‘Inclusive cannabis’ investors apply a racial-equity lens to a high-flying industry

by Liz Enochs at ImpactAlpha

ImpactAlpha, February 26 – It was 2016 and recreational weed was barreling toward legalization in California. Christine de la Rosa and her co-founders at The People’s Dispensary, a medical cannabis shop in Oakland, Calif., decided to jump on the train.

One problem: the dispensary didn’t have the cash to get licensed, much less expand.

The co-founders started to put together an investment packet, a tough sell for minority-owned cannabis businesses, especially one that was a woman-, queer- and minority-led collective. “We realized that the majority of our clientele would not be able to invest in our dispensary because they were not accredited investors,” says co-founder and CEO Christine de la Rosa.

So The People’s Dispensary raised smaller amounts through crowdfunding, mainly through Fundanna, a cannabis-focused crowdfunding site. They recently closed $750,000 in fundraising in Oakland and, as of mid-February, had banked an initial $250,000 in Los Angeles and are raising a round in San Francisco.

Mass incarceration

The opportunity to get in on the “green boom” is drawing both investors and entrepreneurs. Projections suggest annual cannabis revenues in the U.S. could reach $50 billion by 2026, up from around $9 billion today.

One arguably well-prepared group faces obstacles in taking advantage of the opportunities. The crackdown on illegal pot put hundreds of thousands of people behind bars in the U.S. Those felony drug convictions now are keeping many formerly incarcerated would-be entrepreneurs and employees out of the newly legitimate cannabis industry.

Colorado is one of multiple states that restrict those with felony controlled substance convictionsfrom owning or working at a license cannabis business. Colorado entrepreneur and cannabis activist Wanda James, for example, was forced to fire her own brother from her cannabis business due to his criminal conviction for selling four ounces of weed. Getting convictions expunged is time-consuming and expensive.

It’s no secret that the War on Drugs disproportionately affected minorities and, in particular, African Americans. Whites and African Americans use weed at similar rates, but African Americans are nearly four times as likely to be arrested for possession, according to the American Civil Liberties Union, based on data from 2001 to 2010. The differential in arrest rates jumped to more than eight times in some jurisdictions.

On top of that, minority businesses face challenges accessing capital, like the “friends and family” money white-led companies sometimes use as startup funding. A typical African-American family has just $10.30 for every $100 in wealth held by a typical white family, data from the Federal Reserve’s Survey of Consumer Finances shows.   

To redress that disparity, some cities and investors are specifically advantaging those disproportionately impacted by the decades of prohibition. Because many of the challenges that can hold many members of minority populations back from success stem from the very products now attracting so much interest, some view ‘inclusive cannabis’ as the ultimate impact investment.

“It’s more than obvious that there’s an immense opportunity to generate social or environmental impact alongside financial return,” said Sumit Mehta, founder and CEO of cannabis investment banking platform Mazakali. He said cannabis will impact medicine, environment, agriculture, society, food, fuel, fiber, paper, social justice, civil rights and and freedom “in a way that nothing else does.”

“Ignoring its impact on all of these parts of our lives and culture simply does not make sense if you are running an impact fund.”

When Mehta presented his conclusions to some of the largest impact funds in the country last year, “I was told they were not ready yet to think about it that way.”

Equity applicants

Many cities are giving priority to cannabis business run by minorities and people formerly incarcerated for drug offenses or from communities hurt by the war on drugs. Oakland reserves half its cannabis permits for designated “equity applicants” who meet criteria that includes cannabis-related arrests as well as local or past residency and incomes below certain threshholds. Los Angeles and San Francisco also have introduced ‘equity’ programs to give priority to former drug offenders.

Oakland created a revolving loan program of up to $100,000 for equity applicants and offers technical assistance and mentoring. Oakland’s program focused on the question of “how can we level the playing field with what tools we have,” said the city’s Greg Minor, who worked on the report the program is based on.

Oakland’s “equity permitting program” also connects equity applicants with technical assistance by matching them up with more experienced operators. That gives general applicants a faster way to get to the front of the line: Agree to “incubate” an equity applicant by providing free rent or real estate and technical support.

Cannabis investor Ben Larson, former managing partner at cannabis startup accelerator Gateway, is one of the entrepreneurs incubating a minority-owned business in Oakland. Larson’s new firm, Nanogen Labs, which is working on technology to help cannabis compounds dissolve in water, is providing space to equity entrepreneur Lemar Key. Key is connecting craft growers to consumers with his Nimbus Cannabis Marketplace.

To really get the business off the ground, Larson estimates Key needs at least half a million dollars. “But he has competitors in that space that can raise $5 million to $10 million,” said Larson, “so that makes it really difficult to compete.”

A 12-week program at the nonprofit Hood Incubator in Oakland helps local entrepreneurs hone their business plans, meet partners and identify sources of funding.

“We need to get people from our community—black entrepreneurs, brown entrepreneurs—into positions of growing strong businesses that can be able to stand the test of time, that can either compete with those brands that will receive the investment, or get them to grow to become investment-ready themselves,” Hood Incubator’s Lanese Martin told Quartz.

With its seed funding in hand, Oakland’s People’s Dispensary has big plans – for 30 dispensaries in seven states. That requires big bucks: $300 million, according to de la Rosa.

De la Rosa and her partners are seeking angel investors and impact investors to support the company’s growth and its mission: “Making sure those who have been most harmed from the War on Drugs are able to benefit from this industry that is now legal.”