compared to other startups, the marijuana business will be able to leverage one important advantage. While most startups often face the need to create a demand or educate their potential customer base, marijuana startups face no lack of demand. Accounting firm Deloitte posits that 22% of the Canadian adult population consumes recreational marijuana on at least an occasional basis, with a further 17% showing some willingness to try it if it were legal. A total marketplace of 40% of the adult population is an enticing proposition for entrepreneurs. In light of such demand, it will not be surprising to see significant investment funnelling into the cannabis industry.
The sheer variety of business and industry opportunities is another attraction for investors to cannabis startups. For example, take a look at Eaze, an early stage company that offers medical marijuana delivery, helping their 800,000 customers order cannabis on demand. It has been described as the “Uber of Weed,” and currently operates in more than 100 cities within California. At this time, Eaze has raised $51.5 million over 5 funding rounds. Eaze gets a cut of each sale but does not actually sell cannabis itself, instead acting as an intermediary between the customer and the dispensary. A business doesn't even need to touch the plant to have success, as there are ancillary opportunities including firms that provide security for marijuana dispensaries.
Another attraction to cannabis startups for investors are the rapid valuation shifts that take place in a very compressed time period. There is often liquidity in these markets, whether through the public market or private market, and this gives a diligent investor the opportunity for good returns, especially when considering the businesses involved and the opportunities that could arise if they succeed.
The cannabis industry also has the potential of bringing capital and expertise from a wide variety of previous businesses. Cannabis touches on a range of business enterprises, from marketing to retail, science, agriculture, food, health and pharmaceuticals. This gives investors who have experience in other industries an advantage, as they can use and share their knowledge from other areas and serve as both investors and advisors. As the profit potential for marijuana-related businesses increases, it will not be surprising to see diverse sources of capital enter this market.
Despite the questions surrounding the legal and regulatory framework that will govern the cannabis industry in Canada, the bottom line is that legalization will represent a significant revenue opportunity for Canadian businesses and entrepreneurs that do things right and work within the confines of the legislation.
Hussein Ghandour is a 3rd year law student at the University of Calgary and is working with the BLG Business Venture Clinic for the 2017/2018 year.
Blog posts are by students at the Business Venture Clinic. Student bios appear under each post.