Is The Cannabis Industry Repeating Silicon Valley's Worst Mistakes

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Ron Strider

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One oft-cited statistic about the cannabis space claims that women hold 36% of leadership positions in the industry, higher than the 22% average across all U.S. businesses. That figure was first published in 2015, but it's hard to know where it stands at the dawn of 2018; sales of legal marijuana hit $6.7 billion last year and are projected to exceed $20 billion by 2021.

Like digital technology two decades ago, legal cannabis is a new industry that's being built rapidly from the ground up, meaning its norms and culture aren't yet fixed. Yet Ebony Costain, the founder and CEO of BDTNDR, a job-training platform for cannabis workers, believes that if cannabis is any friendlier to women than Silicon Valley, then "it's definitely a white-women space." As she and other cannabis entrepreneurs of color see it, the reason is simple: By largely replicating the tech sector's funding model, the nascent cannabis industry is importing many of the exclusionary practices that tech companies are still struggling to shake.

Big Money And Scant Access

Eaze is a California-based cannabis delivery service with more than $50 million in funding, which reportedly lost $1 million each month this year. Venture capital finds its way into every high-growth industry, so the fact that many cannabis startups are venture-backed and operating in the red is no surprise. But it's one cause for concern among those who are looking to build an inclusive industry from the ground up.

For Sunshine Lencho, cofounder of Supernova Women, an Oakland, California—based advocacy group for people of color in cannabis, the prevalence of big VC money in the space is a sign that "we're basically replicating a model from tech—and there's no secret there as to who operates tech businesses." She's referring to the black women who see just 0.2% of VC funding overall despite being the fastest-growing group of entrepreneurs in the U.S., a problem rooted in the demographics of venture capital itself: Less than 3% of VC firms' investment teams consist of people who identify as black or Latinx, and that small cohort reports greater difficulty getting investors to back the minority-led startups they're excited about.

All 10 of the people I spoke to for this article, the majority of them black women—from entrepreneurs to investors and lawyers working in the space—stressed the rare combination of factors, including educational and startup-world pedigrees, that gave them footholds in cannabis. "I haven't witnessed as many barriers as I thought I would," says Costain, adding that she knows "a Canopy stamp on our forehead makes us better and more acceptable. I would say we are in a very lucky position, and I don't think everyone will experience this, unfortunately."

Canopy is a highly regarded Colorado accelerator that invests in "ancillary" cannabis startups, meaning those that don't actually touch the plant, like medical cannabis delivery service Meadow or EstroHaze, a cannabis business and lifestyle brand for women of color. Costain's company BDTNDR was chosen for Canopy's fall 2017 cohort, but the vast majority of founders in Canopy's portfolio are white, as are most of the accelerator's leadership and mentors.

It's much the same at Gateway, a cannabis incubator that has likewise overwhelmingly backed startups helmed by white men. According to venture partner Princessa Bourelly, the incubator has funded just two startups run by black founders. Bourelly herself is the first African-American woman to join Gateway's team. (When I asked Gateway to connect me with a founder of color, I was pointed to an Asian-American male founder, a demographic of entrepreneurs that, after white men, is the most likely to receive VC funding.) Rather than reinvent the funding model that continues to keep Silicon Valley so disproportionately white and male, cannabis appears largely to have imported it.

Andrea Unsworth, who bootstrapped her cannabis delivery service StashTwist using loans from business school friends in 2014, believes she succeeded "only because I have an MBA [and] I had been working with the investment community. I had lived in that world before." Most people of color, she realizes, haven't—a situation that isn't changing anywhere close to as fast as the march toward legalization that's creating opportunities for better connected, less diverse entrepreneurs.

Recreational cannabis is now legal in eight states and Washington, D.C., with legal sales of recreational marijuana kicking off in California come January 1. Yet black and Latinx people are disproportionately being locked out of the industry partly due to criminal-justice issues. Black people are almost four times as likely to be arrested for marijuana possession, despite use rates on par with white people. Between 2014 and 2016, 86% of people arrested for marijuana possession in New York City were black or Latinx. And even in Colorado, where recreational marijuana has been legal since 2012 for anyone 21 and older, arrest rates for underage possession rose by 50% and 20% for black and Latinx people in the state, respectively, from 2012—2014.

Encounters with law enforcement can have myriad consequences for those looking to earn an above-board living in the cannabis industry. For example, a recent marijuana conviction in Maryland, a state where legal medical marijuana sales began this month, bars you from working in the sector until the state approves your application to expunge your record—but that option only applies for older convictions. California, whose soon-to-take-effect cannabis laws are looser, still allows regulators to withhold business licenses due to prior convictions.

But even state-level approval doesn't put entrepreneurs in the clear. Research suggests that the VC world is rife with biases–some unconscious, others simply unexpressed–that have disproportionately channeled tech funding in the hands of white and Asian men. There's no guarantee that an investor will smile on founders with cannabis-related criminal records, even if state or local regulators do. And so far, there are few signs that the cannabis sector is on the verge of solving these issues.

Small Money And Big Obstacles

A noteworthy exception is Oakland, California's "equity program" for cannabis businesses, arguably the most innovative effort to date to reduce both the criminal-justice barriers that uniquely impact access to the cannabis market and the barriers to funding long familiar in Silicon Valley.

