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Cannabis Needs Impact Investors

Here’s why

It’s green. It’s easy to grow. It represents a multi-billion-dollar industry. It can treat a range of mental and physical ailments. With the right incentives in place, it could generate the income and economic development needed to build wealth in Black and brown communities across the United States.

The problem? In many parts of the US, it’s still illegal.

We’re talking, of course, about cannabis. Thirty-eight states and the District of Columbia have legalized the drug for medicinal and/or recreational use. Recent estimates put the size of America’s legal cannabis market at $13.2 billion and on track to hit $40 billion by 2030.

With the right incentives in place, it could generate the income and economic development needed to build wealth in Black and brown communities.

This is not the first time that legal or regulatory changes have opened up a new market. But what makes the cannabis market unique — and of particular interest to social impact-minded investors — is that the existing, illicit market has been run primarily by people of color and others from marginalized backgrounds. And yet, as a growing number of states legalize cannabis, more than 80 percent of American cannabis business owners are white, and less than 2 percent are Black.

“BIPOC people and women have been running the game for eighty years,” said Christine De La Rosa, the Oakland-based CEO of the dispensary network People’s Ecosystem. “And now, investors are realizing that they can’t create a legal market without the legacy one.”

Building an underground market

Scientists and public health generally agree that marijuana’s medicinal properties, and the relative lack of negative impacts on recreational users, make its 1970 federal criminalization dubious at best — hence, the thriving underground “legacy” market during what the industry calls “prohibition.” De La Rosa was inspired by the role of the legacy cannabis industry at the height of the AIDS epidemic, when patients sought the plant for their palliative care. To meet the needs of these customers, she had to become intimately familiar with the properties of the various strains and the growers who could cultivate them successfully.

Cannabis being measured

“You had to build relationships with these growers, understand their soil conditions, what grows better where and why — it’s just like any other agricultural business,” she explained.

The backdrop for this hustle was the enforcement of prohibition, which has disproportionately impacted communities of color. Even today, despite similar rates of use across racial and ethnic groups in the US, Black people are nearly four times more likely than white people to be arrested for marijuana possession. As a result, advocates have pushed for entrepreneurs of color to benefit from the economic impact of legalization at the state level.

Equity Capital Collective's Sara Batterby

Equity Capital Collective’s Sara Batterby

One early champion was the late Equity Capital Collective founder Sara Batterby. As states like Oregon, where she lived, began building legal markets, she saw that nontraditional entrepreneurs risked being overlooked — so she offered them mentorship and training.

Even today, despite similar rates of use across racial and ethnic groups in the US, Black people are nearly four times more likely than white people.

“[BIPOC and female founders] were not going to be able to compete with professionals with white-collar money that were going to come into the industry,” Batterby said in a 2019 interview. “It was like another version of prohibition, and I wanted to do something about that.”

Coming out of the shadows

Most of the states that have legalized marijuana recognize the negative impact of criminalization. But efforts by state governments to address it directly — mostly by prioritizing cannabis licenses for people from communities harmed by prohibition — have largely fallen flat.

The problem is, in part, a bureaucratic one. At best, states are slow to process license applications. At worst, they put would-be business owners through a gauntlet of regulatory hurdles that bleed excessive amounts of time and capital, favoring those with the most access to both and therefore working against the people the rules are intended to help. One report put the startup cost for a legal cannabis business at $250,000 — and that’s just the annual rent for a warehouse.

The startup cost for a legal cannabis business at $250,000.

“In general, the biggest impediment [to diversity] is that the barrier to entry is too high overall,” said Aaron Smith of the National Cannabis Industry Association. “States then try to carve out exceptions for equity operators, but there are always ways to bend those rules.”

Los Angeles became the unfortunate poster child for this problem in March 2019, when it received thousands of applications for the 100 social equity licenses it planned to issue. Entrepreneurs who were shut out claimed that LA’s process favored applicants with time, money, and an intimate understanding of the city’s financial and regulatory systems — generally not true of the people impacted by prohibition, who the city repeatedly said would be first in line. “My life was shattered for something that’s now legal, and now I have to jump through hoops? It was demoralizing,” entrepreneur Ingrid Archie, who was once incarcerated for selling marijuana, told the LA Times in January.

Entrepreneur Ingrid Archie

Entrepreneur Ingrid Archie; Courtesy LA Times

De La Rosa was in a similar boat after Californians voted to legalize recreational marijuana in 2016. After years of operating underground, she now had to adapt to a barrage of new rules. “I had no experience fundraising, I had no financial literacy,” she recalled. “I didn’t even know where to start.”

Luckily, De La Rosa was among the entrepreneurs who connected with Batterby and Equity Capital Collective to learn the rules of the game. That support drove her successful $1 million raise from 168 investors, including non-accredited investors who were once customers of her underground business. “I wanted them all to have the opportunity to build wealth from this,” she said. “It was my way of giving back.” Today, People’s Ecosystem runs accelerator programs twice a year for would-be entrepreneurs who have the same questions that she had.

That commitment to community wealth-building was why Justice Capital founder Christina Hollenback came to make an early-stage angel investment in the company.

“How do I, as an impact investor, help transition and create catalytic wealth-building opportunities for formerly incarcerated and directly impacted people?” Hollenback says she asked herself. “And quickly, I saw that there were major opportunities [in the cannabis industry] to actually transition folks from the legacy economy into real jobs.”

Investing in fewer barriers to entry

Hollenback’s investment was made as an angel because that’s often the only way to do so legally. Until federal prohibition ends — which could be soon, if the SAFE Banking Act is passed by the Senate before the end of the year — most banks are wary of doing business with the cannabis industry. Obama-era guidance on how to do so opened up a few doors, but most remain hesitant to take the larger-than-average risk, which includes additional compliance-tracking of clients; if they do, the fees charged are often significant, some to the point of being predatory.

According to Hollenback, this creates an opportunity for impact investors like her, who are better positioned to offer entrepreneur-friendly deal terms and fund the accelerators, education programs, and other business development infrastructure needed to transition legacy operators into the regulated economy, including alternative methods of evaluating the credit worthiness of business owners who were once working outside the law.

“That [business development resourcing] is essential for larger investors to get into the game, because right now, they have no data points,” she pointed out. “It’s our job to partner with cities, counties, and states, so that we are able to make sure there’s a continuum of capital for their early-stage growth. We can’t limit their [entrepreneurs’] ability to be creative and bring in their existing customer base, which we need to build the industry. But right now, you have a broken continuum of capital, and you have inconsistent at best business development support. ”

And it’s not just about impact. Hollenback thinks the investors forgoing legacy operators in favor of brand-new startups with zero background in the pre-prohibition markets are making a big mistake.

“I started trying to ring the alarm and tell other investors, how are you missing this?” she said. “And then I stopped doing that because I was like, Wait, this is a value proposition. Y’all can miss it if you want.”

Meg Massey is a writer and strategist committed to democratizing impact investment. She is the co-author of the 2021 book Letting Go: How Philanthropists and Impact Investors Can Do More Good By Giving Up Control. Her writing has also appeared in Impact Alpha, Nonprofit Quarterly, and Chronicle of Philanthropy.

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