Three years ago, Justin Adamcyk and his friend moved from Chicago to L.A. in the hopes of breaking into the cannabis industry. Their idea was to build a business shipping edibles to patients with medical marijuana licenses. They threw down some money to get the ball rolling and then they began looking for investors. But they soon realized that they had very little idea about the regulations they were up against.
“We were just outsiders looking in,” Adamcyk says. “I think the one big take-away was to focus on building a team, especially in this industry.”
In August, Adamcyk officially made his second go of it when he co-founded Ocean Goods, an L.A.-based cannabis distributor working with a variety of local products, such as Bad Wizard concentrates and Mary Jane Juice. This time, though, he has a team of partners including industry experts.
“It’s a steep learning curve,” Adamcyk says. “You have to understand the lingo, how the supply chain works. I think to have someone there that you can pull information from and that can act as an adviser is a necessity.”
Simone Cimiluca-Radzins, a founding partner at an L.A.-based cannabis consulting firm, advises entrepreneurs interested in establishing their first cannabis startup. She said she speaks to people “all the time” who want to be pioneers in the industry but who don’t understand the unique challenges businesses in the space face with the impending, unwritten Proposition 64 regulations.
“The startup cost of hiring consultants, advisers, lawyers, people that are helping apply for these licenses, is huge,” Cimiluca-Radzins says. “The conversation we have to have with these clients now is why don’t you start budgeting a lot for compliance? It’s not just like, ‘Hey, this is fun and sexy.’”
There’s still a host of unknowns about how new state and local rules — written to implement the California law legalizing adult recreational use of cannabis — might make it difficult for startups, particularly those dealing directly with the cannabis plant, to operate. It’s possible that the state will not be issuing enough licenses to go around, Cimiluca-Radzins said. And California could face a problem similar to Oregon, where there’s been a shortage of accredited marijuana labs to test products before they go to market.
Adamcyk and his partners are meeting with investors to secure their seed capital. He’s confident that their company — which aims to create an efficient process for getting cannabis products to sellers — has tapped into an industry need, but he admits that there’s limited data on the probability of their success.
“Working with investors, it’s about being upfront with them,” he says. “We’re like, here’s some of the validation we’ve done, but at the end of the day, if you’re looking for a bet that’s safe, it’s not going to happen in this industry.”
Brian MacMahon, whose L.A.-based startup center Expert DOJO has helped more than 600 startups get up and running since 2014, is working with more cannabis businesses in the hopes that he’ll be able to increase their chances of surviving amid all the uncertainty. The failure rate of tech startups, according to MacMahon, is 97 percent, and he anticipates that number will be even worse in cannabis while the industry is getting established.
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“There’s a tiny investment market, and the investors who are investing are investing in cannabis products they already know and cannabis people they’ve known for a long time, so people who are new to the industry have a very small chance of breaking in even if they’ve got an amazing product,” he says. In addition to presenting funding challenges to startups, MacMahon warns against a trend he’s seen in other industries, where startups give venture capitalists a majority share in exchange for investment, only to be fired from their own companies.
Dan Braunstein foresaw some of these challenges. This is why, despite having more than five cannabis ideas that he thought were all viable, he ultimately founded GrassFed, which will start offering cannabis-infused fine dining around Los Angeles beginning in January. There was a low barrier to entry so it could be funded by friends and family, and there’s less competition in the “cannabis experience” market than in products. But he said he’s seen friends, smart ones with business plans, struggling to raise the initial capital for their cannabis startups for more than 18 months. This is why he thinks that “cannabis incubators are the next big thing.”
MacMahon anticipates that Expert DOJO is going to see a steady growth in the number of cannabis businesses seeking their guidance. His first conversation with them, he says, will be simple and frank: “Make sure that you’re really careful with your partners and really careful with the investors who come in. The failure within tech is high. Don’t think that cannabis is going to be any different.”