Cannabis-based startups are rising despite being demonised but still face many challenges

CBD, one of the substances found in marijuana, has been lauded as a medicinal miracle. While there’s room for high-end marketing and money-making, how can entrepreneurs navigate through the tough legislation?

Cannabis-based startups are rising despite being demonised but still face many challenges

During his teenage years, Jonas Duclos suffered from a genetic disease which resulted in years of unbearable pain. To counter that he used cannabis which significantly reduced his suffering and boosted his quality of life. Now, his company JKB Research SA, which launched in 2017, aims to enhance others’ life quality. “My experience in the CBD industry has been life changing,” Duclos says. “Being able to help so many people with cannabis the same way I benefitted from it is extremely satisfying.”

The former Swiss banker-turned-co-founder’s company trades cannabis legally across Europe. Under the trademark name CBD420, Duclos sells BlueDream, a strain of hemp whose level of tetrahydrocannabinol (THC), the main psychoactive ingredient in cannabis that gives weed its signature effect, is low enough – 0.2% – to be sold lawfully in most European countries. And now it’s his passion to sell cannabidiol (CBD) – a compound found in the marijuana plant – to as many people globally. “For me, it’s a life mission to raise awareness and create trust for cannabis in front of the people I interact with,” he says.

Duclos is hardly alone. Sales for CBD products in the UK have gone up by 99% in 2019 already, according to Wowcher, the discount voucher company. “The continued growth over time means this is no fad but a consumer-led revolution,” says Rob James, CEO of Cannuba, the cannabis distribution company. Indeed, more entrepreneurs are leveraging the cannabis craze as over 700 CBD-based companies registered with the Cannabis Trade Association, the CBD-centric trade body for the UK and Europe, since 2017. Clearly, it’s a growing sector. 

The main reason for the sector’s increasing sales is because of the medical benefits of the plant. For starters, medicinal marijuana has demonstrated to have significant effects for the treatment of epilepsy, PTSD and even anxiety without getting you high, according to the World Health Organization. Furthermore, research done by GlobalWebIndex, the market research company, 68% of UK residents surveyed said they found CBD to alleviate physical pain as well as benefit bad mental health conditions. 

And now, entrepreneurs in the sector are using cannabis in all sorts of products. “It’s getting to the point where if you can ingest it or apply it you can add CBD to it – it really only stops at the end of your imagination,” James says. From food items to cosmetics, the opportunities are seemingly endless. For instance, startups like Daye, which made CBD-infused sanitary pads even received an investment of $5.5m. There is also Top Beverages which is launching CBD-infused gin. Unsurprisingly, the American CBD industry saw a seven-fold growth between 2018 and 2019, according to BrightField Group, the market analyst. And with celebrities like Jennifer Aniston and Morgan Freeman openly propagating CBD, the market is inevitably witnessing a surge in popularity. 

While the opportunities are evident, establishing a business in the CBD industry is far from simple. A discussion about weed with anyone will make one realise how demonised it is. “There is of course still a varying amount of stigma attached to cannabis, 80 years of being told something is the devil’s weed will take a while to gain majority acceptance,” James notes. This is why it was only since Thursday November 1 2018 that the NHS began prescribing CBD medications legally in Blighty. “What remains the biggest issue is the lack of understanding and training available to healthcare professionals in the UK,” James continues. “With an industry still very much in its infancy, getting good quality information is possibly the most difficult factor.”

Although, Britain isn’t lagging behind the rest of the world as Canada only legalised possession and use of medical marijuana in 2001 and recreational cannabis in October 2018 becoming the second country after Uruguay to do so. 

Another pivotal challenge startups in the market face is the difficulty in securing seed funding. “Firstly, as is obvious with a startup you have no track record in an already difficult sector,” James details. “Notwithstanding is the fact that many financial institutions won’t even enter into a conversation about cannabis for fear of drug barons and money laundering operations.” 

While VC funding soared to $881m in the global cannabis industry, according to Pitchbook, the VC data analysis company, most of it seems to be confined to the US. Startups in the UK not only face the trouble of convincing VCs but also investors on crowdfunding platforms. “Crowdfunding is also a nonstarter as most platforms are unable or unwilling to promote cannabis business projects,” James adds. 

Furthermore, banks aren’t a reliable financial source for CBD startups either. “It’s certainly impossible to get business loans from a bank,” Duclos says. “What we’re seeing is very interesting – a lot of people are using their own money to start CBD companies.” 

To ensure startups have a better chance at securing funds, James advises budding owners to do enough research in the sector including the terminology being used before pitching to investors. “The sharks are already swimming in these waters and a great deal of care needs to be taken when dealing with investors,” he says. “As with previous emerging industries like cryptocurrencies and the dotcom boom, many unscrupulous investors are looking to make a quick buck and many startups risk losing their companies to complicated mergers and joint venture agreements. It’s not enough to know your product, if you’re new to the world of finance you really need a firm grasp of how things work.” Furthermore, being on top of the game of the governmental regulations is imperative so business leaders are aware of “how changes in the law may affect your project in the future.”

Apart from finding investors, business operations are also an obstacle as soon one calls their startup CBD-based. “The first obvious challenge is opening a bank account for the company,” Duclos states. “It’s easier for established companies to start trading with cannabis products but new CBD companies will find difficulty in setting up. The grey area around CBD products itself makes it extremely difficult to navigate in every aspect of running the business. There are no standards for products, for labs, for labels.” 

Additionally, marketing can be a challenge. Google and Facebook don’t allow CBD ads to be delivered and Amazon doesn’t allow any products that contain CBD. Since social media platforms aren’t very conducive to CBD-based businesses, it’s harder for these enterprises to attract clients. 

And the main root cause lies in the dearth of UK regulations. “With the lack of regulations and the limitations on marketing with social media and ads, it’s actually a substantial challenge for good brands to effectively communicate their identity and quality,” Duclos says. This is also a reason why there seemingly are untapped business opportunities. “To discover the true scope of CBD we need more research and a legal framework that allows it,” he continues. 

Building on the possibilities which CBD has, it can actually be a win-win situation for the government if it was made easier for startups to thrive in the sector. For instance, if it was taxed as much as alcohol, the revenue could go up by £3.5bn in the British economy, according to Health Poverty Action. “Regulation would certainly have a number of benefits – it would also enable funded research on addiction and measures to protect those that may be most vulnerable to addiction,” James argues.

Despite the multiple stumbling blocks, looking at how the American CBD sector is predicted to be worth $20bn by 2020, according to BrightField Group, it’s evident that the sector is smoking hot for any budding startup owner. While the sector is burning slowly in the UK, as long as they take the time to learn about the plant more, they can be sure their efforts won’t be all huff and puff. “As the industry settles, I would expect levels of production to increase at a rate which will reduce some of the high costs presently experienced by suppliers,” James concludes. “This in turn should make products more readily available across all populations at an affordable cost. We really are just at the tip of a 5,000 year-old iceberg.”

Varsha Saraogi
Varsha Saraogi

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