Finance in the Legal Cannabis Industry

The legal cannabis industry is one of the fastest growing in the U.S. In 2016 alone, the industry brought in $6.9 billion – a 30 percent increase over the previous year, according to Arcview Market Research.

Still, cannabis remains federally illegal, placing the entire legal industry in a precarious position subject to the whims of each Congress and administration. Banks and larger venture capital firms are hesitant to enter the game, leaving the industry undercapitalized.

The undercapitalization of a multibillion dollar industry
The federal prohibition has led to several problems, but few so stark as the lack of access to banking and conventional financing options like checking accounts, lines of credit and business loans. Its breakneck growth might appear healthy, but the cannabis industry has a financial albatross around its neck. Without the ability to bank like other businesses, entrepreneurs and employees alike suffer.

“There’s no regular way to access institutional capital for the cannabis entrepreneur in the U.S.,” said Hadley Ford, co-founder of iAnthus Capital Management. “Unless you have a rich family member or a strong balance sheet, you’ve got to bootstrap. And that [slows] the growth of the industry quite significantly.”

“It’s crippling right now. You don’t realize how important banking is until you don’t have it – just giving employees a paycheck is just brutal,” added Keegan Peterson, CEO of payroll and HR company Wurk. “In a cash environment, it’s difficult to even prove you paid [your employees], or your vendors, or your tax liability.”

Banks aren’t the only ones hesitant to enter the cannabis sector. Large venture capital firms have eyed the industry with interest, but thus far have been reluctant to stake much of a claim in the fledgling industry.

“With later stage companies, [it’s] difficult to make the jump from raising a few million up to five or 10 million,” Micah Tapman, managing director of Colorado-based accelerator CanopyBoulder, told Business News Daily. “There really aren’t larger venture capital or private equity firms playing yet. They’re looking at it but not writing checks.”

A number of reasons beyond simply federal prohibition figure into their calculations, he said. The fragmented nature of the industry and the varying regulations state by state are also great concerns, in addition to the constant fear that the Department of Justice will reverse course on the Cole Memorandum, which has thus far allowed legal entities to operate in compliance with their home states’ laws. All of this adds up to a significant lack of the working capital that would otherwise be in play.

As a result, the industry has produced some workarounds. Largely bootstrapped companies find themselves relying on angel investors and accelerators to get to the next level. Here are some of the solutions that have evolved out of the legal cannabis industry’s financial plight.