Mon Jan 27, 2014, 09:20 AM
marble falls (8,794 posts)
Is there a pot bubble?
When stocks in marijuana-related businesses soared as much as 1,700 percent one week after Colorado’s legalized shops opened, the exuberance reminded some observers of the heady days of the dot-com boom. And, indeed, industry insiders seem swept up in a sky's-the-limit optimism that's reminscient of the late 1990s, with ArcView Market Research—"the definitive source for cannabis industry analysis, trends, and statistics"—forecasting that legal marijuana could expand into a $10.2 billion market by 2018, with 64 percent growth expected just this calendar year, a rate higher than the global smartphone market.
At the same time, entirely new businesses have emerged, hawking insurance, advertising support, software, even pot vending machines. And with Colorado’s legal cannabis shops hitting $1 million in revenue on the first day of legal use, the stampede of capitalists into this new market should only accelerate. “There’s no desk of analysts at Goldman Sachs vetting this industry,” Kenndy says, “but there will be.”
Yet if this is a gold rush, it’s one where the gold has, for 80 years, been either dismissed as fodder for hippies or demonized as actively harmful—a legacy that creates growing pains no other business sector has to tolerate, as marijuana entrepreneurs struggle to be taken seriously and get around a host of roadblocks arising from the fact that the federal Controlled Substances Act still lists marijuana as a prohibited Schedule I drug.
Lawmakers from the states where pot just became legal have stepped in to push for regulatory relief. Reps. Denny Heck (D-Wash.) and Ed Perlmutter (D-Colo.) have introduced legislation that would give legal clearance for financial transactions with marijuana-related businesses—you could call it a form of constituent service to the small business community. And when Attorney General Eric Holder said last week that the Obama administration would soon roll out guidance to allow banks to work with pot sellers, Heck and Perlmutter's efforts got a notable boost. But “Congress doesn’t lead on this stuff,” Heck says. “It’s going to take Colorado and Washington having a successful regulatory environment to make everyone comfortable.”
But this need to convince skeptics, along with the residue of selling what the federal government still considers an illegal drug, has led to barriers that can appear almost insurmountable. “Some check-the-box items that should take a couple of hours take a month,” Kennedy says. Lining up payroll services or security or lawyers or even a bank can be arduous, as many of those companies fear legal ramifications. The Colorado Bar Association recently prohibited attorneys from working with marijuana-related businesses for just this reason—which means that, for now at least, pot businesses can’t hire a lawyer to draw up a contract or close a deal. And even Privateer, with its multimillion-dollar investment deals, was turned down by 16 different banks for a simple checking account.
So far, Privateer has used the money it’s raised to invest in or set up ancillary businesses on the edges of the marijuana supply chain that do not handle the leaf, reducing the firm’s legal risk and regulatory requirements. The company established a Canadian subsidiary called Lafitte Ventures to build a 1.8-acre cultivation site in British Columbia, for example, and a similar American firm called Arbormain, planning 24 warehouses across Washington State for growing, testing and processing a range of products. Privateer also recently acquired Leafly, which is a kind of Yelp for pot, with user reviews of businesses and the products they sell.
Meanwhile, an astonishing amount of this fast-growing industry is still conducted in cash—a situation that can leave businesspeople a little jittery. “I’ve been in rooms with a million dollars,” Kennedy says. “It’s not a good feeling.” Companies have to pay for security to prevent robberies, and getting loans is a headache. “We wanted to build a farm on a piece of property where anyone with a credit score over 700 could get it,” Cooley says. “Mine is over 800, but I couldn’t get a loan. Last year, when we were jumping through hoops becoming permitted, instead of a line of credit, we stopped taking salary.”
David Dayen is a Los Angeles-based freelance writer and a contributor to Salon.
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