Crisis creates chaos for pot entrepreneurs
Funding a problem as state prepares to award new licenses
To break into the legal cannabis industry in Illinois, Anton Seals Jr. and eight of his friends scraped together their personal savings to submit applications for business licenses.
Even with discounts as social equity applicants from Chicago’s South and West sides, the nonrefundable application fees alone ran $2,500 per license, or $27,500 for 11 licenses. If they win the competitive process, they’ll have to come up with millions of dollars more to build and operate those dispensary, craft grower and infuser businesses.
Now that the coronavirus pandemic has thrown the economy into turmoil, investment funding, already difficult to access for minorities in the white ownership-dominated state cannabis industry, has tightened up even more.
“In this time, it becomes an even more risky proposition for a family member to say I’m going to give you $5,000 to invest when I don’t know what’s going on in the world,” Seals Jr. said. “Many black entrepreneurs don’t have the family and friends network for that.”
Federally chartered banks and small business loan programs are off-limits because of the federal prohibition on cannabis possession. With the stock market often facing huge selloffs this year, following last year when cannabis stocks in Canada took big losses, investment funding in the industry has become extremely tight.
One casualty of the new environment last week was an $850 million deal to buy Chicago-based marijuana company Verano Holdings. The deal was killed due to regulatory obstacles and the tight capital market.
The pandemic has hit just as Illinois officials prepare to issue 75 new recreational marijuana store licenses in May, followed by up to 40 craft grower and 40 infuser licenses in July.
State law gives preferences to awarding licenses to “social equity” applicants, meant to be those who were adversely affected by the war on drugs. Those eligible include people with past low-level cannabis convictions, or those who’ve lived in poor neighborhoods, where blacks and Latinos were often arrested at far higher rates than whites — even though research suggests usage is similar among different races and ethnic groups.
Financing hurdles are even more daunting for minority investors. Median wealth for blacks, for instance, was only about onetenth as much as for whites, according to a 2017 Federal Reserve report. The challenges facing large companies are larger for startups, said Nicholas Vita, a former Goldman Sachs banker turned co-founder and CEO of Columbia Care Inc., one of the largest cannabis companies in the country.
“It’s been incredibly hard for large operators, and even harder for smaller operators, to access capital,” Vita said. “The cost of debt sometimes is north of 20%.”
Beyond finances, the virus made it harder for people to complete their license applications by the original deadline Monday. Applicants for craft growers must show that any municipality where they want to locate has approved zoning for the site, but with planning department offices often closed to the public, as in Chicago, it became very difficult to get signed and notarized documents.
Clients are also leery of going out for required fingerprints. Michael Mayes, CEO of Quantum 9, which helps clients complete applications that run hundreds of pages, has several clients who are sick and out of commission, possibly due to the virus.
“It’s slowed investment capital to almost nothing,” Mayes said. “Most investment funders usually have another business. Any disposable income is not going to a secondary investment; it’s going to their primary business.”
Mayes can’t even reach on the phone one client who owns multiple Burger Kings, because he’s busy trying to salvage his fastfood business.
He hopes that state regulators will either show some flexibility in allowing applicants to supplement any incomplete parts of their applications, as officials have done previously.
On Sunday, Gov. J.B. Pritzker extended the deadline for submitting applications to April 30. Applications are to be submitted via certified mail rather than in-person, according to the executive order.
Seeking a dispensary license in the Chicago area can cost $350,000 to $1 million for all the engineering, security, legal, cannabis and real estate consulting to put together a business plan and application, Mayes said.
Getting up and running can cost another $1 million or more, with even greater costs for a craft grower. But if a startup can make it past those hurdles, a dispensary can bring in revenues of $1 million to $3 million a year.
Despite the virus, the cannabis business in Illinois continues to boom. After about $75 million in newly legal recreational sales in the first two months of the year, despite a slight dropoff in February, the average sale in March was up 13% through March 23, according to New Frontier Data, which tracks sales through its client dispensaries.
Some of that was due to customers stocking up in anticipation of being forced to stay at home, similar to people hoarding food, New Frontier CEO Giadha Aguirre de Carcer said. But similar to alcohol, cannabis is expected to be a safe haven and even a growth industry during the crisis. In Illinois, cannabis dispensaries are permitted to stay open as essential services.
New Frontier has scheduled an April 2 online conference for industry members to discuss how to respond to the pandemic.
“Cannabis is expected to be one of the few industries that sustains the local economy, as long as it’s allowed to do so,” Aguirre de Carcer said.
With his four dispensary applications in, Joshua Jacobs is among those waiting to see if he wins any licenses. He grew up in Vernon Hills and lives now in Chicago’s River North neighborhood. At age 28, he runs his own marketing business and applied as a social equity candidate based on a conviction for cannabis possession when he was a teenager.
Seeking $1.5 million to start, he met with investors last year with the help of Quantum 9 and landed one major investor.
Despite uncertainties during the pandemic, he said, this remains a rare opportunity to get into a newly legal business. “If ever there’s a time to do this,” he said, “now is the time.”