Why new cannabis companies face high barriers to entry
Listen and subscribe to The Big Idea on Apple Podcasts, Spotify, or wherever you find your favorite podcasts.
Securing financing for a small business is no easy feat, but it's even harder for those in industries where there's evolving legislation.
On Yahoo Finance's The Big Idea podcast, Erin Gore, the founder of cannabis company Garden Society, detailed the extra hoops those in her industry have to jump through to build a company.
'What we don't have is access to credit, and what we don't have is services around it," Gore told podcast host Elizabeth Gore, who is also her sister-in-law. "So, like, we cannot get a 401(k) — we keep getting denied for 401(k)s for our employees because of the federal illegality of it. We can't get a line of credit for payroll. We can't access any financing services, like equipment financing or mortgages. Our personal bank accounts get shut down.'
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The cannabis industry was estimated to be worth $38.5 billion in 2024, and marijuana is currently legal for medical use in 39 states and for recreational use in 24 states.
However, because marijuana is still classified as a Schedule I drug federally, traditional financial institutions often avoid working with cannabis companies due to the risk of federal penalties and running afoul of anti-money-laundering regulations.
One piece of legislation introduced in the House of Representatives in 2023, known as the Secure and Fair Enforcement Regulation (SAFER) Banking Act, would offer protections to federal financial institutions that offer banking services to cannabis companies in states where it's legal. But the bill has stalled in Congress.
As a result, while an industry with this much capital and growth may seem like a prime opportunity for some budding entrepreneurs, these owners face significant financial hurdles.
Without usual lines of financing, Gore has had to get creative to ensure her business can continue growing. Cash flow has been essential to keeping her company afloat.
She shared that a potential investor once asked her what her cash-to-cash cycle time was, meaning how quickly she saw a return after investing in a product.
Gore said the cash cycle is around 160 days for Garden Society-branded products, 'on a best-case scenario.' But she found that by manufacturing cannabis products for other companies, she could have those firms pay for materials and manufacturing up front, drastically reducing that cash-to-cash cycle timeline and bolstering her profits while diversifying her company's streams of income.
"I shortened my cash-to-cash cycle time, which covered my overhead," Gore said. "It allowed me to invest in my brand. I all of a sudden had different revenue channels that offset my business and put a lot of resiliency and cash flow and profitability into my business."
Even with these adjustments, which increased her company's cash flow and made Garden Society one of California's biggest cannabis companies, Gore still faces significant risk without the additional protections other businesses can get.
"In cannabis, you have no bankruptcy protection," she said, explaining that this became a problem when one of her distributors went out of business unexpectedly while it owed her almost half a million dollars.
"I don't have credit," she explained. "I'm dependent on that cash to pay my payroll, pay my employees. I can't go to a bank and ask for help. I'm only dependent on investor contributions."
With almost a decade in the industry under her belt, Gore has also spent a fair amount of time lobbying for policy changes on the local, state, and national levels.
"Nobody's better suited than the business owner to build policy and build the rules," she said. "But like we always say in the industry, we're building the plane and flying it at the same time."
Though she's seen some progress, there are still plenty of challenges in the industry.
'You have to be so resilient and creative and nimble,' she continued. 'And I think people underestimate how opportunistic and open to change you need to be.'
Every Thursday, Elizabeth Gore discusses real-life stories and smart strategies for launching a small business on The Big Idea podcast. You can find more episodes on our video hub or watch on your preferred streaming service.
