Why Cannabis Businesses Fail

By Jay Czarkowski

Introduction

The business adage of “most businesses fail” is not necessarily proving true in the cannabis industry. While the industry is still relatively young, we can say clearly that most cannabis businesses do not fail. As an OG in the cannabis business world, having obtained cultivation license number seven in Colorado, and logging more than a decade of cannabis investing, consulting, and board positions, I’ll focus on what I have learned about the outliers – those that have failed, so far. 

And, while the number of businesses that have failed is relatively small, many more failures are coming, as I will talk through below. But, if you read no further, take away there will be many, many winners, and there is a trove of information available today that will help you predict the future.

Markets

Total Number of Licenses Really Matters

Many times, you’ll hear talk about how much cannabis is just like any other ordinary business. This is mostly true—with one gaping exception. Its  significant difference from most American businesses is this: There is no interstate activity. 

This one point creates a cascade of implications. Every single cannabis market is different, and the rules that govern a market are a massive determinator of the ease of succeeding vs the likelihood of failure. Some markets have such a limited number of licenses, combined with such a large, interested population, that a cannabis business could only fail through massive mismanagement. Arizona’s adult-use market is a recent example of this guaranteed success, with only 169 dispensary licenses allowed for a population of over 7 million. With about 69% of the population over the age of 21, that puts the people per dispensary at over 20,000. 

We are here to talk about the failures, though, and really, that’s a much more interesting story. Let’s look at two markets together, Oklahoma and Oregon, whose markets have differences, but share state-level open licensing, which has led and will lead to many cannabis businesses failing. 

Oklahoma is called “the wild west of cannabis” despite the fact that it’s not in the west, nor would many characterize the people or place wild. It’s gotten this moniker, to borrow another industry phase, because to get a license “all you need is a pulse and $2,500.” Oklahoma, a medical-only state, began in 2018, and with a laissez-faire approach to regulation has boomed into licenses for 2,397 dispensaries and a staggering 8,844 cultivations. 

With 2.5 million of Oklahoma’s total population of just under 4 million meeting the age requirement to be a patient, only 386,561 are actually registered patients whom cannabis can be sold to. That calculates to 172 registered patients per dispensary, compared to the 20,000 per dispensary in Arizona. For a more apples-to-apples comparison to Arizona, assume we remove the registration barrier in Oklahoma, that still results in only 1,660 customers per dispensary license. As you can see, program structure greatly impacts the basis for business success—or failure.

Oregon has no special catch phrase in the cannabis industry, but the state’s name is often prefaced with profanity, muttered under the breath, particularly for cultivation investors. This graveyard of angel investment has been an active adult-use market since 2015. Oregon, culturally, has a long history of cannabis growing and use, along with a its own unique political environment. With again no limit on the number of licenses and adult-use, there are 759 dispensaries and 1,392 cultivations as November 2021. Oregon has a population of 4.2 million, with 71% being over the age of 21, so about 2.9 million possible consumers. That works out to a much more sustainable 3,928 people per dispensary when compared to Oklahoma, but significantly less so than Arizona’s market dynamics.

Where things get more interesting is looking at the price per pound of cannabis flower over time. In September 2017, a pound fetched an average $1,798 at wholesale. Eighteen months later in April 2019, it had dropped to $649, close to a third of the price. After an uptick to $1,470 in September 2020, it is as of December 2021 the cost is sitting at $948. 

Oregon, just like Oklahoma, does not have a state cap on licenses. The Oregon legislature, however, did stop the regulators from accepting new applications for cultivations in 2018, which expired on January 2, 2022.

To summarize, Oregon operators initially had strong numbers. Many outdoor operations opened, and good growing seasons led to too much product in the market. Operators ran at a loss as they attempted to just move product out of storage. The legislature-enforced license freeze allowed prices to stabilize, but did not create a predictable future, nor did it account for last summer’s wildfires that destroyed some crops and left others ash-covered. 

Now with a freeze lifted, and growing conditions uncertain, operators must guess what the future holds. Would you invest in your operations? Some will answer “of course, how else can I beat the competition?” Others would say “of course not, I’ll spend my money on expanding a sales team” or “of course not, I don’t have any money to spare.” Behind which door hides failure is certainly hard to say. 

Overall, many of the 8,844 cultivations in Oklahoma and some of the 1,392 cultivations in Oregon will fail. There are just not enough consumers to meet the cultivation capacity. Do the numbers on 172 people supporting your business, and even if you’ve never run a business before, it won’t take long to see how much each of those patients would need to spend every month to keep you afloat, much less profitable.

There are states that share Oklahoma and Oregon’s capless state-level licensing without the same market tension, namely Colorado. There, strong local control has led to a more predictable market. No matter the state structure, knowing the number of your competitors, both currently and possible in the near future, helps a lot in being able to prevent operational failure. Reinvestment in a business can grow the bottom line—but only if there is growth to be had. 

While I personally advocate for unlimited licenses, even though my business benefits from capped numbers, there remain debates on both sides of the topic. What’s clear, however, is a thorough examination and understanding of related implications is a primary factor for avoiding failure.

