Wednesday, August 14, 2019

Can Small Business Survive in the World of Big Cannabis? - Valley Advocate

Can Small Business Survive in the World of Big Cannabis? - Valley Advocate


Can Small Business Survive in the World of Big Cannabis? - Valley Advocate

Posted: 14 Aug 2019 09:54 AM PDT

If you can say one thing about the Pioneer Valley, it's that we love local. We champion and support small business, artists, makers, musicians, farmers, organic food, craft beer and pretty much artisanal anything. My recent expedition to INSA — the adult recreational use dispensary in Easthampton where I stuck my toes into the world of modern cannabis — sparked my curiosity and got me thinking about local in a different light.

Technically, all legal cannabis is local — cultivated, processed, and sold in Massachusetts — because importing product from one cannabis-friendly state to another is a big federal no-no. But with very few exceptions, the Commonwealth's cannabis industry currently consists mainly of big players with very deep pockets and a hefty head start on small business owners (more on that in a minute). That includes multi-state operations like Surterra Wellness, which recently bought Northampton's NETA, and GTI, owner of Amherst-based RISE.

So, if all legal cannabis is local, why not just support the big players? Corporate entities do create local jobs, but most of the money they make does not stay within the community. A thriving local economy requires successful small businesses that funnel their dollars back into the community. It gives us the option to choose well-crafted, quality products made, owned and controlled by the people in our towns and cities.

With such well-funded dispensaries already in place, can small cannabis entrepreneurs hope to compete? What challenges do they face in their effort to secure licensing and grow their business? And what, if any, role can the consuming public play in creating a cannabis industry that makes room for small-scale craft operators?

Let it be known — I don't have an entrepreneurial bone in my body. I do, however, have the utmost respect for entrepreneurs — especially those in highly regulated industries. But I discovered a new, exponential level of respect talking with small business cannabis entrepreneurs and hearing what it takes to cultivate a space in this nascent industry.

Kristen Mara, co owner with her brother, David Cichocki, of Pioneer Valley Extracts in Florence, where they will be making and supplying cannabis products including vapes, flower and edibles.

Kristen Mara, co owner with her brother, David Cichocki, of Pioneer Valley Extracts in Florence, where they will be making and supplying cannabis products including vapes, flower and edibles. Carol Lollis photo

Let's revisit that head start I mentioned. Massachusetts provides different types of adult-use cannabis licenses: retail, manufacturer, cultivator, microbusiness (which can be a cultivator, manufacturer or both), craft marijuana cultivator cooperative, independent testing laboratory, research facility and marijuana transporter. You apply for licensing through the Cannabis Control Commission (CCC) — the governing body tasked with "implementing and administering the laws enabling access to medical and adult use marijuana in the Commonwealth."

When the state legalized adult recreational use, the CCC allowed existing medical dispensaries to apply first, which meant they received their rec licenses before other companies could get theirs. That, said Kristen Mara, co-founder and vice-president of operations at Florence-based Pioneer Valley Extracts, gave dispensaries a huge head start.

"They basically locked up the entire market," said Mara. "The dispensaries grow their own cannabis, extract and process it onsite, make their own products, and sell the products in their retail stores. They completely control their pipeline from beginning to end."

Applicants in search of a cannabis license require fortitude and persistence to navigate a byzantine set of rules and regulations governing the process. Reconciling my QuickBooks can reduce me to tears, never mind slogging through pages of bureaucratic language. I'll spare you the gory details, because I'd like you to finish this article. However, if you're a policy wonk, then head on over to the CCC website and have at it. And may the patron saint of cannabis have mercy on your soul.

An enormous amount of work takes place before a small business owner can even submit the application. Like any bureaucratic process, it involves plenty of paperwork.

Frank Dailey, owner of Boston Bud Factory in Holyoke, works on the space that will be opening soon.

Frank Dailey, owner of Boston Bud Factory in Holyoke, works on the space that will be opening soon. Carol Lollis photo

Frank Dailey, the co-founder of the Boston Bud Factory, is currently building out his manufacturing and retail facility in Holyoke, Mass. Lacking the $100,000 it would cost to hire a consultant — just to handle the application process — Dailey, like most small-scale cannabis entrepreneurs, took the DIY route.