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Um, it's been a weird year in tech, broadly speaking, it's been a funky year because moving faster than the founders and venture capitalists can kind of keep up with. So you've seen basically just like, I'd say if you ask most tech founders, most tech commentators, they'd go, it's just been a blink. Then there's the politics and infusion of venture capital, kind of tech takes over DC theme that a lot of people are concerned about at the same so 2025 so far has been chaotic, and I think is probably in our industry of predecessor for a continuous tumultuous few years, AI continuing to outpace kind of how people can understand what's going on, um, tech and politics continuing to converge in weird and interesting ways and venture capital experiencing kind of transformation because of all of those factors. So odd, I'm with you 100%. And it just seems like we're at the this, we're gonna dig into it, but now our our word of the day, and this is series, series which could be A, B, C, it is the letter tag for each round of venture funding. Every new series sells fresh shares and usually lands a bigger check at a higher company valuation, at least that's where it's supposed to go. But, uh, tell us how the venture capital processworks. Yeah. So typically you're gonna have an early stage company go through a variety of funding these nicknames mean different things in different phases. And so you might raise a pre-seed round or a seed round of funding when you're in early stage business. This is when you might go to some angel investors or an accelerator. These are small money folks, either individuals, and you're an angel investor. I'm an angel investor myself, and so you might come to me for, um, as an individual 1500 to $20,000 depending on how wealthy I am. Um, and then you might go to an accelerator or a small fund for a couple $ those terms have been fuzzy over time. So preceed is a kind of a recent machination because a seed round meant too many things. It could mean you raised $50,000 or you raised $3 million and people could no longer tell the difference between what that meant for you as a business or what the CEO did in that moment. But then after that, you start to get to some standardization. So after you raise a seed round, let's say again.5000 all the way to maybe 2 million bucks, you might raise a bridge round another seed, but you eventually get to series A, B, C. Increasing rounds of funding where investors are getting confident that when they put dollars to work, there's something they're betting on a business model that's working or an approach that's working and they want to go, hey, let's pour $5 million.10 million dollars, $20 million onto whatever's going on. And venture back startup ourselves. We've raised $15 million. One of that, one of those rounds is a $10 million Series A. Um, so these are mostly so that there's common language around how much money is being thrown at a company and what sort of confidence you guys talk really fast. I also just talk extraordinarily fast. I get that feedback all the time. So I'm probably even in that crowd.I have questions about the seeds, but I'm just curious how people even find angel investors. Is there like a database? What's your phone number? Yeah, so the hard part actually for a lot of first time founders is this initial finding of the first set of investors because you need an initial yes, whether it's an individual angel or if you raise later rounds, you need a firm to give you your first yes. Typically speaking, these are going to be for most founders, and this is a bad thing about our industry, people you know, so you're going to need to somewhat or find your way into that network. But if you're not somebody who has that network, then your initial few attempts are going to be going to events, finding, let's say a tech accelerator. These are programs that will set up 3 month initial boot camps for early startups. There you can apply public, you can apply online form, but for the most part, again, you're looking to either be in that network already because of where you worked, maybe you worked at a startup, maybe you met somebody who became a venture capitalist or an angel investor, or you're going to need to kind of break your way in through again, an event and accelerator, because you needthem to introduce you. Let's say you do find somebody who gives you your first yes, they're going to only be 500 100 $20,000 of your initial round. You need a couple 100 grand to get started. They're going to need to introduce you to others inside the venture capital ecosystem. And why so many seeds? Because you said you could actually have multiple pre-seed before you even get to ABC. So this becomes the like language of venture capital, right? And so the fact that we call something a seed round is, is not only a deination of how much money you're receiving and at what sort of also a sense of your progress. And so seed round companies typically still going to be a set of experiments at early stage team, not yet scaling to an amount of revenue. Depends on your business model, whether you're consumer or B2B. Um, but by the time you get to Series A, or if you say you're raising a Series A, you raised a Series A, you're indicating to everybody in the world, whether you're partners, future investors, we have figured out our initial business model on the seed. We've made some progress. We're now betting on something that is working. Let's say we built a CRM for doctors, it's some extent, customer exactly database for all of your patients and your insurance companies, all of that. Maybe you go to your Series A because you go, OK, we, we're making 500K in annual revenue. We want to take this to the next level, we need to invest in more technology, but there's something here that's working. If you're raising, let's say you raise a Series B, get to Series C. It's time a Series C, again, this is just the language of venture