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Marijuana business failure rate of 40 percent not bad, says industry expert

In recent days, the Denver Post reported that the number of medical marijuana businesses in Colorado has dropped by more than 40 percent since its peak at the end of 2010 -- from 1,131 to 675 over the course of fewer than three years.

That may seem like a precipitous slide. But one industry expert says that after weighing the various factors and challenges unique to the medical marijuana business, the decline isn't calamitous as it might appear.

That's the view of Shawn Coleman, past head of the Cannabis Business Association and current boss of his own firm, 36 Solutions. These days, he's lobbying on behalf of Vicente Sederberg, a law firm whose principals are Brian Vicente, a primary proponent of Amendment 64, which allows Colorado adults 21 and over to use and possess small amounts of marijuana, and Christian Sederberg, who represented the A64 campaign on the governor-appointed task force that recently passed its implementation recommendations to the Colorado legislature.

Coleman points out a factoid that appears in the Post story, albeit in a less-than-prominent place: 30 percent of all new businesses in any industry fail within the first two years.

"That parenthetical reference to the failure rate of new businesses -- you're talking about 30 percent of businesses entering an already mature and established market," Coleman says. "So you're not really comparing apples to apples when 100 percent of this industry is new.

"If you really want to start the clock at the passage of the first marijuana code in 2010" -- HB 1284, which established rules and regulations for the MMJ biz in Colorado -- "you're really talking about businesses that are just turning three. And then think about the completely out-of-the-ordinary things the industry faced with the drafting of that bill."

Amendment 20, the 2000 measure that legalized medical marijuana in Colorado, "was silent about whether there should be retail distribution of cannabis," Coleman points out. "So to get the bill passed, the general assembly was responding to an industry that was already in place. And while some members who voted for the bill thought the industry was a good idea and wanted to support it, plenty didn't feel the same way -- which is why some parts of that law were designed to create some contraction."

Indeed, HB-1284 co-sponsor Chris Romer made no secret of his desire to reverse the growth rate of MMJ businesses with the legislation. In November 2009, he said, "I fully expect well over 50 percent of the dispensaries will go out of business."

By that standard, the industry as a whole is actually doing better than anticipated at this stage of its development. In Coleman's view, 30 percent of the business losses since 2010 "are related to market forces," with the additional 10 percent "by design."

Of course, the causes of death for assorted dispensaries vary widely.

Continue for more about the failure rate of medical marijuana businesses.

 

Outside Cherry Top Farms on the day of the bust.
Outside Cherry Top Farms on the day of the bust.

Recall the story of Cherry Top Farms, which was closed after federal agents followed trafficking suspects there -- and once they saw the marijuana the center contained, they were duty-bound to seize it. (As you know, marijuana remains against federal law, whether it's being used for medical purposes or not.) And last year, Wanda James shut down her edibles business, Simply Pure, due to an inability to secure banking services for the operation -- a big issue that will get even larger if recreational marijuana sales go into effect later this year or early next.

"The banking issue is huge," Coleman says. "The idea that everyone who came into this industry was a former drug dealer who couldn't hack it in a regulatory environment isn't correct. Many people came to this industry with good business experience in other industries, and they viewed it as an entrepreneurial opportunity. But they were used to dealing with restaurants or other types of businesses, and when they took a look at the regulatory environment, and saw rules that were much more strict than anything they'd dealt with before -- and when they realized normal tools like banking weren't available to them -- they said, 'This isn't for me. I'd rather do something where the playing field is more level.'"

Granted, lots of other shuttered MMJ businesses faltered for the simplest economic reasons -- revenues didn't cover sky-high costs enhanced by jacked-up licensing fees and the like. But although Coleman thinks many of the rules put forward by the Department of Revenue are onerous, and is happy there's a move afoot to reconsider some of them, he sees an upside to the regulatory process. He uses Boulder as an example. "The city has licensed all these businesses not once but twice. The result is a very high compliance rate and a level of professionalism that has increased significantly in that time frame."

Moving forward, Coleman says, "I think we'll see a stabilization of the industry. And for those who've made it thus far, their businesses have matured, and they've grown accustomed to working in this industry. They're more nimble, more able to adjust quickly to a dynamic environment. The entrepreneurs who have been successful in this space can be successful at anything, because anything else compared to this will probably seem easy."

With all of that in mind, Coleman says, "40 percent really isn't that bad."

More from our Marijuana archive: "Medical Marijuana Enforcement Division: No decision about Cherry Top Farms reopening."


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