Cannabis Businesses are Not Startups

Cannabis startup lawyerSerial tech entrepreneur Steve Blank defined a startup as an organization built to search for a repeatable and scalable business model. The basic idea is that a group of people within a startup run a version of the scientific method as quickly as they can, while learning from their successes and failures. Every idea is like a hypothesis you build out and evaluate, applying lessons learned to adapting the idea as you go. Over time, startups are supposed to continually pivot in the directions that will lead to the greatest overall business growth. In practice, this generally involves having small, flexible teams with largely undefined rolls. Communication is key, but the entire early stage business model should be built around the ability to rapidly change resource allocation and focus.

Large businesses, on the other hand, have significantly more inertia. Established companies focus primarily on keeping costs low and revenues high within the bounds of already established business models. Deviations from that model or large shifts in corporate focus are major decisions. These decisions require multiple layers of bureaucratic approval within a company, including endless meetings. Getting anything done can be slow because of the nature of getting approval multiple times within a hierarchy.

But despite the allure of startup-style flexibility, cannabis businesses, like other highly regulated businesses, do not have the luxury of acting like startups. State government regulations force them to act more like established large companies both through required state approval for significant business changes and through implicitly requiring certain internal governance structures. Licensed marijuana businesses have significant record-keeping requirements. They are required to implement seed to sale tracking of all products that run through the business. They must have written operations plans and security plans, and they must have one or more representatives authorized to speak on behalf of the business to government regulators. For significant deviations from these plans, additional state approvals are generally required. Depending on the state, these approvals can take months to secure.

And on top of all the explicit governance requirements, there are significant compliance requirements. For example, Washington State has more than 49 different possible regulatory violations that exist in four different categories. The violations are judged on a strict liability standard, meaning the state does not need to show intention or even negligence by the cannabis business to prove that a regulatory violation has occurred. These violations can carry huge monetary penalties, including license cancellation. And some violations can happen because of the actions of one rogue employee. Diversion of marijuana from the legal market to the illegal market usually carries the harshest penalties in state licensing systems, and it only takes one person to do it. So even where state law does not mandate any specific approach to avoiding diversion, it implicitly requires significant employee training and the implementation of layered compliance protocols to make sure that a single negligent or malicious insider cannot commit a serious violation.

Our firm works with clients all the time who are frustrated by the shackles state regulatory systems put on cannabis entrepreneurs. Cannabis is still a cool new industry, and cannabis business owners want to experiment with different financial, operational, and marketing approaches to the industry. And though our job as attorneys is to show businesses how to cut through the regulatory morass as efficiently as possible, regulated businesses are still cumbersome to adapt and they require the type of structured advanced planning you see in established companies more than startups.

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