"I wrote the business plan and every one of our operating procedures — security plans, employee handbook, our diversion prevention program, extraction process procedures, all the corporate documents. Everything," said Dailey. "It takes time and a lot of work for the little guy to learn the processes."

In addition to the paperwork, small business owners need to secure a host community agreement — a signed document between them (the cannabis operator) and the governing body of the municipality where they plan to conduct business. They must also provide the proposed location of their facility. That often requires a signed lease and paying months of rent before they ever get licensed to do business.

According to Maryalice Gill, the CCC's press secretary, applicants are not required to obtain a title or a lease before they apply for licensing.

"The Cannabis Control Commission's regulations specifically allow an applicant the ability to demonstrate a property interest through submitting a binding permission to use the premises or an option to purchase," said Gill in an email.

It may not be a regulatory requirement, but the on-the-ground reality is that very few landlords are willing to provide "binding permission to use the premises" without getting paid.

"We carried rent for six months, without any licensing, on a building we couldn't do anything with as a small company," said Mara.

Marijuana leaf isolated on white

If an applicant plans to operate in more than one town, they need to secure locations and multiple community host agreements. That means the potential of even more rent and pitching the business to towns that may have very different attitudes, rules, and zoning regulations. Depending on the town, obtaining a single agreement can take weeks or months of discussion.

Once all the ducks line up in a tidy row the application goes to the CCC, which has 90 days to issue a provisional license or deny a completed license application.

"The time it takes to complete the process depends on the initial completeness of the applicant's submitted packets, the time it takes to complete the background check, and the time it takes for a municipality to respond to the Commission," said Gill.

Again, reality can play out differently. The entrepreneurs I spoke with said it took about six months for them to receive a provisional license. What does that mean? The short answer is more work and lots of money.

Startup costs can be intense for a small business owner. Once a business has a provisional license, it's time to build out the space they secured and buy all the equipment they need. Before they can get a final state license inspection, the business must be set up as if it's operational. Think about what that means in terms of money. Small businesses must pay rent, invest in construction, buy equipment and be fully operational — without being in business.

Let's use Pioneer Valley Extracts as an example. The company currently offers three non-psychoactive, hemp-based CBD products — a tincture, a pain balm and a pet tincture. When it receives final licensing from the state, the company will also manufacture cannabis-based products. Considered a commercial kitchen, PVE's buildout required pricey items like stainless steel tables and special kitchen-grade sealants for the walls and floors.

"Once we got our provisional license, we started preparing the space and buying equipment — the security system alone cost $30,000," said Mara.

And that leads us to the next formidable hurdle.

Any small business owner will tell you how hard it is to get a bank loan. But for cannabis entrepreneurs, it's downright impossible. Because cannabis remains illegal under federal law, very few banks in the Commonwealth are willing to provide checking accounts, much less make loans, to legal and licensed cannabis companies. The risk, however remote, of the Feds rolling in to shut down a company makes state financial institutions wary of making even collateral-based loans.

And the one or two banks that are willing to assume the risks charge a huge premium that a small business can't afford. Frank Dailey spoke with 10 different banks trying to secure financing for a $90,000 extractor — the machine that removes oil from both cannabis and hemp plants. He walked away empty-handed.

"One financing option carried a 42 percent interest charge once you added all the fees," said Dailey. "Century Bank wanted a $5,000 minimum monthly balance just for a checking account."

Exactly how skittish are banks? Ask Laura Huard, owner of Hole-in-the-Wall CBD Skincare, located in Warren, Mass. Huard makes a line of products — soaps, salves and face serums — using CBD oil derived from hemp. The Farm Bill of 2018 legalized hemp at the federal level and reclassified the non-psychoactive crop as an agricultural commodity.

After securing her official LLC status, Huard went to Cornerstone bank and opened a business checking account with an initial cash deposit. Trouble popped up a few days later when she tried to deposit a check made out to her company.

"The bank said it couldn't honor my business account because it's tied to marijuana," said Huard. "But it's not. I don't work with marijuana. I work with hemp oil."

