Legalization turned cannabis into a multibillion-dollar industry seemingly overnight, but this hot new market has had more—and more unusual—growing pains than most.
Many experts predict significant market expansion ahead as more states legalize medical and recreational uses of cannabis, the plant containing mind-altering chemicals THC and CBD commonly found in marijuana. But a new case study by Harvard Business School professor Ayelet Israeli about a new cannabis-infused beverage company reveals some of the significant and exceptional challenges budding entrepreneurs face in the cannabis industry compared to other sectors.
“The level of uncertainty is so high for cannabis entrepreneurs. The challenges are quite unique. ”
Though entrepreneurial success stories abound in the nascent market of cannabis products, the sector is rife with regulatory and market barriers unseen in other industries. They all add up to extra costs and burdens for young businesses trying to establish themselves, says Israeli, the Marvin Bower Associate Professor of Business Administration.
The challenges include operating at scale when cannabis sales are still illegal at the federal level—and operating legally across states with a dizzying array of manufacturing, retailing, packaging, and advertising regulations.
“The level of uncertainty is so high for cannabis entrepreneurs,” says Israeli, who co-wrote the case with Annie Wilson, lecturer of marketing at the Wharton School at the University of Pennsylvania. “The regulatory issues faced in this industry are ones that most other entrepreneurs don’t run into. The challenges are quite unique.”
The study follows the business challenges faced by Luke Anderson, who received an MBA from HBS in 2016, and cofounder Jake Bullock. The pair founded Cann while working as consultants at Bain & Company in 2018.
Alcohol alternative with a social mission
Considered one of the first cannabis beverage firms, Cann has sold more than 10 million cans of low-calorie flavored seltzer infused with low doses of cannabidiol (CBD) and tetrahydrocannabinol (THC), two cannabinoids found in marijuana and hemp.
Cann distinguished itself by offering only “micro-dose,” or “low-dose,” beverages that appeal to consumers who only want to get mildly “buzzed,” as opposed to “stoners” who seek out heavier quantities.
Anderson and Bullock positioned Cann’s beverages, which come in flavors ranging from grapefruit rosemary to lemon lavender, as alternatives to alcohol. As queer founders, the duo also committed themselves to inclusive marketing aimed at the LGBTQIA+ community.
Initially launched with $1.5 million in seed funds and the founders’ own money, the firm today has a number of investors, including celebrities such as Gwyneth Paltrow and Rosario Dawson, and recently raised $27 million in Series A funding. Cann’s products are now available sold in 34 states in the US and two provinces in Canada.
Sharks in these (sparkling) waters
Yet Cann’s early successes haven’t come easy. At the very outset, fundraising was hampered by challenges unique to the cannabis industry, such as investors’ fears about backing ventures while sales were still illegal under federal law. Other investors were concerned about how consumers would react to cannabis-infused beverages, a relatively new product line, while others worried about too many new cannabis products flooding the young market.
Anderson and Bullock also had to contend with the fact that they can’t transport certain cannabis-related items across state lines due to federal interstate laws, forcing the owners to concentrate many duplicative business operations, including manufacturing, in individual states where cannabis is legal.
“In many of the places where it’s raised awareness, people can’t even buy the beverage due to state laws. ”
Then there’s the varying state regulations, such as some states requiring that all cannabis products (including smoke, vapor, edible, and beverage products) be sold via designated “dispensaries,” not at more accessible or common outlets such as liquor stores, supermarkets, and convenience shops. Regulations regarding the marketing and advertising of cannabis products, such as what can and can’t be printed on packaging labels, also vary across states.
Even when they come up with a catchy advertising idea that’s acceptable to regulators and consumers—such as the Cann-produced music video called “Taste So Good (The Cann Song),” which recently went viral—the impact can be limited by whether or not consumers can actually access the product.
“You’re creating a lot of awareness with these ad campaigns,” says Israeli, who cofounded the Customer Intelligence Lab at the Digital, Data, and Design Institute at Harvard. “But, in many of the places where it’s raised awareness, people can’t even buy the beverage due to state laws.”
Challenges and opportunities for entrepreneurs
The net result of all the varying cannabis-industry hurdles: Entrepreneurs can’t always resort to the most cost-effective ways to manufacture, distribute, market, and advertise their products.
“They’re facing challenges above and beyond what you would typically see in other industries,” says Wilson. “In the cannabis industry, there are so many more additional costs and regulations, and high uncertainty due to the unclear timeline for federal legalization. It can be daunting.”
“You have to constantly reinvent the wheel, state by state,” Israeli says.
Those and other obstacles ultimately raise questions for entrepreneurs looking to engage in this nascent industry, and to all leaders moving into uncharted waters, especially those with heavy regulation. Entrepreneurs or investors considering this growing sector might ask:
What growth opportunities does the current market offer? How and where to expand is a critical question for cannabis entrepreneurs, like Cann’s founders. Most markets become saturated with time, but founders who venture too far, too soon might have to use bespoke strategies to navigate the splintered regulations.
Are there ripe customer segments waiting to be tapped? Cann has prioritized larger marketing campaigns with the goal of raising overall awareness, but with mixed results. Still, while targeted marketing campaigns can be more effective in some cases, such an approach is challenging in the cannabis industry due to advertising regulations.
Does the brand have the stamina, resilience, and available capital to last in an evolving market? The fractured nature of the cannabis market requires constant problem solving. The best practices of business—economies of scale and repeatable models, for example—might not apply.
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Feedback or ideas to share? Email the Working Knowledge team at hbswk@hbs.edu.
Image: iStockphoto/cagkansayin