Pubdate: Sun, 01 Nov 2015
Source: Denver Post (CO)
Copyright: 2015 The Denver Post Corp
Contact:  http://www.denverpost.com/
Details: http://www.mapinc.org/media/122
Author: Alicia Wallace

LEGAL TO LEGIT

Colorado Marijuana Industry Sheds Stoner Stigma and Cultivates a 
Fruitful - and Portable - Business Model

Justin Henderson was a little gun-shy at first. But it was 2008, and 
the Great Recession had stalled the real estate industry, leaving the 
Denver-based developer sitting on properties that weren't 
cash-flowing. When a couple of friends and colleagues started leasing 
their warehouses to pot growers, Henderson weighed his own options. 
"It's a tricky thing to tell everybody in your conservative financial 
life that you're part of the marijuana industry," he said.

Henderson now heads a company he believes is poised to become a mover 
in the cannabis industry beyond Colorado's borders.

To do so, Henderson's Peak Marijuana Dispensary, 260 Broadway in 
Denver, is diversifying - developing a line of marijuana products, 
acquiring hemp grows, keeping an eye on the implications of health 
care research - and exploring how to use intellectual property and 
licensing agreements to expand to other states.

As Colorado's legal marijuana market matures, these types of 
prospects are becoming more common. But businesses also are prepping 
for a future that may include major market corrections and 
consolidation, and be influenced by legalization in other states.

Nearly two years after retail sales of recreational marijuana became 
legal in Colorado, the industry shows little sign of slowing.

In August, monthly marijuana sales surpassed the $100 million mark, 
advancing the yearly total closer to the $1 billion goalpost. The 
state tallied about 2,000 licenses for marijuana-related businesses, 
and grow operations have gone from gobbling up metro Denver 
industrial real estate to filling greenhouses in sun-drenched Pueblo County.

Business formations are down this year from last, but they continue 
at a strong pace. And compared with the early years of medical 
marijuana, businesses that are forming seem to be surviving at a 
higher rate, according to a Denver Post analysis of Colorado 
Secretary of State records.

Only 15 percent of businesses with the word "cannabis" in their names 
that registered with the state between 2008 and 2013 remain in good standing.

But nearly 60 percent of cannabis businesses that launched in 2014 
are in good standing, as are 93 percent of those formed so far this year.

While it is too soon to know how many of those businesses will 
survive long-term, the new crop is remaining in good standing at 
rates above the state average for this year and last.

Colorado's pot industry hasn't hit its ceiling, but at some point it 
will reach a saturation point, said Taylor West, deputy director at 
the National Cannabis Industry Association.

"I do think people who are looking for something of an early-mover 
advantage are looking in other states," she said. "Colorado is not a 
finished market, but it is certainly a more mature market."

An initiative to allow the sale of recreational marijuana may land in 
front of California voters in November 2016, and that could shift the 
center of gravity from Colorado.

Medical marijuana has deep roots in California, logging about $1.3 
billion sales in 2014, or about half of all legal pot sales in the 
U.S., according to Oakland, Calif.-based ArcView Group's "The State 
of Legal Marijuana Markets" report released early this year. ArcView 
is a cannabis industry research group and investment network.

Nationally, legal marijuana hit about $2.7 billion in sales, up 74 
percent from 2013, said Patrick Rea, executive editor of the ArcView 
report and co-founder and CEO of CanopyBoulder, a startup accelerator 
for ancillary cannabis businesses.

If California approves recreational pot sales, West and other 
industry observers project a migration to take place as regulations 
are developed.

"I think everybody is opening an office in California as quickly as 
they can," said Micah Tapman, a partner and program manager of 
CanopyBoulder. "We are."

Nathan Mendel, president of Your Green Contractor in Englewood, is 
among those looking to expand outside of Colorado, using the 
expertise he developed locally in converting old buildings into grow 
facilities.

Denver is running out of warehouse space. The next business phase, at 
least locally, will probably require new greenhouse construction.

Mendel said he has been approached to convert an old potato storage 
facility in Alamosa and has potential conversions coming together in 
Massachusetts, Illinois, Washington and Oregon.

Local clients are giving him repeat business, and he will help one 
develop a grow operation in Nevada, where Mendel plans to open a Las 
Vegas branch.

Mendel points to signs of a maturing industry. Clients now write 
checks instead of paying with bags of cash. And although banks still 
won't finance buildings, hard money lenders are filling the gap. He 
said he has yet to be stiffed by a cannabis client.

CanopyBoulder is in the throes of its fall program in which business 
leaders, investors and industry members help to mentor and build startups.

CanopyBoulder's 19 portfolio companies have been fairly fundamental 
to this point - specializing in developing products such as 
point-of-sale analytics and business-to-business commerce platforms, 
Tapman said.

