Marijuana News

The Fight to Raise Capital

When Wanda James was working to open her first cannabis dispensary over ten years ago, she was poised with many stressors, such as raising capital and worrying about not going to jail in the midst of it.

In 2009, James and her husband, Scott Durrah, opened the first Black-owned dispensary in Denver, Colo., the Apothecary of Colorado. And in 2010, the couple launched Simply Pure edibles and became the first African Americans in the state "licensed to own a dispensary, a grow operation and an edibles company," Cannabis Dispensary previously reported.

The cannabis industry was in a "very different place back then," James said. Not only did she have to stress about acquiring funding, but she also had to worry about the negative comments she would get from others on how she was making a wrong decision.

"In 2009, I remember The Denver Post wrote an article called ‘Coming Out of The Cannabis Closet,’ and I got so many phone calls from all of the politicians that I work with and business people telling me that life as I knew it was over, [and] I ruined my reputation," James said. "And that was a real thing."

James expressed that the money involved in opening a dispensary in 2009 was first and last month’s rent payment, a security deposit, and whatever extra money owners wanted to put into the business.

 
© Courtesy of Cannabis Business Times
Simply Pure Dispensary in Denver, Colo.

"We’ve always been able to have outside investors," she said. "We just had to go through a bunch of ridiculous gymnastics to make it happen, which means we had to take money in as a personal loan to the owners of the dispensary. Then, the owners could put that money into the dispensary and then pay back the investors through a personal loan or a lien on their house. So, we’ve always had that ability, but now we just have the legal, straight-up ability to be able to take that money."

"If you wanted $5 cabinets or if you wanted $3,000 cabinets, it was entirely up to you," she said. "Our first dispensary and grow facility probably cost us around $200,000, and that was financed through credit cards. … A few friends put some money in, but I didn’t have a finance team, and we didn’t have to do all the things required today because [back then] it wasn’t about money; it was about not going to jail.

And several years later, in 2019, Colorado’s cannabis industry opened up to out-of-state money for the first time. While James said it was a big move for the state, she didn’t necessarily change her strategy. 

James said that it’s apparent more people are interested in investing in cannabis today than before, as they see it as this "fast-growing, multi-million-dollar industry" in the media; however, when they "actually look at it, they quickly decide that they don’t want to get in," she said.

"And the reason for that is simple: it’s the 280E [Marijuana] Task Penalty," she added. "It’s the regulatory framework, which is highly overreaching, that is causing businesses not to be profitable. It’s about all of the bad stories of investor partnerships that have gone wrong throughout cannabis. And quite frankly, in a lot of cases for a lot of businesses, their books are a mess because of all of the gymnastics you have to go through to run a business."

James expressed that small businesses are typically the ones that have the best books and profit margins but are also the ones that struggle to find investors because the more prominent investors generally are only interested in investing in companies that have an extensive reach.

So, the challenge becomes finding the right investors for the right company, she said.

Finding the Right Investors

To find the right investors, James suggests determining your strategy for growth and what you are trying to achieve.

"Bringing on the wrong partnerships is expensive, or I should say, getting out of the wrong partnerships is expensive," she said. "So, not all money is good money."

James encourages businesses to acquire investors who are realistic about the industry.

"There are still investors that think, ‘If I invest a thousand dollars in August, that by December, we’re all going to be billionaires and retired,’" she said. "So, it’s about managing those expectations as to what is real about the industry and also having an [outlook] on your growth. Because if you take on too much debt, you could lose your company. If you take on the wrong type of debt structures, you could lose your company, and that’s happened several times."

She expressed that it often happens to women business owners in Colorado because they generally aren’t always in the "same circle" as those who can find trustworthy investors. So, they must go outside that circle to acquire capital and end up with partners who want to take over their business.

For example, James is currently looking to upgrade her greenhouse lights to an LED system for several reasons and said it would cost around $150,000. 

But where does she get the funding to do that?

"If this was a legal industry, I would go down to Wells Fargo and would be like, ‘I run this amazing company, been running it for nine years, we’re a solid cash flow, and everybody is happy. I’d love a loan for a hundred thousand dollars,’ but we can’t do that," she said. "So, now I’ve got to go to somebody that wants 20% of my company for $150,000."

Invest At the Right Time

"How you raise money early on and how you capitalize your business early on is going to be key," James said.

She recommends that business owners think about their business in stages and look at their finance team with the same lens as their growers or dispensary managers.

"I think that a lot of people go out there, and they’re like, ‘Oh my god, I got a dispensary license, we’re all going to get rich!’ and then they do their very first raise on how rich they’re going to be," she said. "It’s going to be a long time before they reach that or even break even. So, if you think you need $1 million, you need five, and if you think you need five, you need 15."

"So, make that first capital raise enough to get going, then do a seed [funding] round," she added. "Don’t give up all your equity and everything else based on, ‘We’re gonna have 400 dispensaries across the nation.’"

While James has been in the cannabis business for over ten years, she said she broke even for the first time two years ago, and this is the first year she can actually "breathe."

"And I mean, [breathe] just a little bit," she said. "We’re not buying luxury yachts yet or anything like that, but at least I feel like I can pay the staff without having to worry about payroll every two weeks, and it’s that dire this many years into it."

The Need for Change

As the owner of the first Black-owned dispensary in Colorado, James can attest to the difficulties minorities face when entering the cannabis industry.

According to data from the Colorado Department of Revenue Marijuana Enforcement Division, as of Sept. 1, minority owners make up only 16.3% of Colorado’s cannabis industry.

And while many states, like Colorado and Illinois, have begun to embrace social equity licensing programs, James said the processes are "criminal."

For example, Denver is currently reserving new cannabis licenses for social equity applicants to offset the years in which cannabis was legal, but the licensing process wasn’t inclusive of equity.

So, as long as a person qualifies as a social equity applicant and can find the correct location and zoning to open a business, they can likely acquire a license; however, James said it’s impossible as there are not enough spaces in Denver.

"Colorado was clearly lying to Black and Brown owners to say that Denver is open for business and we can open up a social equity dispensary, but then clearly know that there are no spaces that are a thousand feet from other dispensers, a thousand feet from a school, a thousand feet from a park, a thousand feet from a church, and whatever else those requirements are. They do not exist," she said.

James has been looking for a new dispensary location in Denver for the last two years but said she could not find a spot that fulfills the city’s regulations. So, she is asking the city of Denver to lessen the distance requirement between dispensaries.

"Fine, a thousand feet from schools, we can all do that," she said. "But now we want to move it to 500 feet from other dispensers because you can have liquor stores right [next to each other], and that’s not a problem. So, we’re asking Denver to change that because that’s the only way it’s going to be fair for social equity."

But aside from what needs to change on a state-by-state basis, the biggest issue is federal legalization, James said. 

"I’m tired of the over-intellectualizing of legalization," she said. "Look, New York, Illinois and California, all have full-on legalizations on the books for big states, and 38 states are medically legal. Yet, the federal government doesn’t know if it should be legalized? [They] take 40% to 60% of our income off the top from the 280E Tax Penalty [anyways], so why are we even discussing this at this point?"

"That’s the only conversation that we need to have," James added. "If we would just legalize it, we would have more Black and Brown owners because we could go to the SBA [U.S. Small Business Administration]. We could have more Black-, Brown- and women-owned businesses. We could have healthier businesses out there. So, I think we just have to keep pushing that message that politicians just need to do this. Because it ends all of these issues that we’re talking about."

 

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