The White-Collar Future of Weed

The White-Collar Future of Weed

Forsaking stoner culture, a new generation of entrepreneurs is using venture capital, scientific research and new products to revolutionize America's cannabis industry

DAVID DEVOSS

His day started early in a meeting with San Francisco investment bankers. Now Mark Hadfield, a 44-year-old serial entrepreneur, is guiding his Mercedes SLK 350 Roadster over the Bay Bridge to meet a potential business partner. His mission: to spread the gospel of HelloMD, an online platform that allows doctors, patients and retailers to exchange information about medical marijuana.

“People come to the industry who maybe smoked a joint in college but don’t know what’s available today,” Hadfield explains. To those novices, HelloMD offers video consultations, doctors’ recommendations and access to a community of medical professionals, vendors and more-experienced users.

Although medical research has been stymied by Washington, D.C.’s lingering Reefer Madness mentality, it’s increasingly evident that cannabinoid extracts can improve the lives of millions of Americans. “At one end of the spectrum are young men in their 20s who just want to get high, and at the other are people who have cancer, epilepsy and terminal illnesses,” says Hadfield. “We’re focused on the health-and-wellness consumers in the middle who want relief from chronic pain, arthritis, insomnia and migraines.”

Hadfield’s destination is a 13,000-squarefoot factory building on the far side of Oakland. The factory houses Kiva Confections, a cannabis-candy company headed by a 30-yearold former wedding photographer named Kristi Knoblich, who started the not-for-profit collective in her kitchen in 2010 with a $36,000 loan from her father-in-law. Hadfield wants Kiva to join his online community and, as an inducement, has posted a video about Knoblich and her company on the HelloMD website.

“We already have 75,000 members in the community, and that number will double over

the next 12 months,” he says. (At press time, HelloMD membership had reached 100,000.) “We want entrepreneurs, bud tenders and customers exchanging experiences for free on an open platform that’s searchable.”

“That’s so cool,” Knoblich says, smiling. “You should have prizes for the best contributors!” Kiva Confections makes some of California’s most popular edibles. Its chocolate bars, some of which contain 180 milligrams of tetrahydrocannabinol (THC) extracted from indica and sativa strains of northern California plants, are hot sellers in medical-marijuana pharmacies throughout the state. On the factory floor, the heavy tang of cannabis is masked by the sweet smells of mint, Irish cream, tangerine, espresso and gingerflavors that distinguish a variety of chocolate bars, each of which is tested for purity before being sealed in a childproof package.

Chocolate bars are Kiva’s top sellers, but Knoblich believes smaller doses will become more popular if California legalizes marijuana for recreational use—that is, if Proposition 64, also known as the Adult Use of Marijuana Act, passes on Election Day. The company also produces chocolate-covered blueberries and espresso beans that contain only five milligrams of THC apiece. “My concern now is not going to jail,” Knoblich says, “but scaling up to meet statewide demand when prohibition finally ends.”

This is the state of weed in 2016. Despite a layered and contradictory matrix of laws, the industry continues to evolve and proliferate, encompassing big business, technology and mental and physical health—as well as good old-fashioned hedonism. And a new generation of nimble entrepreneurs like Hadfield and Knoblich is carrying the baton.

The rate of change is clear to anybody who steps inside a medical-marijuana pharmacy or recreational-cannabis dispensary. Gone is the head shop staffed by a glassy-eyed stoner. Gandy jars filled with marijuana buds may cover one wall, but they are far outnumbered by edibles, drinkables, tincture sprays and topical creams. There’s even a market for pets: Therabis makes a line of sachets that, when sprinkled into kibble, can soothe a dog’s itching or calm its anxiety. “When they feel better, you do too,” claims its marketing.

In 1937, the Marihuana Tax Act effectively outlawed the use and sale of marijuana on a federal level. The prohibition began to erode in the 1990s, when HIV and AIDS sufferers realized cannabis reduced their nausea and pain. In 1996, Californiabecame the first state to legalize medical marijuana, but cannabis is still banned under federal law, which insists it is just as dangerous as LSD, heroin and ecstasy. Indeed, the federal government considers marijuana more dangerous than cocaine and crystal meth, but it allows states that have regulations in place to determine the nature and scope of intrastate use.

Today, 25 states plus the District of Columbia have legalized cannabis in some form. In Alaska, Washington, Oregon, Colorado and D.G., recreational marijuana is legal as long as specific requirements are met, such as keeping it away from children and strictly monitoring inventories. On November 8, five additional states—Arizona, California, Maine, Massachusetts and Nevada—will allow voters to decide if cannabis should be made fully legal and taxed like alcohol. Four other states will vote on whether to legalize medical marijuana.

