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Coming immediately around the bend at California’s cannabis operators is a massive onslaught of regulatory detail that will require millions of dollars to navigate to compliance. Regulators seem to think there’s plenty of cash in cannabis to make this happen from the “starting line” regulations they have crafted. To be honest, I’m not so sure.

Marijuana Business Daily’s Factbook 2016 reports less than 25% of cannabis businesses are funded by outside money; that leaves 75% of all cannabis businesses as self-funded! And more than 50% report they need capital within the next year to survive. While news media insists on showing fluttering cash machines with each cannabis story, it’s my opinion that our industry is gravely underfunded to meet “starting-line” regulation. There is a clear disconnect between the perception of this industry’s wealth and reality; the reality is money is scarce and difficult to shepherd into this industry.

The lack of investment is hardly surprising; here’s a sneak-peak at what investors face: Few cannabis companies have historical performance data (in a black market, data is evidence of illegal activity.) Few cannabis operators use contracts (in a black market, the courts won’t enforce them.) Similarly, few have expertise in scaling business growth (in a black market, scaling invites law enforcement attack.) Say, did I mention the abject lack of banking or credit line access? It’s easy to see why capital is not just pouring into our state’s industry.

Sadly, the fact is that investment capital is critical to the success of our industry meeting “starting-line” regulations. The lack of capital to meet regulatory burdens just reinforces the continued proliferation of the black market. Period. End of sentence. Full stop.

Our government leaders must learn that “more carrot, less stick” is the smarter policy choice for an industry that has for years blossomed in the dark under threat of intense criminal prosecution. What we need are policies that encourage a new investor class; policies that acknowledge investor economic risk is critical to our state’s successful transition from a policy of “ban and imprison” to “tax and regulate.”

There is a clear disconnect between the perception of this industry’s wealth and reality; the reality is money is scarce and difficult to shepherd into this industry.

Some Pre-Dawn Advice

Just before the dawn of California’s regulated cannabis environment a lot remains uncertain, but one thing is dead certain, a great number of today’s operators will not survive these next few years of transition – not because they can’t produce great product, but because they don’t know how to meet the administrative demands of a regulated industry.

While California’s operators are cannabis production leaders par excellence, one thing we are not is administratively prepared. Regardless of how the Sacramento battles resolve over issues of self-distribution, vertical markets or the definition of “ownership” – our industry veterans are just months away from the harsh reality of triplicate forms, detailed process standards and arrogant inspectors. Let me give you a little example of what’s in store for you:

Sometime in 2015, after I had co-founded a high profile California cannabis company, we boldly invited a public health regulator to tour our multi-million-dollar edible manufacturing plant, designed and created to meet the highest food manufacturing safety standards. Before the tour, our industrial chef co-founders stapled an 8.5×11 sheet of paper on a big empty wall. I asked him, “what’s that?” to which without a smile he responded, “our visitor’s policy.” I laughed thinking it absurd. So later, this regulator comes, and tours the facility – seeing state of the art food manufacturing equipment at work producing highest quality cannabis edibles. We were so proud. At the end of the tour as we’re seeing him to the door, he stops and coyly asks if he can take a photo. We say, “sure.” And what’s he do? He shyly walks right over to that silly piece of paper on this huge empty wall and takes a photo of our “visitors policy.” That’s what excited him.

So how do we adequately prepare for this Kafkaesque future of ours? Along with legal counsel, hire administrative support immediately – and I don’t mean your ex-partner’s sister’s friend who just finished a business class at community college. I mean hire an expert in business processes – someone with experience in how to build business processes, how to document those processes and most importantly, how to implement those processes. Processes (a.k.a “SOPs” or Standard Operating Procedures) are critical because at a minimum processes and systems ensure consistency, which in turn promotes employee and consumer safety.

The good news about compliance processes is that it’s not hard. The bad news is that it’s painfully tedious and is a cost center that won’t drive revenue. For those reasons it’s so is often ignored until it is too late. Remember – regulators could give a rat’s ass about your revenue, your high quality product or your marketing brilliance. What excites regulators are written processes that are well implemented. To their mind, if your processes are in place and followed, their departments goals of promoting employee and consumer safety is accomplished.

The reason I seize on processes is because above all else, thinking about processes will force you to think in a way that regulators think, which is the first step to maturing into the post regulation environment.

If you don’t know anything about business processes, you would do well to read up on the subject now – as they take a lot of time to develop, and you don’t have a lot of time. Here are a few resources to orient you to this subject that will be so critical to your surviving this transition to a regulated market: