Why It's So Hard for Marijuana Startups to Get Funding
And why it may never be any easier.
The legal marijuana business can be tough. It's prone to ebbs, flows, highs, lows, booms, busts. And the number of startups hoping to cash in on the weed world rivals the quantity of mainstream entrepreneurs hoping to cash in on Internet riches. But landing investment capital is difficult for tech firms, or any other small businesses, and it is nearly impossible for most marijuana startups.
“Just like any other company: Investors will look at if your company has a good team,” David Hua, CEO of Meadow platform previously told KINDLAND. “Are they producing a good product? Do they have really good traction? And what is their road map?”
Hua’s Meadow platform offers cannabis businesses point-of-sale software and, so far, has been attractive to investors. Meadow also operates a delivery service, tele-health medical-marijuana recommendation service, and other digital products. The San Francisco startup secured a funding deal in early 2016.
Putting money into weed entails a lot of risk. State-sanctioned marijuana businesses are not federally legal. The money required just to pass the barriers to entry are daunting, as are liability issues that come with launching a cannabis brand. Furthermore, bankruptcy protection is not extended to marijuana operations. If a cannabis company goes under, any lenders stand to lose the entire wager.
From Los Angeles Times:
“Bankruptcy courts, which are federal, won’t take cases from cannabis businesses. In a widely cited case, a bankruptcy appellate court in Denver last year ruled that the courts cannot offer bankruptcy protection to companies that are engaging in federal crimes, even if their activities are legal under state laws. . . That means lenders have to know that if they lend money to a cannabis business there might not be an easy way to get even a partial repayment if the business becomes insolvent.”
So, until the federal legal standing of marijuana enterprise sees reform—which could be a long way out considering the anti-weed prejudice rife in President-elect Donald Trump's incoming administration—it will be a rocky road for cannabis businesses, and any banks that might want to lend the money they need to grow.