Big Cannabis: Growing the Next Great American Industry

January 15, 2013 | Kyle Chayka

For entrepreneur Troy Dayton, providing basic services like insurance and capital management amounts to revolutionary business. The support his firm ArcView supplies might sound standard, but the businesses it works with are anything but: ArcView coordinates investment for the booming number of legal, cannabis-focused companies taking root across the United States. “I always thought that I would need to choose between making a lot of money and changing the world,” Dayton told me. “Never in a million years did I think that my efforts to change the world would lead to the next emerging industry.”

Dayton, 35, speaks with the crisp efficiency of a successful executive, but he lapses periodically into the kind of fervent pro-weed ideology that’s more familiar from late nights spent in a smoke-filled basement. The combination of professionalism and enthusiastic stoner advocacy is only fitting given that he has been working on reforming the United States’s marijuana policy for the past 17 years.

The ArcView CEO was in Denver, Colorado, on the night of November 6 when the state passed Amendment 64, a bill that legalized recreational use of marijuana, passed with a majority vote of 55 percent, alongside the state of Washington’s similar Initiative 502. It was a crowning moment. “There were chills all throughout my body,” he recalled. “I had no previous experience with that sense of vindication and success, after being laughed at and told what I was working on was pointless.”

As more states have legalized medical marijuana and the first inroads are made into full weed legalization in the United States, a new crop of businessmen like Dayton have positioned themselves to surf the rising market tide for marijuana and marijuana-related products, an economy that could grow to be as large as that of tobacco ($35.1 billion of revenue from major companies in 2010) or alcohol ($43.6 billion in 2012). “This is going to be the next big American industry, and people want in on it, and rightfully so,” Dayton told me.

The marijuana industry is already kickstarting itself with new grow farms, dispensaries, and expert consulting firms launching weekly, but that activity flies in the face of government policy. Since 1970, marijuana has been classified as a Schedule 1 controlled substance by the federal government’s Drug Enforcement Administration. This lumps cannabis in with LSD, heroin, and MDMA as a drug that has a “high potential for abuse” and “no currently accepted medical use” in the United States.

The classification is widely viewed as unreasonable and outdated. Medical marijuana is now legal in 18 states (as well as the District of Columbia), a growing minority that, along with the passage of the recreational weed laws in Colorado and Washington, could signal the coming end of marijuana prohibition in the United States. The day may soon arrive when any citizen in any state (as long as they’re over 21, of course) can purchase weed from an accredited store, light up a joint, smoke a bowl, or consume a THC-laden brownie.

The new laws aren’t going to lead to the immediate flowering of a nation of potheads, though; they come with plenty of restrictions for users, growers, and sellers. Under Colorado’s Amendment 64, it’s now legal to possess up to one ounce of marijuana and any number of “accessories” used to grow or consume the drug. Weed aficionados can cultivate up to six marijuana plants in their own homes, but only three can be mature. Home growers can gift up to an ounce to friends without needing a license to sell. Consuming the drug is legal, but you still can’t light up in public (Seattle police are currently letting off flagrant smokers with just a warning, however).

If you’re now thinking that you’d like to go sell eighths and water bongs to the newly minted hordes of legal Colorado stoners, you’ll have to go through a stringent licensing process similar to that required for alcohol sales. Under the law, application fees for recreational cannabis vendors will not exceed $5,000, though pre-certified medical marijuana sellers will only need to pay $500 to upgrade their licenses. Medical marijuana sellers won’t be able to sell to non-patients, however, and can’t purchase the drug from non-medical farmers.

Under Initiative 502, Washington state’s system differs slightly, categorizing three different kinds of licenses for marijuana producers, processors, and retailers. The initial license fee for purveyors is $250, with an annual renewal fee of $1,000. Applicants must have lawfully resided in the state for at least three months, and marijuana outlets are limited to selling weed and weed products only. Unfortunately, that means you can’t bundle in a profitable Taco Bell operation to your cannabis counter.

