The medical marijuana market is expected to grow to $29 billion by 2019, but the real money is in picks and shovels. Just like the California Gold Rush, when it wasn’t the people digging for gold who got rich but rather the businesses who supplied those people, it’s the businesses that supply marijuana-related businesses that are making the most money from the industry.
Cannabiz Media reported this finding in its 2015 report, Tracking the Connecticut Licensed Marijuana Economy: 2015 Edition, stating that a significant opportunity in the Connecticut marijuana industry is investing in picks and shovels.
For example, the market for the equipment used to test marijuana for potency and quality is expected to grow to between $50 million and $100 million by 2020. Given the many regulations surrounding marijuana growers, producers, and dispensaries that often limit revenues, investing in these ancillary businesses which serve the marijuana industry makes sense.
The Real Money Opportunities in the Marijuana Industry
This week, Hilary Bricken of Above the Law identified the three sectors where the real money is being made in California. These are the sectors where her firm is seeing investors most aggressively seeking opportunities to get into the industry after the passage of the Medical Cannabis Regulation and Safety Act and the upcoming November vote on Proposition 64 (the Control, Regulate, and Tax Adult Use of Marijuana Act) which would legalize recreational marijuana. While she advises that California is still a risky place for investors, she says they’re finding the most success in the state in these areas: real estate, technology, IoT (Internet of Things), collective management companies, and intellectual property and licensing.
It’s not just in California that investors are trying to get in on the marijuana industry. Top bankers and investors are pursuing marijuana-related business investments across the country. How do you really make money in an industry that’s still illegal at the federal level? Flank the industry and generate revenue by coming at it from a different angle. Let’s face it, the list of supplies, equipment, and services that marijuana-related businesses need to stay operational is long, and someone has to make, sell, and profit from those products and services. The trick is choosing a product or service needed by the marijuana industry that will have no market potential if the marijuana industry goes away. Software is one such product.
As Hilary Bricken wrote, there is a software void in the marijuana industry. Marijuana businesses need software that “provides business-to-business solutions or that increases cannabis business efficiencies.” Launching such a software could drive significant revenues to the developing company and investors behind it. But if the marijuana industry goes away (which is highly unlikely, but let’s speculate that it could), is it possible for that software to be used in other industries? If the answer is yes, then investing in such a software is far less risky than investing in a marijuana growing facility or dispensary simply because of the way regulations are currently written.
Geographic Regulatory Nuances Greatly Affect Investment Opportunities
This is particularly true in California. Cannabiz Media is currently tracking marijuana licenses and the marijuana economy for an upcoming state-by-state report, and California is a notably tricky state for marijuana businesses and investors. The reason is simple. While there are few state rules that these businesses have to adhere to, every municipality has its own unique rules. It’s a mess for a business or investor to work through.
Making things even more confusing is the license structure mandated by each state. Cannabiz Media’s upcoming report breaks down which states require marijuana licenses to be fully stacked, meaning one license holder controls marijuana from seed to sale. Others require licenses to be partially stacked, or they allow partial stacking to be optional. Other states require licenses to be unstacked. Depending on the mandated license structure, taxes, fees, and operational requirements can vary greatly. Investing in a marijuana business in one state could be far less lucrative than another simply because of the license structure.
These are all things that investors must consider as they evaluate ways to enter the marijuana industry. The hurdles are massive, but there is money to be made in this growing economy. Today, the easiest opportunities and a lot of that money are still in those picks and shovels.