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Where to Start a Cannabis Business

Posted by Micah Tapman on Sep 20, 2016 1:49:55 PM
Micah Tapman
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Good conversation today with an entrepreneur looking to get into the cannabis industry with a new startup. The first question of the conversation was one we receive a lot so let me take a few moments to post a public answer.

"Where should I start a new cannabis business?"

Starting a new business is about creating luck. And we'll define luck as the intersection of preparation and opportunity. Or in startup terms, product-market fit. So how do you get lucky? Let's break apart the two key points, preparation and opportunity.

Preparation, from a startup perspective, is primarily about setting up resources and systems. Resources include money (capital), equipment, strategic supplier relationship, strategic client relationships, and most importantly, a the team (people). Systems are the utility systems that allow the business to capitalize on success, which is generally scaling quickly with demand.

Opportunity is room to grow. Some industries are growth constrained, like the grocery store. There's only so much growth in food sales because the population is growing relatively slowly (in the United States) right now. That means room to grow is scarce and competition if fierce. Other industries are growing very quickly (e.g., healthcare, cybersecurity, and cannabis) and there is a lot of room to grow.

So we're looking for a place where we can find easy access to key resources and establish good systems, and a place where we have easy access to the rapidly growing cannabis industry. Those are criteria we can work with to design an algorithm that suggests ideal locations for a startup. By the way, going against the grain and picking a less than ideal spot is fine too but it's likely harder. The flip side is if you're successful everyone thinks you're a rockstar (e.g., Quicken Loans in Detroit or Lefthand Networks in Boulder).

The constraining factor for cannabis startups is states with functioning markets. There are only a few, namely Washington, Oregon, and Colorado. Secondary markets are medical-only, which artificially limits access for both clients and entrepreneurs. Examples include California, Massachussetts, and New York. I highlight those markets because they are very attractive for other reasons like access to capital and strong team members, and exceptional market potential in the future.

There's a distinct advantage to being in a place like the Bay Area with easy access to lots of angel investors and VC firms (although VC funds don't generally invest in cannabis right now). Talent is also all over the place but the cost of talent is sky-high, as is the cost of living. Compare that with a location like Portland (Oregon) or Seattle where the cost of living a bit lower and there is still a strong investor scene. Denver/Boulder, my home, is also a hot spot and arguably the best area in the country to start a cannabis venture because of easy access to the country's most established and stable market, decent capital resources, and direct flights to the Bay Area in about two hours. That being said, Colorado is definitely more saturated with cannabis startups than some other locations so the competition is higher (that might work to your advantage).

I'll use a rating scale of 1-5, five being best, to evaluate a couple of locations on just a few charateristics.

  Denver Portland San Francisco
Access to Capital 3 3 5
Access to Talent 3 4 5
Stable Market 5 3 1
Cost of Living 5 4 2
  16 14 13

TLDR: move to Washington, Oregon, or Colorado to start your new cannabis venture. Second picks are San Francisco, Boston, and San Diego.

Topics: Analysis, Entrepreneurship