Organic flour and local butter are weighed and loaded into a giant electric mixer. Freshly baked cookies cool, then ride a conveyor belt through a machine that will package them in cellophane.
It all looks like a typical bakery — until the finished goods are loaded into the “Quarantine Room.” That’s where, under Washington state law, the marijuana-infused edibles of Seattle’s The Goodship must stay for 24 hours under video surveillance.
Elsewhere, the company must compile information available to law enforcement listing which individually bar-coded marijuana plants were used in the baking process, and where the cookies are headed.
These cannabis treats are made and sold in Washington state, but entrepreneur Jody Hall wants to jump into the cannabis market in California, where the substance became legal this year and is expected to reach $5 billion in sales.
Hall, Goodship’s founder and CEO, knew the cannabis industry was complex when she decided to create marijuana edibles like snickerdoodle cookies, sea salt chocolate bars and other confections with just the right amount of the psychoactive ingredient THC.
But she had already founded a successful chain of six cupcake shops, Cupcake Royale, and felt confident as an entrepreneur. How much harder could a cannabis bakery be to get off the ground?
So hard, it turned out, that last fall she decided her best bet was to sell control of the company to Seattle-based Privateer Holdings, a private equity firm that could handle the legal and fundraising hurdles so she could focus on developing the products and the brand.
“It’s the best and fastest way” to get to the green rush in California, she said.
The deal, with undisclosed terms, closed in December.
The cannabis industry is one of the most complex environments there is for entrepreneurs today. For starters, the nascent industry is illegal under federal law, so business owners are technically drug dealers. This means traditional banks won’t offer loans or even checking accounts. Business expenses cannot be deducted from the corporate tax bill as they typically are for other companies, and insurance is generally not available.
Each of the 30 states where marijuana is allowed in some fashion has different legal requirements, from licensing to packaging. Add the fact that U.S. Attorney General Jeff Sessions wants to shut the whole industry down, and “it’s like a twist on the famous phrase,” said Hall: “This is your business. This is your business on cannabis. Any questions?”
Hall persisted through the industry’s challenges for two years, but even after creating her first set of products, establishing a facility to produce them and arranging distribution to cannabis shops in Washington state, she found she was spending most of her time on legal and fundraising issues.
Decisions made without a second thought in other industries take hours of legal mulling in the world of cannabis, and even after lengthy (and expensive) discussions, lawyers weren’t always able to offer a complete risk assessment.
“Can we sponsor a music concert and hang a banner with our company name on it? No. Can we donate product to an auction like a wine company would do? No. Can we rent space in a building that is federally insured? No,” said Hall.
While the legal meetings are frustrating, Hall does believe it is important to be extra cautious in all aspects of the cannabis business. “It’s all proof of concept,” she said. “If we (businesses pioneering in the industry) screw it up, other states won’t have the chance to be legal. Walking on eggshells is the right way to approach things.”
Raising money to expand her business was equally daunting. Under current laws, each state requires a separate production facility, so creating a national presence requires access to multiple factories and is extremely capital-intensive.
Product labeling, testing and packaging requirements differ from state to state, so companies that want to expand geographically must build systems that adhere to the specific details of each market.
Still, Hall has had success in Washington. Goodship sells about $50,000 or $60,000 worth of edibles per month and is looking to build that number with better distribution, she said.
“We like our sales-per-store volumes, but want to grow from 120 to 300 stores in the state,” she said. Because most stores are not part of a chain, that means each has to be visited individually.
Goodship has also found a way to expand its brand awareness through a lecture series called “Higher Education,” where attendees are invited to arrive high and consider the world through a different lens. Past topics have included the search for extraterrestrial life, the history of sex, and advances in artificial intelligence.
Last year, Hall ran into Brendan Kennedy, CEO and founder of Seattle-based Privateer Holdings, when they served together on a cannabis-business panel. Kennedy, who has raised $200 million for Privateer, was building a portfolio of marijuana-related businesses that could work together by sharing back-end operations and resources.
He pitched Hall on selling Goodship to him: She would remain in charge of brand-building, product creation and production, while Privateer provided a legal team, access to investors and management of accounting and human-resource responsibilities. Hall welcomed the freedom to focus on products, customers and evolving the public’s attitude toward cannabis.
The agreement came before Sessions revoked the Obama-era Justice Department’s Cole Memorandum, which protected legal marijuana companies from federal prosecution, but Hall said that announcement didn’t really change much. Investment in the industry had already felt a chill when Donald Trump was elected in 2016, and again when he appointed the anti-marijuana hard-liner Sessions to head the Justice Department.
The companies in Privateer’s portfolio include the cannabis directory and review site Leafly, a line of marijuana products named for Bob Marley called Marley Natural, and Tilray, a medical-marijuana producer in Canada.
Kennedy said the portfolio companies will share best practices and data and find other ways to collaborate. Goodship’s creation of a new chocolate product for Marley Naturals shows that is already happening.
Goodship will face stiff competition in California’s recreational market. Daniel Yi, a spokesman for MedMen, which runs seven cannabis stores in California, said new cannabis-infused edibles, lotions, pre-rolled joints, and other products are being created at a rapid pace and brought to market in California.
“We already carry more than one thousand different products,” said Yi. “Goodship will need to show what unique value-add they can offer.”
There are some factors working in Goodship’s favor, said Yi. The edibles category is a growing percentage of sales, he said, so Goodship has chosen a robust sector to enter.
“The customer base is broadening,” he said, and edibles offer consumption options to people who don’t want to smoke, who want to partake in cannabis more discreetly, or who need to measure their THC dosage accurately.
Goodship is also bringing the experience of successfully operating in a recreational market, which puts it several steps ahead of entrepreneurs new to the industry.
In California, Hall has a license and a 22,000-square-foot production facility in Santa Rosa ready to go. She hopes to have her first California product, cannabis-infused candy pastilles, on the shelves by the summer.
She chose to start with pastilles, said Hall, because she wants customers to have a positive first experience with edibles. The small candies have 2.5mg of THC each “so people can really control their intake,” she said.
The California Department of Public Health’s Manufactured Cannabis Safety Branch (just one of the three state licensing authorities involved in licensing and regulating commercial cannabis activity there), set an upper limit on total potency per serving for edibles of 10mg of THC. But Hall said, “That’s too much for a first-timer,” echoing the well-worn edibles advice, “start low, go slow.”
The most important objective of the acquisition, said Kennedy, has been to get Goodship ready to start selling recreational cannabis products in California and Canada as quickly as possible.
“These are enormous markets,” said Kennedy, “and moving in quickly with a high-quality brand can give us a significant advantage.”
He expects Goodship could multiply its sales tenfold in the next two years by entering these two markets well.
Hall said she’s been happy to spend less time in legal and pitch meetings. “We have a long way to go” to make the company all that she wants it to be, she said, “but having a bench of experienced attorneys has really freed up my time.”