Dozens of Cannabis Startups are struggling to get fully licensed

Dozens of Cannabis Startups are struggling to get fully licensed

As adult-use cannabis dispensaries continue to open across Connecticut, other types of marijuana businesses have been slow to begin operations.

As of Nov. 1, 55 cannabis companies had licenses pending, according to the state’s online licensing database, with 40 of those businesses having received their provisional license, which gives entrepreneurs more than a year to get operations up and running.

But just 10 companies — seven dispensaries, two growers and a delivery service — have fully active licenses, and are either operational or about to come online.

Experts say there’s potential for some prospective business owners stuck in the licensing pipeline to abandon their plans.

In addition to a rigorous regulatory process, cannabis startups face a host of challenges, including a lack of capital and real estate options, as well as general tough economic conditions, experts said.

“I think that’s certainly going to happen, unfortunately,” said Drew Richards, a CPA at accounting and consulting firm Marcum, referring to the potential for cannabis businesses to not move forward with their licenses. “In a normal business in a free capital market, you’re going to see businesses close unfortunately, or get 50% of the way there and say ‘nope, not for us.’”

“I think it’s kind of a combination of access to capital, as well as just the availability of locations throughout the state in those towns that allow cannabis businesses — it gets pretty limited,” Richards said.

Many startups are taking baby steps to get off the ground, instead of racing to be first to market, Richards added.

The state Department of Consumer Protection, the agency tasked with overseeing both the medical and adult-use cannabis programs, said the slow rollout of businesses isn’t a surprise, given the newness of the industry.

DCP spokesperson Kaitlyn Krasselt noted that some cannabis businesses have up to two years to get fully licensed, before their expiration window closes.

“These businesses have a lot of time to get up and running,” she said.

Licensing process

Most businesses currently operating in Connecticut’s cannabis industry are owned or partially backed by companies that were active in the state’s medical marijuana market.

Those larger, mostly multistate operators — like Curaleaf, Verano Holdings and even Hartford-based Fine Fettle — were allowed by the state legislature to expand into the recreational market, either directly via hybrid licenses, which allow them to serve both recreational and medical customers; or through partnerships with social equity entrepreneurs who are opening new businesses, including retail sites and cultivation facilities.

Those multistate companies own the majority of the state’s 27 existing cannabis dispensaries, and all four grow facilities.

Companies still in the licensing pipeline include lottery winners, social equity cultivators and equity joint ventures between existing cannabis companies and social equity partners.

To secure provisional licenses, companies had to pay fees ranging from $250 to $75,000, depending on the license type and the social equity status of the applicant.

That means all prospective cannabis companies in the licensing pipeline have some skin in the game.

So far, no food and beverage companies, product manufacturers or packagers have come on line, and only one delivery service is fully operational.

While a micro-cultivator and large-scale grow operation, both in Bloomfield, have their final licensing, it will be several months before their facilities are up and running.

Financing woes

Richards said access to capital is still a big challenge for startup cannabis businesses, since many traditional fundraising avenues aren’t available to them.

Cultivation operations in particular are “capital intensive,” when it comes to real estate and the actual build out of the facility, he said.

Megan Budd, a CPA and principal with accounting and advisory firm Withum, said entrepreneurs who aren’t partnered with larger, multistate cannabis companies are having the most difficulty accessing capital.

“The reality is, a lot of these standalones are looking for funding in order to get up and running,” Budd said. “When you’ve got somebody who’s linked up as an (equity joint venture) with another company … they’re getting up and running a lot quicker because they’ve got capital behind them.”

The state is trying to help with some funding support.

The Social Equity Council (SEC) in August launched the Canna-Business Revolving Loan Fund with an initial $10 million allocation. The fund provides licensed social equity cannabis business owners with low-interest loans that can be used for equipment purchases, leasehold improvements or expansions, working capital and lines of credit, among other things.

As of Nov. 1, the SEC had not issued any loans but was still accepting applications, a spokesperson said.

Ian Butler, an attorney with Glastonbury-based law firm Brown Paindiris and Scott LLP, said financing, in addition to complying with what can be a complicated state law, are key challenges for new business owners.

It will have to make business sense for companies in the licensing pipeline to move forward.

“You have to project profits, and the landscape is constantly changing,” Butler said. “Complying with the state’s requirements to actually get up and running is difficult, it’s costly, and they’ve been given a limited amount of time to do it. … I know there are people out there who are questioning whether it’s worth it to them, particularly with some of these license types that are less of a sure thing in terms of their profitability.”

Real estate

Another key issue is finding business locations.

The state’s adult-use marijuana law allows municipalities to restrict cannabis businesses from opening within their borders.

Thirty-one municipalities currently have cannabis business moratoriums in place, while 19 communities have banned such companies, according to DCP data.

Even when companies find an accepting municipality, identifying an actual site is a challenge.

“Real estate is really tough to come by, so trying to find these spaces that fit all these certain criteria is difficult,” said Richards, the Marcum CPA. “There’s just limited space.”

Nicholas Morizio, a commercial real estate broker with Colliers International, said there was a flurry of cannabis real estate activity at the beginning of the year, but that’s subsided in recent months. He said rising interest rates have made already-expensive properties even more costly.

Industrial space for cannabis grow facilities can cost around $80 per square foot, while retail sites go for between $15 to $20 per square foot, he said.

And that doesn’t include the work that needs to be done after acquisition.

“The build out is very expensive — they need lots of power, water and so on,” Morizio said.

During the license application process, prospective cannabis companies didn’t have to identify a specific place of business.

That seemed like a blessing early on, but it has created a bottleneck of entrepreneurs looking for business locations, said Michelle Bodian, an attorney with cannabis law firm Vicente LLP.

“I don’t think finding a site is as quick and easy as people were hoping,” Bodian said. “I wouldn’t be surprised if a way smaller number of businesses (that won licenses) operationalize.”

Morizio said he hasn’t yet heard of cannabis entrepreneurs giving up on their plans to open new businesses, but acknowledged “not all of them are probably going to come online.”

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Region: Connecticut

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