capital. The amount of money evaluation can differ, but then you've really proven some revenue you've probably been making one.5 to $10 million on an annual basis and you're saying there's even more to bet on. We want to scale our go to market teams, we want to do market expansion. We have competitors that are, you know, at our heels. And so again, it winds up being a language in venture capital, nothing is strict. And so again, you you saw Series A, let's say in the frothy times of 2021, when venture capital was at its height, a Series A started to mean anywhere from 10 million bucks being raised by a company to 100 million bucks being raised by a company. And this is one of the critiques I think of the language of seed or series this stuff again, winds up being redefined based on the norms of the moment rather than being definitional. Ilove moving goalposts. But you just mentioned 2021 is a peak, and this led to my next question I was going to ask you anyway. 2022 was a terrible bear market in stocks and, you know, publicly traded stocks, but we also narrowly avoided a recession. And then we talked to a couple of VC people last year and they said things were just finally starting to thaw in 2024. What is the market like now for funding? It is very feast or famine based on who you are and what you're doing. And so the market overall for venture capital, uh, if we think about this is, you know, kind of the market of how LPs, the people who fund these venture capital firms think about this asset class is not fantastic. The returns have not been great. There was a lot of height funding that kind of started in 2018 to 2022 vintage at valuations that didn't pan out into companies that didn't pan out, um, and a lot of this again is kind of being reevaluated right now from the LP base that invests in venture capital there's a drawback of overall dollars. Then you have the venture capital firms themselves who invest in startups, and they're nervous because there was a whole decade they basically learned from where they invested in startups, but the theories of growth, the theories of revenue didn't pan out. Yeah, and we had ultra low interest rates. I mean, we're in a differentmacro environment. Exactly. And so now I think you have venture capitalists who are nervous, LPs who are not necessarily viewing the asset classes positively, except the winners. And so there are firms, funds, andstartups that did really well in this moment. There is still the positive outcomes. And so you have this flight to quality or the flight to perceive quality where, for example, venture capital firm that is investing in 2025 is being very cautious and going, what founders do I already know that are taking another crack at it? Or if you're an LP looking to invest in a venture capital firm, which venture capital firm do I already know and where do I want to put those dollars? You have AI being obviously a huge buzzword for funding and so you see a lot of flights to AI because that's the hype does mean a lot of startups with more traditional or slow moving ideas or maybe first time founders are struggling. And so you see again this feast or famine kind of effect from it all. Yeah, thatseems tough. I'm curious, you said you raised, was it 15 million Series A. So what gets you to be? You haven't gotten B yet. And we view, you know, our path might not be continued venture capital, might be using venture capital we have so far to continue our growth, and that depends on every particular business. For us, let's say that we did want to continue to raise venture us, that market would be on revenue. Um, every business is going to be slightly different. What sort of revenue that a Series B investor would want to see. So, you know, we're kind of consumer services and orientation, so they probably want to see from us, something in the realm of 10 million bucks to be confident to do a Series B or Series C round of funding, versus your B2B business where it's a little bit more repeatable in a hot space like AI, you might give that sort of company a Series B round just off of a million bucks of initial revenue because you go, the gonna be explosive. Yeah, you don't want to missout. I, yeah, and we'll have plenty of time to talk about AI after the break because I got a million questions, but just real quickly, if, if somebody's considering taking a job in a startup, like what, what stage should the company be in to maximize their personal return and what are the risks versus rewards in each of these different stages orwhatever? Such a lottery ticket. And so I I advise so many job seekers and they always ask me this question a lot. It's just a lottery ticket. Now that's a lottery ticket that you influence, right? And so I think when IAdvise people on this. I advise a lot of people to join startups and I go, do you like the potential of this company? Don't necessarily do the math and think I'm guaranteed that my equity, especially there's options that you have to actually purchase over time. There's a whole bunch of mechanics I can get into, but there's so much that stands between an early employee and eventual cash. 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They're finding it, you know, appetizing to, you know, continue to get private rounds of funding, whether venture capital or otherwise because they get to continue to exercise control over their company. They don't have to you know, uh, subject to all the, the, the need of the regulatory scrutiny scrutiny, quarter. And you'll you'll hear there are two competing forces in venture capital. These are really big voices like in Anderson Horowitz or Founders Fund on one side of the equation going stay private, we'll give you more money. We want it to be private. We want to run this show versus Bill Gurley, whoa benchmark fame who goes, hey, these companies are going to be better off if they have this public scrutiny, shaping the executive team, shaping their go to market, but also allowing other people, allowing the public to invest in the moments where there's still a lot of upside for the public markets, which also tends to mean that these companies have an audience in their stockholders. 