Marijuana boom spawns ancillary businesses

By David Pierson, Los Angeles Times

Saturday, May 17, 2014 | 2 a.m.

Ben Wu took a six-figure pay cut when he left a career in private equity for a shot at the marijuana boom.

Trained to spot small businesses with big potential, he started this year as chief executive of Kush Bottles, a Santa Ana, Calif., company that sells child-resistant plastic cannabis containers.

It took some persuading to get his parents and girlfriend to embrace the move. But Wu insists it was a sound business decision. As the pot industry blossoms, he reasoned, a robust supply chain is needed to help grow, package and market legal marijuana.

"The sky's the limit," said Wu, 35, a New York University business school graduate and former vice president at Wedbush Capital Partners. "As long as states continue to adopt, we're going to double growth each and every year."

Container brands like Kush Bottles are among a slew of ancillary companies joining what many are calling the green rush. Where there's weed, there's also a growing need for everything from greenhouses and fertilizer to pipes and vaporizers.

"The annual revenue is easily in the hundreds of millions, and likely much more," said Chris Walsh, editor of website Marijuana Business Daily.

Demand for pot-related products and services is expected to grow sharply as more states loosen marijuana laws. Already, 21 states and Washington, D.C., allow the sale of some form of pot.

Entrepreneurs are attracted by the industry's open field, with few established players and many untapped markets. Some say the marijuana boom reminds them of the Gold Rush a century and a half ago.

"We're selling shovels in a gold rush is all we're doing," said Rich Nagle, a former electrical engineer who now peddles an automated indoor marijuana growing system, designed to be managed remotely with a smartphone.

No one has been able to estimate the potential market for ancillary products and services. But legal cannabis sales are expected to grow to $2.57 billion this year, up from $1.53 billion a year ago, according to ArcView Group, a San Francisco investment network and market research firm focused on legal cannabis.

In addition to product suppliers, marijuana retailers and dispensaries are also increasingly seeking lawyers, accountants and security consultants, said Troy Dayton, CEO and co-founder of ArcView. But many of those professional firms still avoid the pot business.

"The reason there's so much opportunity in ancillary businesses is because the industry is being underserved by traditional players," Dayton said. "In part, it's because they fear the reputational risk and they fear the market is too small. But it's growing fast."

Growers and dispensaries offer some of the quickest returns on investments and fattest profit margins. But they also are exposed to risks that don't affect supply chain companies.

The federal government still classifies marijuana as a Schedule 1 drug, on par with heroin and ecstasy. That means any enterprise that handles pot faces the threat of closure or prosecution, no matter what state laws say. Because it's a cash-only business, companies that sell pot are also at higher risk of being robbed or burglarized: Most banks are prohibited from taking deposits from marijuana sellers.

"Any time you're literally touching marijuana, you're subject to a different set of laws," said Justin Hartfield, founder of Weedmaps, a review website that is similar to Yelp but for pot dispensaries. "We don't touch the product itself, and that's how we're able to get a bank account."

Hartfield's site is one of the most recognized brands to emerge out of the recent rise of legalized pot. Founded in 2007, shortly after Hartfield received his first medical marijuana card, Weedmaps grossed about $25 million in revenue last year.

Dispensaries post their menu of marijuana plants and prices for a monthly fee of $420.

Hartfield is building an empire around legalized marijuana. The Weedmaps site is one of a constellation of ventures, including the recently redesigned Marijuana.com, a news and forum site, and MMJ Menu, a point-of-sales software for tracking marijuana sales, inventory and patients.

Hartfield, who grew up in Hawthorne, is betting the federal government will relax marijuana laws, fueling the growth of his brands. His treasure trove of data on usage and pricing, as well as an expanding network of sellers, helps his business stand out.

"I think we've grown a business and brand that would be either ripe for acquisition or something we could build out long term. I think we have a lot of value. So we're begging for legalization," Hartfield, 30, said as he sat inside his sprawling new headquarters at an office park in Irvine.

Wu, of Kush Bottles, is closely following state-level legalization efforts. As more states permit pot, regulators will be looking at child safety requirements for plastic pharmaceutical containers that typically carry much of the nation's medical marijuana.

Unlike child-resistant twist-off containers, Kush Bottles opens only when squeezed with enough strength. That's intended to stop children 5 and younger from opening them.

"This is pharmaceutical packaging," Wu said. "We didn't reinvent the wheel. This industry is really great at adapting what's already out there and using it for their products."

Part of Wu's business strategy is having his sales team call or visit dispensaries to educate them about the laws for containers. Several states require child-resistant bottles. California has no such rules, but about half of Kush Bottles' sales come from the Golden State.

Wu said the company's focus on safety alleviated some of his girlfriend's reservations about his job change. She initially feared that Wu would become the next Walter White, the chemistry teacher turned meth cook in the hit TV drama "Breaking Bad."

The new job took some adjusting. Wu put away his business suits and learned how to convert grams to ounces. To boost his cred, he schooled himself on the lingo for different strains of marijuana such as OG Kush and Sour Diesel.

Still, when strangers ask him what he does for a living, he simply says he's in pharmaceutical packaging.

"I go to sleep very easily knowing the DEA is not going to kick down my door," Wu said.