24 February 2022 |

The Universal Challenges To Succeed In Cannabis

By Matthew O'Brien

Cannabis-Cash

This weekend, I became even much more bullish on the future of cannabis.

On top of having to deal with the worst windstorms in 10 years, I was fortunate enough to give myself food poisoning.

While this wasn’t the most ideal way to spend a weekend, it did provide an ideal opportunity to reflect on how wildly effective cannabis is as a medicine.

No sooner had I consumed cannabis when the symptoms I was experiencing such as a headache & nausea were gone.

Despite the value cannabis products provide people today, it remains extremely difficult to succeed in the cannabis industry in 2022.

The following are the universal challenges cannabis companies face today.

1) Excessive Taxes

The amount of taxes cannabis companies are required to pay significantly varies across North America, however, in a majority of regions where cannabis is legal, the taxes cannabis companies are subject to have one common denominator.

They are asked to pay enormous tax bills to justify their very existence.

While the taxes these companies pay prove to be valuable in inciting other nations to also allow adults to access legal cannabis products — they can also do significant harm to the cannabis companies operating in these regions.

The reality is that consumers will only pay so much for legal cannabis products before they proceed to purchase products from the illicit market.

This leaves legal cannabis companies in a difficult position when it comes to the pricing strategies they must adopt to remain competitive vs the illicit market.

We are seeing this play out in Canada, California and many other markets whereby large numbers of consumers continue to purchase products from the illicit market.

Ones To Watch: Cookies standouts as a company / brand that has truly carved out a special place for itself when it comes to producing premium cannabis products, which in turn provides them the luxury of charging premium prices for their products.

2) Too Much Capital

Since 2017, the primary story in the cannabis industry has been the emergence of massive cannabis conglomerates worth billions of dollars.

In this case, the headline tells itself why these companies receive so much attention, however, while it was exciting to see these companies rise, in reality many of them couldn’t live up to the expectations these valuations created.

There are certain cases in business whereby achieving economies of scale makes sense for companies, however, for many cannabis companies — growing bigger simply means having to deal with bigger problems.

This challenge has resulted in very significant layoffs in the cannabis industry at large of late, as these companies adjust to the new reality that they simply grew too quickly, and it remains unclear how this situation will resolve itself.

Ones to Watch: Aurora & Hexo standout as being prime examples of companies incurring the negative consequences of producing vastly too much cannabis relative underlying consumer demand for the products they are producing.

3) Too Little Capital

There’s a balance between raising too much capital and raising insufficient funds to provide your team with enough runway to successfully build and monetize your business such that you can reach profitability.

For the majority of cannabis companies, having access to too much capital is a problem they don’t have to concern themselves with, as accessing capital remains prohibitively expensive in the cannabis industry in 2022.

Cannabis being a schedule I drug in the United States, coupled with the unmet expectations of large Canadian cannabis companies has resulted in many of the biggest investors wanting little to do with the legal cannabis industry today.

As such, for many ambitious entrepreneurs — building business plans with the assumption that you will gain access to capital might be an early mistake, as the few investors focused on the industry don’t have nearly enough capital to back every entrepreneur seeking to build a business in the cannabis industry today.

Ones to Watch: Pantry (cannabis products) & Proper (cannabis software) are two interesting examples of cannabis companies I know of who have made it a point of focus to avoid raising excessive amounts of capital.

4) Marketing Channels

One of the biggest challenges the cannabis industry has to overcome long term is to demystify the perceived dangers of consuming cannabis products.

Unfortunately for cannabis companies, they are without access to many of the most important communication tools every other industry currently has access to, with cannabis companies commonly receiving suspensions from platforms such as Instagram & Facebook.

Beyond being unable to play a large role in educating the public on the true safety profile of cannabis online today, cannabis companies are also heavily restricted in the actions they can take to promote they produce online.

To make matters worse, in many regions across North America there remains very limited ways cannabis companies can attempt to promote their products in physical settings, as cannabis ads are only allowed to be shown to adults in these regions.

This is in many respects the true genius of products such Facebook & Google whereby they can show two people the exact same piece of content, however, they can show completely different ads, however, currently neither Facebook or Google is willing to work with legal plant touching cannabis companies.

It remains unknown when the policies these platforms have adopted will change.

Ones To Watch: Anyone who is building a relationship with their customers using email, a platform that is many multiples more difficult to censor as opposed to relying on social media to communicate with your customers.

5) No Distribution

Producing high quality cannabis products is insufficient to succeed in 2022.

When we spoke with Cann’s Co-founder Luke Anderson some months back he highlighted that getting people to distribute Cann’s products across California was one the biggest challenges they faced when starting out.

This same problem persists well beyond the confines of cannabis beverage startups, with cannabis companies across North America having to tailor the products they produce to the demands of the distribution channels they rely on.

In Ontario, the province home to 14.57 million people, roughly 40% of Canada’s population, cannabis companies are forced to work with the Ontario Cannabis Store who use THC thresholds when determining which products to stock.

This THC threshold ultimately requires cannabis producers to produce products per the specifications of these distributors who assume they knew the preferences of all the cannabis consumers in this region.

Ones To Watch: Cann is one of the few companies who were willing to go against the grain by focusing on low THC products despite almost every distributor warning them against making this move & with the company having recently closed their $27 million series A — it’s fair to say this bet paid off.

Our Take

Whereas once it was possible to create a cannabis company and sell it for millions of dollars in a short period of time, today while it remains possible to succeed in cannabis, the opportunities to make a quick buck have seemingly declined.

Personally, I think this is a good thing for the long term success of the industry.

While cannabis companies may face many challenges to succeed in 2022, there’s also no shortages of opportunities in the industry with U.S cannabis sales on track to surpass $45 billion USD in 2025 alone.