California Marijuana Start-Ups, Shut Out From Banks, Turn to Private Backing

California Marijuana Start-Ups, Shut Out From Banks, Turn to Private Backing


Marijuana is becoming legal in California, and entrepreneurs are rushing in with infused artisanal chocolates, specialized farming equipment and security teams to guard large hauls. On Jan. 1, companies will be able to produce and sell marijuana in the state, making it one of eight in the United States where the recreational use of cannabis has been legalized. But finding expertise and financing won’t be easy.

Cannabis use still lacks legal standing with the federal government. That means growers, processors and retailers can’t open accounts or access lines of credit from federally insured banks. They can’t write off business expenses when they file their taxes, and it’s extremely difficult to purchase crop insurance (think of the recent spate of fires in California).

“It’s federally illegal, and that makes running a cannabis business more challenging than arguably any other kind of business,” said Kris Krane, co-founder of 4Front, a medical marijuana investment and management firm.

Cannabis-focused accelerators and investment companies aim to change that.

These enterprises have long been a presence in Silicon Valley, offering mentoring and investment in exchange for an ownership stake. Companies that provide these types of resources are critical to expanding a nascent industry around legal marijuana, said Mr. Krane, if only because they can introduce its entrepreneurs to angel investors and other private capital sources.

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Most Octavia Wellness products have little to no THC, the psychoactive component of cannabis. Ms. Tice, its founder, worked with an accelerator to develop and expand her business.

Credit
Amy Harrity for The New York Times

Funders have reason to be interested. Selling cannabis in California has the potential to generate $5 billion a year, once a critical mass of businesses have proper permits, according to the Agricultural Issues Center at the University of California at Davis. Each harvested acre of cannabis could be worth millions of dollars, based on current prices in Washington, Oregon and Colorado, according to Greg James, the publisher of Marijuana Venture, a monthly business magazine.

Two years ago, Ben Larson and Carter Laren co-founded Gateway, an accelerator in Oakland that has helped expand 19 cannabis-related start-ups specializing in a wide variety of business activities, including payment solutions, cannabis products aimed at seniors, agricultural technology and hemp-based plastics.



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