The bank closed her account — a business that's legal at both state and federal levels. I wanted to hear Cornerstone's perspective, however no one in corporate compliance returned my phone calls. But it's not just Cornerstone. At this point, Huard says building her business is on hold because she's having trouble finding a bank that will honor her CBD business.

"It'll happen," said Huard. "It's just a matter of time before they start opening it up. But in the meantime, how do you fund your business?"

And there is movement afoot both at the state and federal level. The Boston Globe recently reported that the GFA Federal Credit Union in Gardner — which does service accounts for recreational cannabis operators — may start providing loans to licensed cannabis companies in the fall. It also reported that Century Bank of Medford now provides services to recreational cannabis companies.

On the national front, there's legislation known as the Secure and Fair Enforcement (SAFE) Banking Act. Should Congress pass the measure, it would prevent financial regulators from sanctioning banks, credit unions, and insurance companies for conducting business with licensed cannabis companies.

But that's a painfully long process for cash-strapped small businesses. Currently, they have two options. They either bootstrap it on the friends-and-family plan and hope they survive, or they find an investor give up a certain amount of equity.

Dailey, who falls firmly within Camp Bootstrap, received invaluable help through his extensive network of friends.

"I'm lucky to know a lot of good people who helped with engineering plans and the site surveys," said Dailey. "I still had to get engineers down the road, but their work helped us get through the permitting process and move further along."

Mara, who co-founded PVE with her brother, opted for a partnership with DionyMed, a multi-state cannabis brands platform based in Canada. The company approached Mara after PVE received its provisional license — an asset that makes small companies tempting acquisition targets.

Both Mara and her brother worked full time — she had a corporate job and he ran his own business. They bootstrapped PVE on the side for 18 months and learned first-hand how hard it is for small-scale players to break into this business.

"We needed to move faster if we wanted to get into the market early enough," said Mara. "And we couldn't do that without an infusion of capital."

Pioneer Valley Extracts LLC remains intact with Mara and her brother in charge of on-the-ground operations — as salaried employees of DionyMed.

"We're lucky because we can draw on DionyMed's expertise," said Mara. "It's the kind of partnership we wanted, and it's a pretty sweet deal for us."

Here's a fun fact. Through zoning laws, most municipalities in the Commonwealth — including the Valley and the Berkshires — have restricted cannabis cultivation to commercial industrial areas. According to Eric Schwartz, co-founder of Farm Bug Co-op, that pretty much cuts farmland — and farmers — out of the cannabis industry. While Schwartz is based in Somerville, Mass., Farm Bug works with cultivators, farmers, and landowners across the state of Massachusetts.

"When municipalities — even 'pot-friendly' ones — create zoning laws that limit cannabis cultivation to commercial industrial areas," said Schwartz, "they're setting up a local cannabis industry that favors large players."

Marijuana buds in glass jars on wooden backgroundSchwartz is currently working towards securing a craft marijuana cooperative license. This type of license allows a cooperative of cultivators across Massachusetts to have up to 100,000 (non-contiguous) square feet of canopy space and up to three manufacturing locations. They can grow and process cannabis, manufacture products and then transport them to licensed cannabis retailers. They cannot sell directly to the public.

Applying for — much less acquiring — a craft marijuana cooperative license is not for the faint of heart.

"It's a hard license to get," said Schwartz. "A co-op has cultivators in different towns across the state, which means you're going after multiple host community agreements — it's hard enough to secure one host community agreement."

Keep in mind that all the cannabis ducks must toe the line before the application can be submitted to the CCC. As if nailing down the community agreements weren't hard enough, Schwartz must wrangle another seriously difficult duck.

"We need to come together as a group of cultivators to write, unanimously vote for and sign off on a set of bylaws," said Schwartz. "And all of our cultivating members need to be on that application when we submit it to the CCC."

Currently, the terms "craft" and "organic" as applied to cannabis have little — if any — meaning in the state. Schwartz and other Farm Bug members are working to change that.

"We're entrepreneurs, but we're also advocates," said Schwartz. "We want to be on the forefront of how Massachusetts defines and labels craft products and organic cultivation. It's not like there's a USDA stamp for cannabis."

