Growing the Pot Industry: A Test of American Business Ingenuity

Now that marijuana sales are legal in Colorado, but still illegal under federal law, entrepreneurs are rushing to figure out how to develop a business model for the pot industry.It's a real test of Yankee ingenuity. Entrepreneurs are jumping into a Wild West-like landscape of marijuana market opportunities. This new gold rush sometimes is referred to as a "green rush," led by "ganjapreneuers."Working within state guidelines, they are moving forward with ambitious cannabis business strategies. They see potential for big sales and profits—especially if more mid-sized businesses can transition to large, national brands.Wealthy individual investors already are tapping private equity firms for a bite of the potentially lucrative marijuana business."Our investors are from the far left and the far right," said Brendan Kennedy, chief executive of Privateer Holdings, a cannabis-focused private equity firm. "There's old money and new money. You put them in a room and they wouldn't agree on anything else but this issue," Kennedy said.Seattle-based Privateer also acquired Leafly.com, which offers online reviews of cannabis strains and dispensaries.Twenty states and the District of Columbia allow medical marijuana—and New York Gov. Andrew Cuomo announced a medical marijuana plan last week.But voters in Colorado and Washington state went a step further in 2012, becoming the first to legalize small plant amounts for adult recreational use and to regulate it like alcohol. Colorado sales began on New Year's Day. Marijuana retailers are scheduled to open in Washington state later this year.Amid this historic backdrop, a small merchant-focused pot industry is growing, alongside forerunners to national—potentially public—cannabis companies. The legal marijuana sector could unfold and function like the beer industry, with small batch varieties nabbing market share amid larger brands.For now, mass cannabis production and business models aren't as vigorous as they could be because marijuana remains illegal under federal law. Banks and credit card companies are prohibited from processing pot business transactions, according to federal rules.In an analysis of the marijuana marketplace, San Francisco-based ArcView Group forecasts a 64-percent surge in the legal U.S. cannabis market to $2.34 billion this year. The five-year national market could grow to $10.2 billion amid rising demand and potentially new state markets, according to ArcView.Supporters of legalized marijuana are pushing for ballot measures in Alaska and California."There's been a remarkable evolution in the cannabis industry," said Steve Berg,editor at ArcView Market Research. ArcView offers start-up funds to cannabis businesses. "While certain people do still smoke joints, many other formats used are constituting an increasing portion of the market," Berg said.New marijuana ingestion methods beyond smoking are helping to drive cannabis' growth. Marijuana concentrates are the fastest growing category of products. Oil extracted from raw cannabis also can offer exact dosing for medicinal purposes, including the treatment of chronic pain. Non-smoking technologies include vaporization, edibles and capsules.Beyond actual pot production and sales, more ancillary businesses are emerging, including security, insurance and e-commerce companies that support the legal marijuana supply chain.Some food-focused entrepreneurs are betting adult recreational marijuana becomes an alternative to wine consumption.Denver-based party planner Jane West, owner of Edible Events, has been throwing parties for years. As the adult legalized marijuana market takes shape, she's hosting her first cannabis-food party this month at an art gallery. She has created a tasting menu specifically designed to pair with marijuana consumption.To be clear, the food will not include weed as an ingredient due to state regulations. Instead, the cannabis food party is BYOC, bring your own cannabis. West has partnered with Uber, which lets consumers connect with drivers using a mobile app. Party rules will prohibit guests driving themselves.Roaming waiters will serve high-class munchies to sate cannabis-induced munchies. Forget doobies, chased by cheap party snacks. Imagine this scenario instead. Ingest marijuana through a sleek vaporizer. Hungry? Then nibble on bacon skewers, laced with ancho chile, finished with sweet corn chowder. Because ingesting marijuana can sometimes cause a dry "cotton mouth," West is sticking to food with high moisture content, so no bread, crackers or pretzels."I wanted high-end food pairings with 'BYO' cannabis, as cannabis is an alternative to wine," West said. "I wanted a mainstream, artisanal experience."Amid Colorado's fast-moving marijuana scene, weed and sushi pairing menus have appeared.Plus, a Denver marijuana dispensary already is experiencing a short-term shortage, a 3D Cannabis employee told CNBC last week. Amid restocking inventory, dispensary workers are rationing sales to customers.Marijuana industry experts forecast an even more robust, wholesale cannabis market once a key rule expires at the end of September. Colorado law now requires marijuana businesses to grow a substantial percentage of the marijuana they sell, which is commonly known as vertical integration."The obvious forecast is that you'd see an industry that looks like the beer industry," said Jeffrey Miron, senior lecturer and director of Undergraduate Studies at Harvard University's Department of Economics. Micro growers could produce more expensive, artisanal cannabis strains, with larger manufacturers producing more readily available varieties. "They could co-exist," said Miron."The precursors of true national cannabis companies have emerged in the form of multi-state licensors and are leveraging strong branding and scalable business models," Berg wrote in his recent ArcView report.Take the case of Denver-based Dixie Elixir, a leading maker of cannabis-laced edibles. Its products include cannabis-infused chocolate, ice cream, beverages, capsules, bath soaks and muscle relief lotion. Dixie Elixir employs a national branding and licensing strategy, with plans to grow and be acquired."These companies will be prime candidates for acquisition or public listing, especially upon federal legalization," Berg wrote in his report.Yes. Pot entrepreneurs are betting on marijuana IPOs.