As permissive laws encourage a new wave of entrepreneurs to join the cannabis economy, a Big Marijuana food chain is beginning to connect across the country, linking farmers to distributers, store owners to customers, and investors to successful weed-driven enterprises. In the post-prohibition era, cannabis expertise, even more so than the drug itself, is a valuable product.

No American marijuana industry could exist without someone willing to get their hands dirty and actually grow the plant. Jason Katz is one of those pioneers. After deciding to make a career change, Katz became intrigued by the burgeoning medical marijuana economy. He traveled to Colorado to make some industry connections, raised money from family and friends to start a marijuana grow operation, and moved to Denver in March of 2010.

Going green wasn’t so simple, however. Colorado’s House Bill 1284, passed in June 2010, made it more difficult to run a business solely based on growing marijuana and selling it wholesale, encouraging the consolidation of grow operations with medicinal dispensaries — “You had all these forced marriages,” Katz explained. So he hooked up with Jon Salfeld, the founder of Local Product, an established Colorado dispensary remarkable for its professionalism and highbrow brand image, not unlike a hip micro-brewery. Katz is now the company’s head of operations, managing its production of choice weed strains like the award-winning BC Purps, THC-infused oils, and hash. (Katz gave up marijuana for a number of years in his twenties, but has lately been “experimenting” with different products.)

2011 brought a rolling series of new state regulations that the company successfully navigated. “It was all about who can stay alive,” Katz said. By late 2012, Local Product had settled into a routine, focusing on achieving maximum production capacity and building out their staff. But that process wasn’t easy, either. “It’s hard to find a qualified individual for a grow operation when two years ago, anyone who did that was part of an illicit market,” he said. “There was nobody telling them what to do.”

That situation is changing as the industry matures. “People who were unqualified two or three years ago are getting more experience working in commercial facilities and earning that knowledge that we need,” Katz told me. “The pool of qualified candidates is getting larger as time goes on.” The boutique company now works with a dozen full-time employees between the store and the production center, and hires extra part-time staff as needed.

Katz and Salfeld are optimistic about the possibilities of legalized recreational marijuana for expanding Local Product’s business, though there remains a level of uncertainty about the future. “The way it looks is we will want to participate,” Katz predicted. Their previous experience will come in handy. “It would appear that existing medical marijuana dispensaries will have preferential treatment in the issuance of recreational licenses,” he said, citing rumors that the release of Colorado’s first recreational marijuana licenses will come in early 2014. At that point, Local Product will take on even more of the trappings of national, standard-setting business in this new industry, and it will need the support to make that leap. That’s where the next link in the chain comes in.

Troy Dayton, ArcView’s CEO and co-founder (with Steve DeAngelo), began his fight for marijuana legalization after a high school experience with the drug. “The first time I tried cannabis, my friends got this security guard from the place we were hanging out to put a siren on his car and come around and put me in handcuffs, and say he could either call my parents or the cops,” he recounted. The prank made him consider the injustices of the weed ban. While attending American University, he began to work on drug policy reform through student organizations and, later in his professional life, advocacy groups like the Marijuana Policy Project. The ban on marijuana is “the most egregious overreach of government intrusion into the personal lives of human beings that I can imagine,” Dayton told me. “That’s where my motivation lies.”

Dayton founded ArcView in 2010 while working as the chief fundraiser for the Marijuana Policy Project. He noticed that businesses in the cannabis industry had big plans for expansion, but couldn’t find support in areas like insurance, banking, and capital management. At the same time, those with the capital weren’t being served, either: “I noticed investors were making terrible investments without the knowledge of how the industry actually works,” he explained.

Investors “want to invest with someone with a track record of making money in a sector,” Dayton told me. “There’s no one with a track record with making money on investments in this sector. A whole lot of interest, not a lot of rubber hitting the road.” ArcView is now bringing the rubber.

The company launched an angel investor network in 2011 with the goal of “creating a bridge between the business world and the cannabis industry, and focusing on the ancillary businesses that don’t touch marijuana directly,” Dayton said. This means that ArcView’s group of 25 investors, which the CEO notes includes private billionaires, venture capitalists and the heads of top marijuana businesses, invest only in companies that do not actually grow or sell the plant itself. Instead, they sell marijuana industry-specific insurance, packaging, staffing programs, and branding and marketing campaigns, filling some of the absences that Jason Katz from Local Product was complaining about.

The distance ArcView keeps from the drug is meant to create a “warm space for investors to participate,” Dayton said (as well as to keep the company from being buffeted by legal changes, one assumes), but it’s also the market area in which he sees the most future growth. “I don’t think that [weed] use rates are going to rise very much as a result of legalization,” he said. But the entities that will sell the drug are “going to be very different and have very different practices,” requiring new kinds of support that ArcView’s incubated companies will provide.

MedMen, a California-based marketing, consulting, and management firm for weed-based businesses, could be one of those companies. If Local Product provides the production infrastructure and ArcView provides the capital, then this is where the sales pitch comes from.

I spoke to MedMen co-founder Adam Bierman as he was convening a meeting of 10 medical marijuana dispensary owners in Arizona to discuss best practices. He’s of the most tight-buttoned archetype of weed entrepreneur: Before founding the business, he had no previous experience with marijuana and he doesn’t partake. MedMen spun off the marketing company ModMan in 2011, after the parent company found it was receiving too many inquiries from farmers, dispensaries, and marijuana product makers to handle. “We ended up getting into the industry as it grew,” Bierman said.

Alongside offering consulting services to help owners open compliant medical marijuana dispensaries, MedMen is designing websites for weed accessory makers and doing brand consulting with an eye toward the future of the marijuana economy, which Bierman sees as trending away from its hippie roots. “The concept of it being some kind of rogue counterculture operation, I think that is where we were five to 10 years ago,” Bierman told me. “As this becomes more mainstream, those brands that are in and of themselves more mainstream in nature are going to continue to grow where the rest are going to die off.”

During the push for Amendment 64 in Colorado, a billboard in Denver displayed a picture of a stereotypical soccer mom in the living room of a plush suburban home. Underneath the photograph was the slogan: “I choose marijuana over alcohol, what’s wrong with that?” The image speaks to certain truths that marijuana is going to have to face down if it wants to become, as Troy Dayton predicted, the next big American industry. The drug is still seen as something consumed by irresponsible teenagers, college drop-outs, and middle-aged male leads from Judd Apatow movies rather than normal people.

A 2007 survey by the U.S. Substance Abuse and Mental Health Data Archive found that of citizens under the age of 50, approximately 50 percent of the population had used marijuana. The cannabis industry’s branding doesn’t yet reflect that huge sector of the population — working parents, retirees, successful yuppies, whoever — that already uses the drug, a disparity that could keep it from growing to its full potential. After all, consuming marijuana is no longer as rebellious an act as it was back when Reefer Madness was released.

Pulling out a joint, after a sophisticated dinner party, for example, is now such a commonplace adult activity that it inspired a recent article on the etiquette of weed smoking in the Washington Post’s Style section. There’s a “murkiness” to the drug’s presence in civilized company and smokers may find their habits “alienating,” but etiquette writer Jodi R. Smith argues that cannabis should be treated like “a bottle of brandy or a box of Godiva chocolates,” in other words, a luxury to be shared among willing partakers. (In the future, perhaps the first legal smoke clubs will provide the friendliest atmosphere for consumption.)

“There’s a very small percentage of patients that like the anti-establishment side” of weed, Bierman told me. “They want to feel like what they’re doing is legitimate and legal.” That movement is already being reflected in the kinds of businesses MedMen works with. Marijuana companies “are acting like real labs, branding themselves as real scientists,” he pointed out. The new generation, cultivating weed that comes with controlled THC percentages, is “subbing out for those people who used to be in a basement somewhere listening to some kind of rap or reggae and making concentrate.”

