Pubdate: Sun, 30 Nov 2014
Source: Denver Post (CO)
Copyright: 2014 The Denver Post Corp
Contact:  http://www.denverpost.com/
Details: http://www.mapinc.org/media/122
Author: Tom Downey
Note: Tom Downey is a licensing attorney in Colorado and former 
legalized marijuana regulator in Denver who happens to have never smoked pot.

ALL THAT GLITTERS GREEN IN COLO. IS NOT POT GOLD

While nearly half the states in the country have some form of 
legalized marijuana and others are moving that way, many 
entrepreneurs-to-be have false visions of easy money.

Despite common lore and portrayals in the media, few Colorado 
marijuana businesses have made a great deal of money, and many more 
than expected have failed. There have been "Three Waves" so far in 
Colorado's legal pot trade.

The medical marijuana industry in Colorado started five years ago, 
manned almost exclusively by former illegal pot growers.

Many had passion for the marijuana movement or a genuine desire to 
help people in pain. A great number, however, were looking to make a 
quick buck.

The recession was in full bloom, and they were able to find cheap 
space from desperate landlords. They also faced little regulatory 
scrutiny beyond zoning compliance and avoiding criminal violations. 
They relied upon word of mouth for guidance, supplemented by criminal 
defense attorneys without experience in regulatory or transactional 
law practice.

Colorado voters passed the medical marijuana constitutional amendment 
in 2000, but the General Assembly did not agree on enabling 
legislation until ten years later.

Frustrated with the lack of action, proponents started opening up 
cultivation centers and dispensaries in 2009. State and local 
governments played catch-up, imposing regulations and licensing 
structures, but the existing First Wave was grandfathered in.

The Second Wave started in late 2010, made up of non-marijuana 
business people stepping into the industry. Typically, a real estate 
developer leased warehouse space to a medical marijuana grower, saw 
poor business practices and great opportunity, and bought out the 
tenants. They succeeded, but not as conventional wisdom has assumed. 
They worked tremendously hard, bringing legitimate business practices 
to an incipient industry. They weathered extreme changes in both the 
pot market and regulatory requirements.

When legal medical marijuana sales increased dramatically from 2010 
through 2013, the industry started shaking out into an oligopoly.

A small business savvy minority of the FirstWave combined with the 
Second Wave to represent the lion's share of the expanding market. 
Their success has been measured in the media coverage and the tax 
revenues. While the total profits have been significant, few pot 
businesses have experienced the successes portrayed in the press.

The marijuana facilities of 2014 are unrecognizable from their 
ancestors. The dank basement grows have given way to massive and 
highly technical cultivation centers. Those who have succeeded are 
not sitting on piles of profits, as they have continually re-invested 
in their operations. Those without state-of-the-art functionality 
need money to upgrade, or they will be unable to compete. Those who 
have invested in the best and latest operations are 
property-and-equipment-rich, but cash-poor.

This capital demand has created the Third Wave. Starting in the last 
year, with legalized recreational marijuana coming on line, new money 
is coming into Colorado's marijuana industry. They are sophisticated 
investors with reasonably deep pockets. Their goal is not just to 
make pot money in Colorado, but to hone their systems, processes and 
brands before replicating their efforts in other states.

They must be wary, however, of the potential pitfalls. The most 
common mistake is to rely too heavily upon the representations of the 
sellers. While most Colorado marijuana businesses have trustworthy 
owners and great potential for real returns on investment, others are 
desperate to sell and have a history of illegal activity.

The next warning is that the short-term profits will not sustain 
their earlier growth.

A supply/demand clash is also on the horizon. As bigger, more 
efficient grow facilities are coming on line, the amount of available 
legal marijuana will increase. This higher supply will outpace the 
growth in demand. The resulting glut of product will likely trigger 
two outcomes: collapsing prices and production caps. This will force 
more operators out of business and accelerate the industry hegemony by a few.

Two years from now, Colorado's marijuana trade will be strong and 
quite successful. There will be many short-term casualties along the 
way, along with plenty of lessons for other states.
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MAP posted-by: Jay Bergstrom