Entrepreneurs and politicians alike are fixated on California, which has the world’s sixthlargest economy and accounts for nearly half of America’s legal cannabis sales. Says Allen

St. Pierre, former executive director of the National Organization for the Reform of Marijuana Laws, “California really is the linchpin for hemispheral legalization.”

Back in 2010, Californians rejected a similar referendum to legalize recreational marijuana by a 54 to 46 percent vote. But this time advocates for legalized pot have the support of the state’s lieutenant governor, Gavin Newsom. The “Yes on 64” campaign has more than $6.6 million to spend on political messaging, thanks to direct or indirect contributions from philanthropist George Soros, Napster co-founder and former Facebook president Sean Parker and Hyatt Hotels heir Nicholas Pritzker (who is also an investor in Tesla, SpaceX and Über).

“Marijuana reform is a generational issue, like health care reform and marriage equality,” says Jason Kinney, a Sacramento political operative who heads the Yes on 64 effort. He adds that more than a dozen recent polls have shown at least 60 percent of California voters support the legalization of recreational marijuana. It’s also receiving strong support in minority communities disproportionately affected by the war on drugs. Over the past decade, nearly half a million people in California have been arrested on pot charges.

Efforts to legalize marijuana have typically been opposed by police chiefs, county sheriffs,

district attorneys and politicians at all levels of state and local government. But not this year. Opposition at the city and county level has been muted by the prospect of a tax windfall from a $9.25-per-ounce cultivation tax and an existing special 15 percent tax on the retail value of all marijuana sold—in addition to the usual state and local sales taxes.

California voters could narrowly defeat Proposition 64, but West Coast investment bankers doubt a “no” vote would diminish a nationwide consumer market for legal and illegal marijuana already valued in excess of $40 billion, according to some estimates. One recent investment report by San Francisco’s Ackrell Capital titled “The Green Gold Rush” estimates that the U.S. consumer market for recreational and medicinal cannabis will expand from $4.4 billion in 2015 to $9.5 billion in 2019. If legalized federally, Ackrell predicts, the market will grow to $37 billion within five years and $50 billion within 10 years.

Shannon Soqui, Ackrell’s head of cannabis investment banking, says, “A broad range of investment opportunities exists for sophisticated investors who are willing to take significant risk.”

One measure of pot’s acceptance is the number of strategic relationships extending to major corporations. Microsoft recently partnered with

a cannabis-industry software company called Kind Financial to launch a computer system that tracks the cultivation, harvesting and eventual vending of marijuana. The “seed to sale” software helps government regulators ensure that no product is diverted for illegal purposes.

The Microsoft venture coincides with a $400 million investment by Jim Hagedorn, CEO of Scotts Miracle-Gro. According to a recent article in Forbes magazine, Hagedorn’s epiphany came on a trip to Yakima, Washington, where he noticed that the hydroponics tanks, lights and liquid nutrients used for the indoor cultivation of marijuana were consistently outselling dirt, grass seed and other Scotts products. So last year he paid $135 million for two California companies that market soil, fertilizer and accessories to pot growers. He then spent another $120 million on a Dutch hydroponics-equipment company and vows to invest an additional $150 million before the end of the year. By September, Scotts MiracleGro stock had jumped 17 percent.

An Israeli company called Leaf recently raised $2 million to develop an automated grow system the size of a mini refrigerator that uses a smartphone app to help growers monitor the temperature, humidity and feeding of marijuanaplants. And in Los Angeles, Cedars-Sinai Medical Center reportedly began referring

cancer patients directly to a West Hollywood medical-marijuana dispensary.

The flirtation between big business and recreational cannabis stems from the profit potential, but it also results from the fact that cannabis executives are just like other executives. When cannabis companies decided this summer to hold a fund-raiser for the Denver Colorado AIDS Project, they opted for a charity golf tournament instead of a Phish concert.

Because it took root in the legal shadows, the cannabis industry now evolving west of the Mississippi isn’t controlled by old money or the male-dominated corporate hierarchy of the last century. Its leading entrepreneurs are as diverse as the communities in which they work. Take Jane West, who spent 20 years as an event planner in New York and Houston before moving to Denver and starting a company called Edible Events Go. She is often referred to as the “Martha Stewart of pot.”

Staged once a month at high-end art galleries, West’s themed soirees attracted local business leaders, who enjoyed gourmet munchies served in an atmosphere tolerant of recreational cannabis. “My first event, called End of Prohibition, was in January 2014 to coincide with Colorado’s legalization of pot,” West says.

“The party, which cost $125 a person and was limited to 100 people, was covered by CNBC and got me fired from my job.” Undeterred, she immediately began to plan a Valentine’s Day party called A Threesome With Mary Jane, which featured live bodypainting. The next month she hosted Miso Hungry, which offered Asian cuisine and an origami station “because people who are stoned love to work with their hands.”

Despite a visit from a SWAT team in April 2014, by midsummer, organizations were coming to West. By the end of that year, she had established a professional network and was ready to start Women Grow, an organization that helps women enter the cannabis industry.

With chapters in 44 cities and locations as far-flung as Alaska, Guam and Canada, West says Women Grow now has more than 50,000 members who promote marijuana as a healthier alternative to alcohol and create products designed by and for women. West has her own YouTube channel and sells cannabis-related products on her website. She believes America may finally be on the verge of accepting cannabis culture, and she wants to make sure women play prominent roles in the industry.

“Sixteen men created the modern alcohol industry over the course of 150 years, and their names live on today,” she says, rattling off John Jameson, Jack Daniel, Joseph Seagram and several others. “Women have the same opportunity to make their indelible mark in the cannabis industry. Thanks to the federal government, cannabis companies have to start small and stay local. Why can’t women create 16 bud brands before the large corporations come in and take over?”

Toward this goal, West is creating a lifestyle company featuring glass products she’ll sell online beginning this month. She calls her elegant bongs, pipes and beakers “home goods” instead of “paraphernalia” and hopes that one day her designs will be for sale at Grate & Barrel.

“Women make excellent entrepreneurs because they can multitask,” West says. “They also drink more alcohol than men and buy 80 percent of the products brought into the home.

We should take over the cannabis industry now before it has time to develop a male hierarchy like other mature industries.”

In the past, marijuana had one application: getting you high. But decades of genetic experimentation and horticultural innovation have opened a wide range of benefits that have nothing to do with creating a buzz. Colorado-based Ebbu is among the companies using sciencebased purification processes to isolate marijuana’s various psychotropic properties—and eliminate the unpredictability that users face every time they light up.

In Evergreen, Colorado, in a building that resembles a ski chalet, Ebbu’s research team of three Ph.D.s is developing an ethanol-based technique that extracts cannabinoid compounds and terpenes from marijuana strains so they can be recombined to create products

associated with one of five desired feelings: chill, bliss, create, giggle and energy. “We want the consumer to be able to select an exact experience that is precise and predictable,” explains Ebbu CEO Jon Cooper.

A succession of locked doors lead down to Ebbu’s basement laboratory, which is entered through a clean room containing lab coats and hair nets. There, Cooper’s research team has been able to extract dozens of compounds that react with the human body’s endocannabinoid receptors. Some cannabinoids, such as THC, produce the buzz familiar to college students. Other cannabinoids, such as cannabidiol, or GBD, reduce pain and inflammation and alleviate anxiety instead of creating a high. Transcending that state and its attendant clichés is Ebbu’s stated mission. “Our goal is to create a mainstream product that will have a positive impact on society,” Cooper says.

Privately funded research shows that therapeutic compounds extracted from cannabis appear to influence every aspect of the human body when applied, ingested or inhaled. Endocannabinoids and their receptors are found in organs, the brain, connective tissues, glands and immune cells. In each tissue the cannabinoid system performs different functions, but its prime goal, surprisingly enough, is to maintain a stable internal environment for the body.

Marijuana’s medicinal properties attract many executives to the industry, but Hugh Hempel embraced cannabis for a more personal reason. In 2007, his twin daughters, Addison and Cassidy, developed a rare and fatal disease called Niemann-Pick type C. Sometimes referred to as “childhood Alzheimer’s,” the condition is caused by harmful amounts of cholesterol that adversely affect the brain, spleen and liver. Severe seizures are a by-product of the disease. Many of the pharmaceutical drugs available turned the twins into “little zombies,” Hempel says, so he turned to cannabis, which provided the girls relief without the side effects.

A veteran of the tech industry, Hempel sold IBM mainframes in New York before taking a marketing position with Apple. Later, he acquired a large sum of money from a Netscape IPO. He invested his time and some of his fortune to find a medicine that would prolong the lives of his daughters. “When my daughters got sick, I was forced to learn how to make medicine,” he says.

“MARIJUANA REFORM IS A GENERATIONAL ISSUE, LIKE HEALTH CARE REFORM AND MARRIAGE EQUALITY.”

Hempel, 58, is now the GEO of Strainz, a Las Vegas-based developer of medical-marijuana products he co-founded with his wife. Strainz products are sold in Washington, Colorado, and soon Nevada through licensed partnerships with local manufacturers. He buys locally grown strains of marijuana in each state and extracts oil in aprocess using carbon dioxide or ethanol. After being refined, the oil from several strains is blended and placed in cartridges that can be inserted into a discreetly sized vape pen. Oil also comes in a tincture that can be taken orally. “Today cannabis is my passion, and I couldn’t be happier. I can do well by my family by doing good for society,” says Hempel.