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The second one being AI, the first one being companies in general drawing back on what they think of as being regional, reasonable budgets headcounts, how much management layer do we need? What do we think of as being our entry level workforce. This has less to do in last year or 2025's case with just like AI replacing anybody or augmenting anybody as it does with, we spent too much money in this last phase of technology. We do not need as many people to execute on some of business models. It's not literal math that people are doing, but instead executive teams going, OK, what didn't pan out in the last bet? What was more cultural than it was practical? So that I think has driven a lot of what has happened so far. Then you have the emergence of AI and it's not again yet displacing people in like kind of a direct way, but what it is doing is it's telling people, do I want to invest in the workforce? Do I want headcount that might be here for the next 3 to 5 to 10 years? Do I want to invest in a management layer that has expectations?If I believe that AI is coming in a way, and we're starting to see this augmentation where engineers as an example, can produce a lot more code if they're using some of these tools, you don't want to in 2025 invest in a big junior or mid-level engineering class because you'll have those people in 2 to 3 years. And so that's now this future forecasting that I think is impacting some of these headcount decisions. So it's a little bit of backwards, hey, this headcount stuff didn't work in the past and forward looking, let's not make the same mistakes, especially with AI in mind. But are we, OK, this is weird, but are we just gonna end up with many more companies with few workers because of the combination of what you were saying first with the advancements of AI like it's gonna be like times companies buy 500,000 and they only have 3 people. And how do these younger workers get experience then if nobody wants to hire the junior level? So that's a huge problem. The unemployment rate amongst the college, whether you're in engineering or in any other field, it's it's really bad. So we've seen Derek Thompson wrote about this in the Atlantic and other people are kind of looking at the graduation undergrads, um, that that cohort is currently not doing well post graduation. So um they're not getting exposure. They're not getting learning by osmosis. They're not in the office in the same way and they're not getting these opportunities. It's not just for a remote work factor.I don't know how we solve that. I think a lot of this is now going to be an onus on people to decide to self train, and that has to do also with like, what jobs will exist. So this goes to, you know, kind of the second category of what do we think is changing? Are there going to be a lot of small companies?I don't know if they're going to be a lot of small companies. Companies will certainly be smaller. So there are people in venture capital who are, you know, at the forefront of AI who believe this is going to lead to an explosion of entrepreneurship and all these tools are going to enable people to build their own businesses. But are all three of us, for example, going to want to build our own, you know, mug business and sell each other mugs? I don't know that that's actually what they want. Well, maybe I just stay home though, like if I can make, if there's going to be a way I could as long as I'm making money though, by the way, I do have a question though, overall, like, are these tech layoffs or is it is a warning sign for the broader economy? Almost certainly. The thing with the broader economy that people don't quite when people try to make this translation and don't quite understand it is the broader economy requires more in terms of automation in the real world for companies to make the same sort of forecasting decisions, and that of, OK, what will robotics be capable of? What will automation in the physical world be capable of, what will drones be capable of? And I think people have even in tech have less of an understanding because we can all play with chatship ET, but not everyone has access to the latest that's going on in humanoid robots. So people are, are not there yet, even executives are not there yet. But I think that just requires again, seeing the chathi ET moment happen, let's say in robotics or in humanoids, and suddenly those same executives making the sort of choice with their software teams or their worker teams will make that choice also with retail, with um a factory, obviously self-driving, so it is a little bit lagging, but I don't think that'll last. Yeah, it seems like at least a few years lagging, but you mentioned you touched on something about the different levels, and I want to talk to you about chat GPT. I have to subscribe to the Pro version and it is light years 03, um, yeah, with chain of thought reasoning, and then 4.5 with its ability write scripts, for instance, it's just amazing to me, but there's, it seems there's going to be the stratification and for the average person, they're going to have a level of AI accessible to them that is just like, not even a 10th, not even 100th, maybe not even 1000 of what is possible. Yeah, I think this is going to continue to be the case, this bifurcation of like, OK, um, you get what you pay for. So right now we have the example. I'm also a subscriber to the pro version of JatT. This gives us access to a one queries of deep researcher 3, these models that are better than what, let's say a free subscribers, subscribers paying a lower tier are going to receive. That's the first set of bifurcation. The second set is actually when you just unleash costs. So the examples here are actually right