The Massachusetts cannabis industry is still new and evolving. But it's the small-scale locally owned operators that get caught up in a slow procedural structure that heavily favors big companies. And big players have ample resources to weather both regulatory and financial challenges.

"The CCC takes a lot of heat for moving so slowly," said Mara. "But they're not bad to work with, and I do think they're trying."

How can the consuming public in the Pioneer Valley and beyond promote and support small, locally owned-and-operated cannabis operators? First, don't assume your town officials are on board. Take it from Eric Schwartz, who has crisscrossed the state talking cannabis with dozens of municipalities for the past two years.

"Cannabis consumers in the Pioneer Valley may be all about craft, but their governments, for the most part, are not."

Go talk to your city and town officials. Find out if they're educated about these issues and ask them where they stand. Let them know how you'd like to see the industry evolve. Some cities are more welcoming than others and did the upfront work required to facilitate this budding industry.

"Holyoke and Easthampton have done a great job," said Dailey. "Folks like Alex Morse, Nicole La Chapelle, Owen Zaret, and Karima Rizk did the prep work with the state, with ballot initiatives — everything they needed to be ready for recreational cannabis."

The entrepreneurs I spoke with remain optimistic about this nascent market and how it will mature over time. Despite the challenges, they believe we'll see more independent, local companies open — and that means more options for the consuming public.

It's a market-driven world and cannabis companies — both large and small — will ultimately be judged on the quality of their products.

The Ad Industry's Focus on Scale Has Ignored Small Businesses - MarTech Series

Posted: 09 Aug 2019 12:30 AM PDT

viantinc logo Today's Advertising and Marketing industry model is focused on serving large enterprises. But with small- and medium-sized businesses (SMBs) making up 99% of all private sector businesses in the US, this model neglects companies that need support the most. This is where a SaaS (software as a service) business model really shines: with a subscription model, SMBs can access enterprise-grade solutions in a very cost-effective manner. The subscription model provides much more transparency into the fees associated with programmatic ad buying and allows SMBs to scale spend without incurring additional fees.

A recent survey revealed 42% of SMBs do not use technology to its full capacity. This shouldn't come as a surprise considering they might not have the same needs as large organizations, and often don't receive the same amount of attention as their larger competitors. But SMBs are big contributors to the US economy and are at the front lines of innovation – visit any coworking space or incubator to see this first-hand. As the Advertising industry puts SMBs on the back burner, focusing solely on servicing large enterprises, it misses out on an opportunity to build relationships that have considerable lifetime value as these companies grow and expand.

For example, Programmatic technology should have leveled the playing field for advertisers of all sizes, giving any brand an equal chance to purchase the same inventory. There will always be an expertise gap that needs to be bridged, but programmatic creates an equal chance to compete. Whoever is going to pay the highest cost per impression is going to win.

But the model today is geared towards serving bigger customers, and that isn't due to a lack of interest from the smaller ones. The Advertising industry has grown so large with a focus on the scale that SMB's suffered in the race for greater margins. And this makes sense, right? If the current business model only supports providing live customer support and training to its biggest paying customers, that's going to happen. The irony is that as SMB's grow, they suffer from operational issues and manual processes that could have been solved by the very businesses that neglect their needs.

One of the biggest challenges an SMB has when it comes to any technology investment, but especially Advertising and Marketing, is the number of choices its leaders must make. Making the decision to invest in search, social, video, audio, DOOH, CTV or all of the above can be intimidating for someone that is not an expert. Where to get started and what is going to get the biggest return on investment can require some hand-holding for an SMB. Thinking about this from the perspective of lifetime value and customer retention, it's important for the industry to consider a better way to approach customers beyond the large enterprise or agency. The SaaS model ensures SMBs have access to specific tools that positively impact their efforts.

It goes back to their Marketing plan and budget, their goals and objectives. For most SMBs, their primary objective is lead generation and creating demand for the business and the Sales team. They often have a social media presence and have invested in paid search, but want to go the next step. They just need a pathway to get there.