“People associate weed with old-school drug war, hippies, and stoners,” Local Product’s Jason Katz said. “Most businesses are getting away from that. We’re rebranding the image of marijuana on a much more professional level.” Katz describes the brand of Local Product, which has a circular, military-green imprint of Colorado Mountains and two small, tasteful cannabis leaves for a logo, as a “balance between… fun and a little bit exciting.” He said that the cannabis industry isn’t quite ready for the “suave and sophisticated” angle that high-end alcohol has exploited, but it’s easy to imagine a future in which custom-bred, aggressively marketed trendy weed strains fly out of Brooklyn storefronts.

Troy Dayton agreed that weed needs to grow up, but maintains that the industry should honor its roots as well as the market. “My hope is that this plant continues to teach us to embrace the diversity of who people are and how they show up in the world,” he told me. “Let’s not forget where this plant comes from: It comes from hippies, and we’ve learned a lot from hippies. I consider myself one.”

The professionalism needed for a mature industry doesn’t mean abandoning all of weed’s cultural heritage. For Dayton, it simply means being dependable, “doing what you say you’re going to, doing things in a responsible manner that considers your stakeholders. Proper business practices,” he said.

This idealism for the bright future of a national marijuana economy will only be relevant if that industry actually survives the regulation process, and there remain very real roadblocks to its growth.

Cannabis-focused companies are only just beginning to organize themselves, explained Michael Elliott, the executive director of Colorado’s Medical Marijuana Industry Group. The group, which counts Local Product’s Jonathan Salfeld as a board member, was formed as a “trade association” in June of 2010 when a state bill threatened to ban marijuana business altogether. “A bunch of business owners got together and said, ‘If we don’t work together, this whole thing is going to be shut down, and we have to fight for control,’” Elliott explained.

Together, the businesses in MMIG fought for strict regulation of cannabis in Colorado, which Elliott sees as the safest way forward for the state’s citizens. “Either the drug cartels and the gangs can control the sale of it or the government can,” he argued. Still, the state has not made it easy for medical marijuana businesses. Though banks want to take on marijuana companies, state police have been “advocating against it,” according to Elliott, leading to a cash-only industry with problems in “accountability, tax collection, and public safety.”

The biggest fear is what might happen when Amendment 64 comes to full fruition. “Who’s going to be the first person to open up a recreational marijuana business, and what is the federal government’s reaction going to be?” Elliott asked. “Is it going to be a showdown?”

Though our president has publicly admitted his youthful pot-smoking habits, the Obama administration has taken a few different public stances on cannabis. In February 2009, Obama’s Ogden Memo announced that he would cut back on busting medical marijuana dispensaries in California and other states that legalized the drug. Over the past year three years, however, the administration has carried out more busts of state-compliant dispensaries than George W. Bush did.

Then the president flip-flopped again. Following the Colorado and Washington legislation, Obama reiterated his earlier plan to stop enforcing the federal ban on weed. In a December 2012 interview with Barbara Walters, the president stated, “It would not make sense for us to see a top priority as going after recreational users in states that have determined that it’s legal.”

The burgeoning marijuana industry is betting that the president stays true to his word. Even if the government shifts to a harder line, however, it might be that the genie has already been let out of the bottle. “Marijuana prohibition is like a house of cards,” Troy Dayton said. “The first two cards have just been pulled out of it. It’s quite possible that this whole thing crumbles faster than anyone ever imagined.”

“One thing is for sure: We’re going to win, I just don’t know when. That’s what makes this industry a good bet,” Dayton told me. “The key thing for investors is to think about which companies are going to be sitting on top of this geyser when it goes off.”

Author Kyle Chayka can be reached at chaykak [at] gmail [dot] com or on Twitter @chaykak. Illustrations by Seth T. Hahne.