How Will Small Marijuana Businesses Fare in the Wake of Proposition 64?

ShowGrow's L.A. location
ShowGrow's L.A. location
Courtesy of ShowGrow

In the wake of Proposition 64, California's law to legalize weed for adults over 21, small businesses and boutique growers will have to stake a space for themselves in California's quickly growing cannabis industry.

"From my perspective as a retailer, there's no doubt we're going to see larger business models emerge in the industry, looking to profit off cannabis operations on a massive scale. This is that 'big marijuana' fear we hear so much about," says Brendan Hill, co-owner of the dispensary Paper & Leaf in Washington, where the rollout of the recreational marketplace may offer some perspective on California's green future. "No doubt these large players will eventually garner their part of the market share, but just like the rise of the craft beer and wine industries, there's both room and demand in the market for unique, arguably better products from small businesses."

Since California legalized medical marijuana in 1996, Hill points out, California has built a reputation for its high-quality cannabis, largely thanks to "the little guys." Mom-and-pop growers are known for their dedication and expertise in horticulture, he says, while having risked their freedom to provide medicinal marijuana for those in need. "They're growing because they have an unmatched passion for the plant and for helping others. That's not a motivation we're going to see behind 'big marijuana' and a major reason why consumers will turn to small businesses, and possibly pay a little extra, for higher quality cannabis."

Proposition 64, also called the Adult Use of Marijuana Act (AUMA), bans large-scale cultivation for the first five years of the program, in order to offset monopoly interests. Smaller operators can get a microgrowers licenses (such as for a bud-and-breakfast with on-site cultivation), which is meant to encourage small businesses, says Shawn Hauser, senior associate at Vicente Sederberg LLC, a national marijuana law firm: "The micro license allows for small craft growers to succeed in the market, [as] they will be subject to different standards than other businesses, and the fees are scaled to the business size for easier entry." Moreover, she adds, Proposition 64 does not require that growers use a third-party distributor to transport their weed to dispensaries. "That cuts the cost of paying a distributor and leaves less room for distributors to come in with big business," Hauser says.

However, Proposition 64 does allow single entities to vertically integrate, or to hold multiple types of licenses for different activities along the path from seed to sale. This alone favors big business, since the cost of even getting a license, what with upward of $100,000 in consulting attorneys' fees to ensure compliance, can be a strain for small-scale operators.

The cost of becoming compliant under the state's incoming regulations applies not only to the adult-use industry but also the medical industry. California has long enjoyed a highly unregulated medical market, leading to gray-zone confusion that legislators are trying to alleviate via the Medical Cannabis Regulation and Safety Act (MCRSA). AUMA aside, regulation was already on the way with MCRSA, and the reality is that compliance in a government-regulated market requires a good deal of starting capital.

"If you're thinking about getting into this industry now, it's not that simple. You need money just to get a license," says Daniel Yi, director of communications at Med Men, a cannabis management and investment firm. "But if you're in the industry now, you have a good chance and can get ahead. You have the know-how, you know the regulatory landscape." Watching the cannabis industry blossom in a place like Los Angeles, soon to be the country's biggest marijuana market, is like being around Silicon Valley when the tech industry grew up, he says. Those who are here already have an advantage.

"For people entering the business and for people who are now trying to follow regulations as they're being set forth, it would be really beneficial for small companies to reach out to someone who has experience working in a regulated environment," says Erin Phillips, president and CEO of Strainwise, a Colorado-based company that helps entrepreneurs build their business. "It's important that they have strong standard operating procedures, put in place to mirror the regulations." It's also important to not be undercapitalized and to develop a strong brand, she adds. "The best demographic for small businesses [to serve] on the outset will be medical patients because they're looking for quality, as opposed to quantity. Once they have that consumer confidence, they can transition into the adult-use market for those same reasons."  

The Emerald Exchange marijuana farmers marketEXPAND
The Emerald Exchange marijuana farmers market
Star Foreman/L.A. Weekly

Mendocino-based grower Justin Calvino, for instance, has already begun to carve out a market niche for boutique, outdoor-grown medical cannabis. He puts on the Emerald Exchange, a cannabis farmers market in Malibu, and founded the Appellations Project, which mirrors wine appellations to distinguish high-quality medical cannabis according to where it's grown and its terroir — environmental influences, such as soil and climate. "I'm making sure that people understand that the grower is the most important part of the equation," Calvino says. Cannabis is equally affected by the environmental terroir and the cultural terroir — the farmer's methodology and technique.

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Moreover, Calvino adds, brands such as True Humboldt or his own, Green Goat, are coming together and coopting other farmers and brands to create one unified host brand. Ranging in size from a couple farmers to a couple hundred, cooperatives like these give small farmers the ability to participate in a marketing and distribution model greater than what they could do individually. "It's like the small farmer saying, 'OK, we're going to distribute with you because you have more access to market share and you can get us the price we need,'" Calvino explains. Green Goat, for example, gathers just five growers together, to market their outdoor-grown Mendocino cannabis to distributors in L.A. The distributors have relationships with dispensaries, delivery services and monthly boxes.

Going forward, it will be important for small businesses to ensure their voices are heard, both in the marketplace and in the Legislature, says Todd Mitchem, a Colorado-based entrepreneur who has worked with lawmakers to ensure high operating standards for the cannabis industry. Whether it's making sure the regulations don't favor big business, or talking to customers about quality standards or pesticide abuses, mom-and-pops will need to be vocal in order to protect themselves amid incoming competition.

"Things have changed immensely in a short period of time. The cannabis landscape is wide open now because it was a movement by the people, and it came from the bottom up instead of the top down," says David Barakett, CEO of SoCal medical cannabis clinic ShowGrow. So change and little-guy protection will continue to have to be from the bottom up, he says, such as making sure local jurisdictions don't ban cultivation or limit operators' ability to succeed. "It's important to be ingrained in the community, and that's why we still do purchase a lot of products from small producers," says Barakett. "There's always going to be room for people who do a great job and provide a great service, who are the lifeblood of the cannabis community. I don't think anybody wants to see it go the way of a more corporate model and lose the heart and soul of the industry."


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