Population Matters

Whether you’re growing cannabis, processing it, or dispensing it, you need a sufficient quantity of potential customers. I know it seems obvious, but I mention it because too often I’ve seen this variable missed—or miscalculated—leading to business failure. What population you need to look at exactly varies by business type. 

A dispensary should not look at total state population, Rhode Island excepted. Rather, they need to look at regional populations. Failure can certainly come through the process of growth here, as many a successful dispensary has decided the solution to growth is two dispensaries in that one town, rather than branching out into a new market.

Backing up the supply chain, processors have to look at the number of dispensaries, and their distance from the facility. In Denver, for example, a centrally located city, the northwest city of Craig is 3 ½ hours away, the southwest city of Durango is 6 ½ hours away, and Craig and Durango are 6 hours from each other. Thinking about overtime, size of each market, and storage/shelf space at potential dispensary locations should all go into the calculation of where to expand. In planning how much raw plant material to acquire, looking to state-wide statistics is helpful, especially factoring in growth of population, competing processors, as well as cultivations to buy from.

Turning to cultivations themselves, calculating based on statewide population is most applicable. Medical cultivators must add the calculations of patient growth rate and considering the possible boon—or bust—of adult use, and the likely year of its arrival. Adult-use cultivators must consider changing demographics within the state’s population, such as shifts in average age and the number and type of people moving to or from their state.

Even the worst predictors will succeed in a market that gives them a large market segment; only the best predictors will avoid failure in an over-saturated market. 

Adjoining States Matter

The above section assumed a siloed market, but that’s an oversimplification. Border towns have another metric at play, though it only applies when adult use is in the mix, as medical is confined to the state’s citizens. 

For one example, a look at Portland, Oregon, a city on the border with Washington. Washington, though one of the first adult-use states, had a slow launch with persistently high prices and unexceptional product. Those within driving distance flock to dispensaries across the border in Portland. Whether this situation will remain, equalize, or even reverse is difficult to predict.

Second, let’s look at the borders in the state of New Mexico. Starting with the north, Colorado’s southernmost cities and towns have many more dispensaries than their populations can support, as so many New Mexicans – and sometimes Texans, and formerly some Arizonans – drive up to get cannabis. New Mexico added adult use in 2021, with sales beginning in April 2022. This change in a bordering state will put at least some of the more than 25 dispensaries in Trinidad, Colorado, alone, out of business. 

Looking at the eastern border of New Mexico, traffic from Texas is going to be big business for adult-use dispensaries in New Mexico. But for how long? Texas barely has a medical program, but if they skip to adult use cannabis in the next couple years, then some new businesses along that border will likely fail, as they will not be able to recoup their initial investment. Colorado enjoyed a decade of New Mexican business, will Texas grant the same windfall to eastern New Mexican businesses?

People Make or Break It

Three Skillsets You Need

Having run multiple cannabis businesses, invested in more, and consulted with hundreds, I’ve seen that the team is the biggest factor in success or failure. I have seen that one person, no matter how dedicated and intelligent, cannot do it alone, either. Breadth and diversity of team members must fulfill these skillsets: legal cannabis experience in your specific operating sector; mainstream business experience; and community relations and knowledge. Many early Colorado businesses that have failed had the first and third, but no one who knew how to just run a business. Many newer businesses that have failed only knew how to run to a business, but lacked leadership in the other two areas. 

The But-I’m-Not-a-Stoner Bias

If you’re reading this thinking “but I’m a serious businessperson, I’m going to come into cannabis with [fill in your business strategy] and wipe the floor with these stoners” then let me call out the “but-I’m-not-a-stoner bias.” Popular culture has bred a lingering belief —that is wholly detached from reality—that “serious” businesspeople have yet to enter this space. What this bias overlooks is that serious businesspeople are who made the legal industry a reality and continue to be heavily involved. Just think about the lobbying alone that was necessary to launch the industry! 

 This bias has led many industry entrants to underestimate their competition. The bargain-basement license sales of failing businesses are littered with “serious businesspeople” trying to recoup a fraction of their investment because they knew serious business and their competitors didn’t…or so they thought.

An Overpaid C-suite 

Ok, so you need cannabis expertise, and you need business expertise. But, it is hard to be profitable when the margin gets eaten by salaries. If a company is lacking something that only a high-paid person can provide, a contract with an end date/consulting structure is far better for the future of the bottom line than using them in perpetuity. Additionally, some owners want to hold all the equity they possibly can (understandable), but end up overpaying rather than giving away equity, ultimately dooming success. 

Conclusion

I will say again what is worth repeating: most cannabis businesses do not fail. A limited market makes success likely. A team that covers all the bases, is not filled with ego, and is paid reasonably will do well. The future will see more cannabis businesses go under than have so far, but much more money will be made than lost. Cannabis is a continually evolving space, which requires agility, solid personal relationships, and an active connection to your world. Most importantly, it is an industry that helps literally millions of people every single day, so be proud to be part of it—and never let a failure make you lose sight of the ultimate good of building this industry.