Between legal barriers to traditional fundraising and few opportunities for mentorship, the landscape is still challenging
  • Racial equity in cannabis startups remains low, even in states with the stated goal of “restorative investing” for communities impacted by punitive drug laws
  • Impact investing with a racial equity lens needs to consider creative solutions to put capital in the hands of diverse founders
  • Cannabis is projected to be high-growth as more states legalize, but the networks driving it remain predominantly white

Cannabis-related startups are a hot topic for investors as restrictions around the world continue to loosen.

The global market was valued at $10 billion in 2018 and is expected to hit $100 billion by 2026. In the U.S., however, the continued federal classification of marijuana as a Schedule 1 drug creates unique wrinkles in that process. 

For one thing, the criminalization of marijuana in 1970 has had a disproportionate impact on people of color; even in the current reform era, Black people are arrested for marijuana-related offenses at three times the rate of white people. At the behest of activists, some new state and local laws recognize the need to ensure that the same communities who suffered under the criminalization of cannabis have the opportunity to make money in the new legal cannabis economy. According to a 2017 study by the nonprofit Cannabis Cultural Association, less than 20% of owners or stakeholders in cannabis enterprises were people of color; just 4.3 percent were Black.

As it turns out, integrating racial equity into the legal cannabis economy is easier said than done. Because marijuana is still illegal at the federal level, most banks cannot provide loans or accounts to cannabis-related businesses. Online-only banks or local credit unions that aren’t barred from doing business with cannabis entrepreneurs may still not want to. 

In Massachusetts, racial equity language was included in the state’s 2018 legalization bill. Ari Zorn will be the state’s second Black cannabis entrepreneur once his pending cannabis license application for Devine, the hemp retail store that he and his wife Heidi recently opened in the western Massachusetts town of South Egremont, is approved. The couple have spent more than a year navigating what they described as an overly complex process to get a license and raise capital.

“The intention with all this as reparations to people who have been incarcerated because of [marijuana] — their model is absolutely impossible for people that don’t have money,” said Ari Zorn in an interview with Karma. “If you get out of jail and don’t have a pocketful of investors, or the knowledge needed to fill out an application, a bank is not willing to make random loans to people with bad credit histories.” 

That the Zorns had the advantages of deep community ties, experience opening restaurants and other small businesses, and good credit speaks to just how profoundly difficult fundraising for a cannabis business can be. Along with a lawyer, they are working to document their licensing and fundraising processes in detail so that future entrepreneurs can learn from them as the state’s cannabis market begins to mature.

They found their fundraising solution in another rapidly-growing industry: equity crowdfunding. A chance meeting in Boston connected them with Fundanna, an offshoot of the truCrowd platform just for cannabis entrepreneurs facing the same challenges with securing seed-stage capital amid a complicated legal patchwork. Devine joined the platform in February and has raised $50,000 to date — including a surge in investors after Zorn spoke at a local Black Lives Matter protest in June. 

“We always wanted this company to be owned by the community, and with everyone home because of COVID and the Black Lives Matter protests, with people asking what they could do, the timing was kind of perfect,” Zorn said. 

On the West Coast, the fundraising challenges are still there for entrepreneurs in California, Colorado, and other states that have legalized marijuana — but a deeper network of mentors and investors is starting to emerge. The Arcview Group, a longtime cannabis investor network based in San Francisco, launched a broker-dealer arm last week to source deals with an eye to restorative justice. 

The co-founders of Vertosa, which creates cannabis infusions for beverages, self-funded their business and, like the Zorns, are seeing a new willingness to get creative.

“COVID has done an interesting job of testing out a hypothesis that we’ve long had: that cannabis might be recession-proof,” said Vertosa CEO Ben Larson. “But it’s still tough for traditional investors to wrap their head around equity investing in the cannabis space in particular.”

Because of this, Larson is observing a new willingness among investors to consider straightforward grantmaking, where the investor does not take an equity stake or any future capital but gets to seed a nascent industry. 

If any of that capital is going to reach founders of color, there will need to be a commitment by established companies expanding as well as startups. Austin Stevenson, Vertosa’s Chief Innovation Officer, pointed to the ‘back of the store’ investment as a good place to start.

“I want to see more stores that are vertically integrated, that have a wider market share, do more to lead by example,” he told Karma. “It’s not just cutting a check, it’s supporting grant funding programs and vehicles that lift community members… it’s getting good Black and brown distributors to tailor the logistics, and supply chain managers engaged to help them accelerate their production.”

Mentorship for founders of color, however, remains a problem. “Being the only Black male in the room — in many rooms — for the past five years, there isn’t a lot of mentorship,” he said. “What that speaks to is a very romantic ecosystem that is trying to be inclusive…but to be quite honest, it’s only people of color trying to uplift each other without a lot of outside resources or support.”

That said, Stevenson was quick to praise the work of Momentum, a new accelerator for cannabis entrepreneurs of color, which just announced its inaugural founder class — all selected by an advisory board made up primarily of cannabis entrepreneurs and activists of color. Momentum is a project of Eaze, the California-based cannabis delivery service that became one of the first cannabis startups to secure venture capital funding.