now in the coding tools. So this is like a clawed code or an AM code. And the interesting pricing model behind these is these are essentially charged on consumption. So developer is using, let's say cloud code to generate a driven they're not paying, let's say a subscription. There are some subscription models, but in some of these cases, it's just based on what you use. And what the companies are doing in this case, and they're going, we're not going to restrict the model in this case. When we're subscribed even at $200 a month to your BT OpenAI goes, we want to limit how much the AI does in that moment because as the AI does more stuff, reasoning, using tools, it costs them money, it costs them if you tell the consumer, hey, you can have as much as you want, you're going to pay for it. You have programs again, like AM code, cloud code that just run wild. The developer pays for it, but if they get high quality output, they actually don't mind. Now you have developers who are spending $200 a day on AI generated outputs, and you can see companies obviously budgeting for this, whereThey're going to access not only high quality intelligence, you're pointed at a different tier of pricing, but they're going to access a lot more of it because they're willing to pay the compute price. And I think this is going to be aification you not just in code, but in other forms as well. So we are going to see there's the base layer of free or you know, kind of accessible cost. There's the kind of subscription based here where the model makers are going to shape what you get. And then there's going to be get all the intelligence you want and in a fire hose, and that'll be priced at even a third tier. It's an Just quickly, do you think there's any situation with adoption of things like chat GPT on on a level that would have any stigma attached to it and people might not want to purchase that higher level like, oh, you know, I, I use it once in a while, but I'm not buying the the big version we're getting to our next round too. We got multiple rounds yeah yeah it' will be a stigma and you see it already when people can identify when you've used like AI written, you can see the hyphens or the M dash N dash. Um, I think that will away when people just realize how powerful we can all be if we're using the best models all the time. So stigma today, normalization tomorrow. I do. I use them all the time. And here's one. It's right in the script. Look at that spotlights up. It is time for a showdown. Now first up, we got this strip down the strip is a red cap rainmaker strutting and a 50 tweet thread on regulation in his back pocket. He's not just talk. His firm hosts DC fundraisers as often as it signs term sheets. Now close behind, we have the blue cap believer waving a net zero term sheet promising impact and returns. He says his money is clean and purpose driven, but is that a failure or a feature or just a label? AndSlipping between them comes this stealthy gray cap numbers ninja who lets the returns do all her talking. No press releases, no slogans for her, just cold hard IRR and a giant quiet pile of exits. Now Sheveen, who steps off the cat this catwalk with the hottest term sheets in 2025, either of the political firebrands or the stay out of it purist? Uh, there are no purists anymore. He have the opinion of venture capital. And so we have the class of folks who are very opinionated with what the capital is intended to do. So this is, let's say the Andrews and Horowitzs of the world who say American dynamism and they're, you know, they even somewhat supported the current administration during the electoral process. And these folks are somewhat pointing, you know, kind of they're painting a worldview and they're saying, hey, our dollars not only are intended to get us returns, we have a longer term theory of what nation states should be folks are king right now. The problem is a lot of founders don't necessarily align with that worldview. And so the question is over a long enough time horizon, do either new purists or people who do think about impact at the same time, um, start to compete because they say, hey, look, this has become too opinionated as capital, right? And so in 2025 opinionated capital in the form of Andrew and Horowitz or Founders Fund, these very political firms where um their originators or even current partners are activists, um, are currently leading the hypothesis is on a 2 to 5 year time horizon, you're going to see pushback, and especially from a founder class that again might not align with the worldview that's being painted. Any tips for making your pitch for funding on an angel tips I give everybody. The first is context is king. And so in a lot of pitches, what you see is people don't realize it's not just your pitch. It's like, do people what's important about your pitch and you have to world build, you have to give people a little bit of context. So you have to tell them about the industry. You have to tell them what you know, what your secret is, what the insight is that you're building on, beyond the thing you're building. And so delivering that context is king. The second thing, and this is probably, you know, what most people make as a mistake is you want to be I'm a foreign language from someone we had on our show, the feedback loop, a venture capitalist judge, the point and initial pitch is to be compelling but not complete. A lot of to pour all the details, all the nuances, all the future cases they're going to solve. But the problem in that moment is the venture capitalist is new to what you're offering and can't quite rock at all. And so instead, if you're compelling but not complete, you're giving them enough to want the second meeting. All good podcasts must come to an end. This is going to do it for this episode of Stocks and Translation. Be sure to check out all our other episodes on the Yahoo Finance site, mobile app, and we will see you on the next episode of Stocks and Translation.