Introduced last year, it reserves half the city's cannabis business licenses for neighborhoods most affected by the aggressive policing of drug crimes over recent decades. (In 2015, 77% of people arrested for marijuana possession in Oakland were black, 15% were Latinx, and only 4% were white; each group makes up about 30% of the city's population.) Equity applicants must have lived in their respective neighborhoods for at least 10 years over a 20-year period and must earn no more than 80% of the city's average median income. The program is also open to anyone who meets the income requirement and was convicted of a marijuana-related crime since 1996, when California legalized cannabis for medicinal use.

But critics say the Oakland program doesn't reduce obstacles entrepreneurs face even before applying. Some of them lie beyond the city's jurisdiction. Since cannabis is still illegal at the federal level, startups in the space are subject to section 280E of the federal tax code, which bars them from claiming certain deductions and in many cases securing bank loans. Banks often reflexively turn away even ancillary founders for fear of unwanted scrutiny from federal regulators. (Similar frustrations are familiar to owners of adult and sex-tech businesses—many of whom are also women and minorities—which, despite being legal, are often rejected by banks and VCs due to stigma, risk aversion, or just plain bias.)

Other issues are unique to Oakland. While California doesn't bar formerly incarcerated people from working in cannabis, and the equity program actively encourages them to apply, a founder who meets the other criteria but falls short of the city's 10-year residency requirement, for instance, is out of luck. Oakland's scarce, expensive real estate is another problem, which the program addresses by allowing equity applicants to partner with an entrepreneur who has already locked down space. The latter offers the former a rent-free workspace for three years, and the pair can apply jointly to accelerate their businesses' licensing.

One entrepreneur Bourelly works with has done just that, but she points out that's where the partnership often ends. "Unless they're very passionate about bringing in people of color," she points out, non-equity applicants aren't required to share "access to their connections or sales," she explains. Without robust networks like those that Unsworth and Costain spent years building before getting into cannabis, many founders of color find themselves struggling.

Oakland's program reserves $3 million, plus technical assistance, for two years to help equity founders get started. By Bourelly's estimate, that might end up helping some 50 companies in the coming year, assuming each receives about $30,000, which is what Gateway itself offers the startups it accepts. (Bourelly says it's not yet clear how the money will be distributed.) And while equity applicants tell Bourelly that even $20,000 could prove decisive, for comparison, Y Combinator's standard investment in the startups (cannabis or otherwise) it backs is about $120,000. (One of the few firms making larger investments is Casa Verde Capital, which lists Snoop Dogg among its partners and initially offers $500,000 to early-stage companies, but only to ancillary cannabis startups.)

For many cannabis entrepreneurs, access to funding well beneath the million-dollar mark matters. A big reason, according to most of the founders and venture partners I spoke to, is because the margins for cannabis businesses are typically razor-thin. Lencho cautions against gaping at the $6.7 billion in revenue cannabis reportedly raked in last year: "No one is talking about the money that people who are operating are making, because they're not [making much]."

And as competition increases, so does the amount of initial capital needed to get a company off the ground. "Under $100,000 is about what I started with three years ago, but I don't know that I could do that again," says Unsworth. "I don't think I would be able to scale [StashTwist] fast enough." For the company's next fundraising round, she is seeking about $800,000.

Ways Forward

If there's any upside to the fact that cannabis's diversity problems share similar sources as tech's, it's that some of the necessary solutions are obvious. By comparison, untangling the regulatory and criminal-justice issues, as Oakland is trying to do, will likely mean experimenting with different approaches over time.

One of Gateway's alums, Khari Stallworth, points to an issue founders of color beyond cannabis know all too well: "Where are the people that look like me . . . [who] can invest in my idea?" he asks. "You have no idea how hard it's been for me to take a look on LinkedIn and find just 10 people, [when] I filter down with the word 'cannabis' and 'investor,' that are black." Stallworth tells me he's spent months scraping together just one or two meetings, despite the fact that his edibles company, Kamala, has been in business for eight years. "People know us up and down the California border, but I'm going to have to constantly prove that I deserve to have that recognition because I'm producing a good product," he says. "I have a company that has 28 SKUs. I have traction. I have three distributors."

Stallworth hopes more people like Snoop Dogg—wealthy black musicians or athletes who want to invest in cannabis—will enter the space, leapfrogging over hesitant VC firms dominated by white men. But until that happens, the clearest fix is simply to diversify the investor ranks. While Stallworth says his experience with Gateway was invaluable, he contends that more diverse advisors would have helped, "especially when you're dealing with a company that's coming from the underground to be above ground," he adds.

By way of example, Stallworth points out that selling cannabis edibles to a heavily Latinx community could be very different than selling to a market that skews black. "Somebody in the Latino community [may] want something that's extremely spicy," he explains, "but that extremely spicy product will not carry over, quite possibly, into an African-American community." Crucially, Stallworth believes, investors of color are more likely not just to grasp these challenges, but to see them as potentially lucrative opportunities.

"That's going to take an understanding of what the community wants," he says, "not just a broad-based, 'Hey, I'm a white guy and I've been making products forever. Listen to what I'm saying'."

News Moderator: Ron Strider 420 MAGAZINE ®
Full Article: Is The Cannabis Industry Repeating Silicon Valley's Worst Mistakes?
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