As the industry evolves, so will the entrepreneurial activity. And 
it's there where Colorado probably will maintain an authoritative 
position, said Adam Orens, director of the Marijuana Policy Group and 
BBC Research & Consulting.

"I think Colorado has a great shot at remaining that innovation hub 
in this cannabis space," he said. "I think the next few years are 
very important in cementing that."

Amendment 64, passed by voters in 2012 , gave Colorado a year to get 
its regulations in place and begin issuing retail sales licenses.

"The longer it takes California, the better it is for Colorado," 
Orens said. "We have strong human capital here."

Denver software developer Rob Rusher is among those who saw potential 
in being a first mover. His app, GrowBuddy, replaces paper grow 
journals. It is free to download, but the data it gathers on what 
conditions produce what kind of yields for what kind of strains 
represent a treasure trove.

Growers from around the globe who are using his application are 
cultivating nearly 12,000 new cannabis plants a month and providing 
highly detailed records, Rusher said.

After boot-strapping for months, Rusher is now hearing from big 
corporations that want to partner with him, and he is close to 
raising his first round of angel financing.

The extent to which the ability to buy and consume pot legally has 
affected Colorado's tourism market remains anecdotal at best. Full 
economic-impact studies are still being conducted.

However, the Colorado Tourism Office says it's minimal.

About 7 percent of out-of-state travelers visited a marijuana 
business, according to the tourism office, which cites its own 
marketing effectiveness research. Only 2 percent of visitors to 
Colorado are motivated to come to the state because of legal weed.

But some dispensary owners say tourism plays a key role in their businesses.

Peak Marijuana owner Henderson estimates that his store traffic is 
evenly split between residents and out-of-staters. During the four 
days surrounding April 20 - the unofficial pot holiday - a total of 
82 buses and 17 limos stopped by his central Denver store.

On a normal weekend, about two to three tour buses drop off dozens of 
patrons at Peak, he said.

Henderson said he knows the novelty may wear off, but he hopes to 
retain clientele by being "unapologetically top shelf."

Peak is building out a 10,000-square-foot grow and manufacturing 
facility for its three product lines: Hush organic pot, Mojo 
pre-rolled organic joints and Coldwater organic hash.

The company also has bought a 40-acre hemp farm in El Paso County. 
Henderson sees potential in cultivating hemp for cannabidiol - a 
valuable, nonpsychoactive chemical compound found in hemp, and its 
cousin marijuana, that has medical applications.

"We all want to succeed in this industry," he said. "It's hard enough 
to just abide by the rules and regs without every single one of your 
competitors trying to bury a knife in your spine."

Colorado's marijuana industry now is reminiscent of the early days in 
the natural products and supplements industries, said CanopyBoulder's Rea.

Both were born out of the counterculture of the 1960s and both have 
demand driven by consumers seeking an alternative, he said. In the 
case of marijuana, it's an alternative to recreational drinking or to 
pills for medical needs.

But the "irrational enthusiasm" that has led to hundreds of 
dispensaries and grow operations popping up around the state probably 
will drive change, he said.

"It's simple Econ 101: When you have a slower-growing population 
(and) a fixed market and you increase supply, what happens? Prices go 
down," he said. "We'll see a rapid decline in retail and wholesale 
operations. I expect a bloodbath when it comes to growers."

Rea likens the potential correction to what happened to the dietary 
supplement industry in the mid-1990s. Flush with cash, numerous 
brands hit the shelves. But after more stable federal regulations 
were enacted and price cuts were made by giant GNC, companies across 
the industry lost value.

"I'm waiting for a major player to make a dramatic change in course 
like that," Rea said. "It'll be a bellwether, one of the major 
players that will cause everybody to gasp."

Consolidation already is occurring, and some brands are growing in 
stature: LivWell now has nearly a dozen medical and recreational 
shops in Colorado.

Size has its benefits. However, in a time when regulations are 
dynamic, chains also can run into barriers, said Michael Elliott, 
executive director of the Marijuana Industry Group, a Denver-based 
trade association for the marijuana industry.

"It can be tough getting too big too quick," Elliott said. "The tax 
burden can be enormous."

Aside from the lack of banking, and the fact that federal regulators 
could flip the switch on the industry in a second, the chief concerns 
now are drilled deep in the nuances of rules: How is a test 
conducted? What are the means of testing more efficiently? What can save money?

"We're down, nose to the grindstone, trying to implement these 
regulations, trying to cut out the fat," Elliott said.

How successfully the industry matures in Colorado is critical for the 
marijuana industry's future in general, he said.

"We're being given this window to prove that we can do it in a very 
safe manner," he said, "and I think that we've proven that we could."

Staff writer Aldo Svaldi contributed to this report.
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MAP posted-by: Jay Bergstrom