A major roadblock to creating an entry point for SMBs into the Digital Advertising and Marketing ecosystem comes down to pricing structure. Current fees are based on a percentage of media spend, in other words, the more an advertiser scales, the more they pay in tech taxes. Right now, if an advertiser invests $100,000 per month on programmatic spend, they might pay around a 10 percent fee or roughly $10,000 on technology taxes alone. And this is cumulative the more they spend. This approach does not reward scale and efficiency of spending over time.

A simplified pricing model, that takes out the inherent complexity in media buying, makes the most sense for SMBs. You don't need to look any further than the SaaS model, which better serves the small- and medium-sized business community, while also proving beneficial to larger enterprises as well – it's a win-win. A predictable, fixed platform fee is a more cost-efficient way to advertise, by removing the variability of fees as an SMB scales spending, increasing their return as more dollars are going towards working media.

Nearly 91% of SMBs plan to invest more in Digital Advertising in 2019, making them a valuable part of the ecosystem that should not be neglected. With a SaaS model, the advertiser benefits are clear, including consistency and transparency with how much spend is going towards media. From a business perspective, we've seen the rise of subscription companies in every industry from entertainment to MarTech to fitness because it works for the business as well as the customer. It's time advertising moves in that direction to help the SMB market.

Read more: Event Metrics That Will Impress Your Executive Team

Solarplicity energy supply business collapses amid Ofgem row - www.businessgreen.com

Posted: 14 Aug 2019 03:32 AM PDT

Clean electricity specialist was reprimanded earlier this year by Ofgem for unpaid renewable energy subsidies and poor customer service

Solarplicity's energy supply business collapsed yesterday amid an escalating row with regulator Ofgem, with the supplier's chief executive David Elbourne declaring there is "no viable future as a small-scale energy supplier in today's overcrowded, highly regulated market".

Solarplicity announced yesterday it has ceased trading and confirmed Ofgem will appoint a new supplier for its 7,500 domestic customers and 500 business customers.

The company stressed that while it was exiting its regulated energy supply business, Solarplicity Supply Limited, "with immediate effect", it would now refocus the group's activities on the provision of renewable energy technologies to local authority and housing association tenants. 

In a statement Elbourne blamed Ofgem for the failure to secure a buyer for its energy supply business, accusing the regulator of making "unnecessary statements" about the business' finances that led the collapse of a potential sale.

"Ofgem's recent and unnecessary public statements about the Group's finances have caused a second initiative to sell the supply business to collapse," Elbourne said. "As a result of this failure to release fresh funding, the Directors have unfortunately been left with no alternative than to place Solarplicity Supply Limited into administration."

In July Ofgem issued a public update calling on Solarplicity to make outstanding payments to Feed-in Tariff generators registered with the company, stating that the supplier's "financial position" necessitated the official order.

Ofgem declined to comment on Elbourne's remarks.  

Solarplicity did not respond to a request for information about the size of the outstanding payments due to Feed-in Tariff generators. BusinessGreen understands that those owed money will now need to contact Solarplicity's administrators.

Solarplicity is the 13th UK energy supplier to collapse since the start of last year, as smaller firms have come under pressure from intense competition, a volatile market, and the government's new energy price cap.  

Alongside the row over Feed-in Tariff subsidies, Solarplicity faced further pressure from Ofgem in recent months over allegations of poor customer service. In February the watchdog banned Solarplicity from taking on any new customers for three months unless it made significant improvements to its customer service, although it took the decision not to confirm that order in May 2019 after Solarplicity's performance improved.

Last month Solarplicity sold the majority of its retail customers to TOTO Energy, explaining it wanted to focus the business on its core operations - installing clean technologies for local authority and housing association tenants. Elbourne said yesterday the company will continue with this activity and will provide an update on its future plans "in the coming days".

He added that existing customers within the firm's Community Energy Scheme (CES) in Stoke will not be affected by the announcement. "Today's action means that the Group is ultimately better placed to drive further improvements, particularly in sales and customer service in the CES," he said. "It will also help to accelerate the roll-out of this and similar schemes in Stoke and in the other cities, keen to repeat its success."

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