In Colorado, a manufacturer produces Hempel’s cannabis oils in a 25,000-squarefoot factory a few blocks north of the I-70 freeway running through Denver. Surrounded by a locked wrought-iron fence, the unmarked building is compartmentalized by doors that can be opened only with a key card. Why all the secrecy and security? “Because it’s legally mandated and because at any time we have hundreds of thousands of dollars’ worth of products in production here,” Hempel explains.

Research by Strainz and similar companies shows that CBD has analgesic and anti-inflammatory properties and can achieve measurable success in the treatment of Crohn’s disease, multiple sclerosis, epilepsy and post-traumatic stress disorder. Cartridges inserted into Strainz vape pens are marketed with THC and CBD in different proportions, so customers can enjoy the medical benefits of CBD without experiencing the high associated with THC. Seven years after their diagnosis, Hempel’s daughters experience less frequent and less intense seizures thanks to orally administered CBD tinctures. It’s a sign of how far the culture has shifted that neither of these users nor their “dealer” is anomalous.

Even in states where cannabis is legal, companies handling marijuana and its derivatives face a variety of challenges that keep their executives wandering in a regulatory fog. Pharmaceutical multinationals have to deal only with the Food and Drug Administration, but companies that produce or sell cannabis must answer to state, county and city administrators who can change the rules at any time and often do. Regulatory compliance in Colorado is monitored by the Marijuana Enforcement Division of the Department of Revenue; Washing-

ton’s oversight is handled by the Washington State Liquor and Cannabis Board. Some states allow advertising and the distribution of free samples; others do not. Washington restricts ownership of companies to residents; Nevada welcomes investment from outside the state.

Cannabis companies are perhaps the only businesses in America that don’t complain about local taxes—despite the fact that the money they pay goes far beyond the sin taxes placed on tobacco and alcohol. Jim Rice, founder and GEO of High Level Health in Denver, has two indoor grow houses that supply marijuana strains to retail dispensaries he owns. He pays the 15 percent excise tax on the value of every pound of recreational marijuana he produces, but he questions why every single location where he operates requires a separate business license. Instead of having one license for agricultural cultivation and a second for

retail sales, the 40-year-old businessman is forced to purchase 16 different licenses that range from $3,000 to $9,000 each.

The greatest impediments to the cannabis industry, however, come not from the states but from the federal government, which continues to insist the product is illegal, despite dozens of state laws to the contrary. No financial institution larger than a credit union will open an account or accept deposits from an individual or company involved in the cannabis business. Neither will federal law permit a cannabis dealer to use or accept payment on a credit card. Freight and delivery companies including FedEx and UPS that are involved in interstate commerce will not deliver a product containing marijuana—even if the shipment is within one state. Federal prohibitions preventing cannabis companies from using the mail and other forms of interstate commerce make it impossible for a company to expand legally

beyond an individual state’s borders unless it builds a duplicate factory producing the same product in the second state.

The federal agency inflicting the most pain is the Internal Revenue Service. “I used to own a wine and liquor store and could deduct utility costs, employee salaries, office supplies, business entertainment, advertising, travel tickets and conference fees as costs of doing business,” says Rice. “My dispensaries incur some of these expenses, but I can’t deduct any of them, because they’re associated with a product the 1RS deems illegal.”

A little over one block south of Colorado’s elegant capitol building is the law office of Christian Sederberg. More than 95 percent of the 38-year-old attorney’s clients are companies involved in the state’s four-year-old marijuana business. How has legal cannabis affected Colorado? Have laws and levies stunted its growth?

“Back in 2012, when we voted to make cannabis legal, Colorado instantly became a late-nighttalk-show joke,” Sederberg says. “Since then the state has had three straight years of record tourism and economic expansion. New people are moving in. Foreign diplomats come to study our tax-and-regulate approach. There are no stoners sprawled on a couch here.”

National pot policy won’t change anytime soon. Federal courts are unlikely to get involved, because access to marijuana is not a civil rights imperative. The industry lacks the army of lobbyists necessary to promote congressional legislation. And after years of contentious debate over abortion, illegal immigration, gay marriage and access to public toilets, neither political party wants to embrace another divisive issue on a national level.

But ultimately the federal government, having invited the states to establish their own marijuana policies, can do little to stop the steady march toward legalization. California’s acceptance of recreational marijuana will provide political momentum, if only because cannabis will immediately become one of the state’s leading cash crops. But a defeat of Proposition 64 would not mean all is lost. Thousands of young, well-educated entrepreneurs have seen the demand for medical marijuana grow in states throughout the country, and they’re determined to build a legal and regulated industry whose products can make life healthier and more enjoyable for all Americans. And their dogs. ¦

ULTIMATELY, THE FEDERAL GOVERNMENT GAN DO LITTLE TO STOP THE STEADY MARCH TOWARD LEGALIZATION.