Marijuana Legalization: The Potrepreneurs are Coming

We all know that Washington and Colorado will lead the way with marijuana legalization in 2014. But what will the marijuana industry of the future look like? Will we see "WEED" or "BUDZ" as stock ticker symbols by 2018? 2020? 

The marijuana industry has explosive potential, but regulatory and organizational obstacles are looming in the next few years as the infant industry takes its first steps.

Marijuana Policy Project estimated that the marijuana industry was worth $1.7 billion in 2011, with the potential to grow to $8.9 billion by 2016. That could be a 523% growth rate in five years, resembling the growth of some of the explosive tech companies in the 2000s.

Currently, the agricultural and commercial sectors of the black market marijuana industry do very well: Marijuana is the first, second, or third-most expensive cash crop in all 50 states. At a relatively low cost of production, it is one of the most highly profitable crops in the country, mainly because of its current prohibitory status. (As the market opens, we can expect to see the price per kilogram fall.)

Even the heavily subsidized and price-fixed sugar industry cannot compete with the profits that marijuana growers reap on the black market. Additionally, the wholesale and street prices of marijuana, thanks again to the black market, are considerably higher than the monetary costs that suppliers face. The UN Office on Drugs and Crime reported that the price per ounce of marijuana in 2011 ranged from $20 to $1,800, an estimate so laughably broad that it could only apply to an item sold in illicit markets. The reason for the huge price discrepancy? Risk, which is considerably higher on illicit markets than legal ones.

As the market opens, it could be bad news for black market growers and sellers who may see their extreme profits decrease. But it is good news for many investors, entrepreneurs, and buyers that prefer to interact in the legal sector. However, a few issues stand in their way before they take the plunge into the marijuana industry.

Regulatory Challenges. The marijuana industry faces significant regulatory challenges, especially in the state of Colorado. An Atlantic Cities report states that after Amendment 64 was passed, the Colorado legislature mandated that:

“A person [should be] a Colorado resident for two years before they can apply for a marijuana business license, and three years before they can invest in a marijuana grower or retailer. It also has to be the investor's primary residence.”

With requirements like this and issues of marijuana legality in other states (there is no option to open the company’s headquarters in Delaware, for example), the industry may sputter for a while, since few of the highest profile investors actually live in Colorado.

Firm Reluctance. One of the easiest ways for the marijuana industry to explode will be if large firms enter and operate their business like any other large agricultural business in the country. In 2010, CNBC ran a piece about the potential of marijuana as a future cash crop. They interviewed agricultural giant Monsanto, asking if any marijuana cultivation was in their future. Of course, in 2010, they said it was not since it was “largely illegal.” However, if they (or any other large firm) change their mind, they could have the power to multiply the size of the industry.

For those of you that hate the idea of the marijuana industry turning into “Big Tobacco” or just hate Monsanto, don’t worry. With the legal market opening up, there could plenty of opportunities for market differentiation, i.e. the huge Starbucks chain-like retail locations, and the boutique hipster coffee shop-like locations. However, for investors that are looking to get in to the industry, they will see much higher returns on a large Starbucks-like firm (maybe even one that has an IPO) than on a small, family-owned business.

Time will tell more about the future of the marijuana industry and its growth potential. But for those with an itchy finger and a high tolerance of risk, especially Colorado residents, there could be many opportunities in the future.