What a week for cannabis! On Tuesday the people of Oregon, Alaska and Washington, D.C. made their voices heard and chose to take a new approach to regulating marijuana. All across the country we are witnessing sweeping pro-cannabis sentiment, and conscious push-back on decades of stigma and fear – the making of history.
We’ve always approached Solstice as part of this greater movement, so times like these are particularly exciting. It’s the type of moment that pinches you a bit, and reminds you just how far we’ve come.
The larger cannabis movement is the macro version of any start-up, where the battles are daily but every now and again you win big. It’s the time and energy spent in the trenches that leads to those savory moments. For Washington State, the implementation has been slow and although wins like this lie ahead, many were hoping they’d come much sooner.
As anyone starting his or her own venture knows – whether you’re opening a coffee shop or revolutionizing the falafel industry – launching a new business is an enormous undertaking. If your plan is more lemonade stand on the corner, more hit and run, you might get caught less in saving, planning and investment. But opportunities like that—a ‘short work burst,’ as Tim Ferris of The 4-Hour Work Week fame calls it – are rare. More frequently, us at Solstice included, I find entrepreneurs leaning toward a long-term perspective where planning is pivotal.
Any business whose idea of success is an exit strategy more than several years out requires a strong foundation. A reliable credit line, quality investors, and a plan to effectively navigate tax laws are a few high level issues crucial to the growth and financial health of a new company.
For cannabis, these issues bring several unique hurdles that have worked to drastically slow the growth of this very young industry.
A strong line of credit can be a lifeline for a small business. Creating steady cash flow can take time, and understanding seasonal stability only comes with living through the season.
Companies can project, but projections often go up in smoke (forgive the pun) when you jump in and really see what the market is like—particularly in an emerging industry where no data exists.
A line of credit can be a boon to a fledgling company in a time when cash flow is slow. However, banks have thus far been unwilling to work with cannabis. The effect? Fear, hesitancy, and ultimately conservative decisions. In the cannabis-banking saga, ‘cash-only’ is center stage but I would argue that lacking access to credit is more crippling. After all, being short on payroll isn’t an option.
For the first several years, most companies spend more than they make, and the corporate tax structure allows them to thereby skip out on income tax. You can’t tax what you don’t make.
Further, while companies are young and building a foundation, the corporate tax structure incentivizes them to spend—to invest. This translates into more hiring, more research, more construction, and more ‘involved’ businesses. Even donations to non-profit organizations and into the surrounding community can be written off on a corporate level.
For cannabis, regular business expenses don’t count. Because of tax code 280E – created under the Reagan Administration to catch hardened drug criminals like Al Capone on tax evasion – any company that sells (trafficks) a ‘controlled substance’ cannot take standard tax deductions. This means that expenses that are very real to your bottom line don’t translate to your tax return.
The result? Small businesses end up looking like they’re turning profits when they’re actually in the hole.
The first two years Solstice had negative net income. Both tax returns, however, showed income and thereby created income tax. Income tax, mind you, for a business that didn’t have any profit.
We’re not unique; this problem hits the whole industry and severely limits a new business’ ability to invest.
Most new businesses reach a point where they need to raise capital. Aside from creating financial stability it confirms validity – a stamp of approval, a show of faith from someone outside your circle saying, “I believe in you.” The more sophisticated the investor, the more it signals the validity of your vision and practices. Investors have the potential to become integral advisors who help shape long-term strategy and connect you with an invaluable network and resources. In short – the best investors become invaluable mentors.
The cannabis segment is ripe with interest from investors of all backgrounds. The greatest challenge when meeting one, typically, is overcoming the elephant in the room – otherwise known as Federal Law. Minor detail.
As it stands, that’s the easy part. An investor must also qualify under state residency requirements. Different for each state and regulatory model, Washington’s I-502 recreational law says that investors must reside in the state for a minimum of three months. Aside from making it impossible to bring in investors from other geographic areas, this limits the networking value previous investors can offer.
Entrepreneurs tend to be a scrappy breed. Perseverance – or perhaps more aptly, survival – in the emerging cannabis market will eventually lead to a fertile platform. I am well aware that other industries face similar hurdles. While the relative uniqueness of cannabis laws are founded largely in fear, you won’t find a pity party here. Something this important was going to be difficult.
Patience is key—for consumers, regulators, and prospective entrepreneurs.
Solstice has paid more in taxes than I ever thought possible for a business without profits. We’ve reinvested capital and even chosen to give back to our surrounding community despite our inability to deduct these expenses. We’ve had to say no to investors we would have loved to have on board – ones with tremendous value beyond the capital they might have offered.
So when you see only a couple stores open in Seattle under Initiative 502, please know that there’s far more at play than an intense regulatory structure. More are coming.