What to Know Before you Start your Pot Business, Part 1: The Disruptor

Any business savvy person looking for a start-up opportunity that has major growth potential, is an industry disruptor, and is likely to see a significant return on investment should not ignore the pot industry. In a series covering the ins and outs of what Forbes has called, “2015’s best start-up opportunity”, we explore the pros, the cons, the money and the future of marijuana.

The Pros

Medical marijuana is legal in over half of U.S. states. Recreational use is legal in four states with more on the way and we have seen an exciting shift away from a traditional business model, making it ideal for new entrepreneurs. Instead of start-ups looking for outside investors to provide millions of dollars in initial funding, first-time business owners and seasoned professionals alike are starting with very little capital. That capital comes from personal investment – 47% spending $100,000 or less – or a crowd-sourcing model that allows a lot of people, including those who have never invested in business before, to pool their money and be a part of something new.

A shifting acceptance of pot as an acceptable recreational drug, growth potential at the $7 billion mark (which means a lot of tax revenue) and a banking system that is catching up with the shift are factors that will push more states to legalize, opening up demand. Eventually, we will reach a tipping point that will force the decision about marijuana decriminalization to the federal level. We’ll dive further into all the financial considerations in part two. Until then, here are a few the negatives and the risks to consider before committing to this business opportunity…

Cons to Consider

While there is a lot of promise in the industry, there are also a lot of additional factors to consider before you jump into the vacant store-front down the street and open a dispensary. One of the biggest cons is potentially expensive changes to regulations controlling the industry. The pot business as a whole is new, which means business owners and investors should expect the unexpected. Each change to regulations potentially costs the new company money as they have to reset to meet new guidelines.

The Colorado Department of Revenue changed packaging guidelines effective February 2015 to require all retailers to make packaging childproof. This meant that product that didn’t meet the new requirement had to be sold at a discount prior to the date regulations went into effect and retailers had the added expense of updating their packaging. Not to stop there, the department changed the THC potency standard in edibles and the labeling requirements to include indicating all non-organic pesticides, fungicides and herbicides used in production and a list of any solvents or chemicals used to produce concentrates. We don’t even do that for the food on the shelves at the grocery store, but it is now required that small pot businesses comply with this standard.

Regulations have yet to be standardized across state lines when it comes to sales, possession, growth, packaging and labeling. What is legal and profitable in one state might not work or be legal in the next. Pot can’t even cross state lines – in any form – even when both states have decriminalized because that takes the substance from state control to federal control, where it is still illegal and comes with criminal charges. These types of regulations and ongoing changes to regulations can be expensive. Smart investors will plan for these changes as more are sure to come.

Ground-level Investing

Starting a pot business may not be a walk in the park – there is a lot to pay attention to and it will take the right kind of investor. Those who can weather the changes as the industry grows are likely to benefit from getting in at the ground level – which is now. In part two of this series we will dive into some of the numbers including revenue potential, taxes and what banks are doing to catch up with what may be one of the biggest business opportunities since the Internet.

Have you already invested in a pot business? Was it your first business investment decision? We’d love to hear why you made the choice to get in on the ground floor. Talk to us @StarterNoise using #PotBiz.


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