Canada’s regulated cannabis industry is in trouble. We continue to see high levels of creative destruction among business, Health Canada is failing to achieve its public health and safety goals, and the country is quickly losing its status as a global leader in socially responsible policy-making.  These outcomes are a direct result of the Canadian government’s lack of support for cannabis entrepreneurship and small business.

Fairness and Equality

During a 2017 Vice interview, Justin Trudeau told a story about his brother avoiding a conviction for cannabis possession because their father was able to call in a few favours and pay for solid legal support.  The takeaway, he told us, was that legalization would ensure that not just the connected and wealthy could avoid a criminal record, but that everyone could.  That his government would build a new system based on Fairness and Equality.

In one sense, legalization has achieved that goal by removing from law enforcement a lever for control that was typically used on racialized people. But it has NOT made the industry “fair and equal” for entrepreneurs who were already running established underground businesses. 

From the time cannabis legalization first became a topic of conversation, we knew that we wanted to participate in the legal market.  Running an underground business is fun in many ways, but it is NOT fun when Child Services show up on your doorstep, or when someone follows you to your car after a market and robs you at gun point, or when a supplier sells you rock salt instead of CBD.  For me and Ari, participating in the legacy market was something we did because we believed in the power of the cannabis plant to change people’s lives.  Both of us have had our lives made better by cannabis, and we built our business to give people access to safe and reliably-dosed edibles.

Moving from the Legacy Market to the Regulated Market

Participating in the legacy market has allowed us to connect with and speak to many different entrepreneurs, people who grow and make all kinds of products, from vape pods to edibles to topicals to packs of exotics. With few exceptions, they are a group of people who are passionate, dedicated to the plant, and smart and savvy in running their businesses.  They are often from marginalized groups and have been forced by systems and circumstances to operate in the shadows, take risks they wouldn’t necessarily prefer to take, and find ways outside the regulated system to provide for their families. Many of them are women and people of color. Many of them want, more than anything, to participate in the cannabis industry in a legitimate way. 

One of the reasons I wanted to move Fritz’s to the regulated space was to pave the way and do my part in helping other legacy entrepreneurs move out of the shadows.  Most know they’re running their business on borrowed time, and that their livelihood could be taken away from them at any moment.  They are interested in continuing their business in the cannabis industry not just because they’ve already spent their time and energy building their brands, formulating their products, and building their customer base, but because they have a passion for the cannabis plant. For them, it’s not just about making money; it’s about their personal values.

These same legacy entrepreneurs who have been successfully running their small businesses for years watch with growing incredulity as large LPs put bad products out to market, demonstrating their lack of knowledge about and love for the cannabis plant, destroying shareholder value and minimizing the impacts on stakeholder value all along the way.

Over the past year, I’ve spoken to many entrepreneurs who are looking for ways to make the move to the regulated space.  Without exception, they are taken aback by the time, money, and effort required to get a compliant product to market.  Most I’ve spoken to have simply faded back into the unregulated space, where they can continue to profitably run their small business.  One, with deeper pockets, has started the arduous process of becoming legal.  One woman I know, who has been making wildly-popular infused topicals for many years recently told me that her only option for participating in the market was to take a deal with an LP that offered her 5% of sales as payment for the years of R&D she had put into developing her formulas.

What went wrong?

Back in 2017, Canadians were optimistic about being the first country to legalize cannabis. We envisioned a future where Legacy entrepreneurs like us would be welcomed into the regulated industry, valued for our innovation, respected for our passion, and paid commensurately with the expertise we’d worked to develop.But the mandate for developing regulations for the Cannabis Act was given to Health Canada, rather than Industry Canada, and as a result the focus of the regulations is on public health, rather than on business and industry. 

By focusing on public health to the exclusion of good business practices, Canadian regulators set the barriers to entering the industry so high that the only people who were able to participate were already well-established, well-connected, and well-financed.  If I were more cynical, I might think that by setting the industry up in this way the federal officials at the time ensured that their friends and colleagues would be able to make money off the legalization of cannabis, rather than prioritizing the participation of legacy entrepreneurs in the regulated market.

In freezing out legacy entrepreneurs, the very people who understand and respect the power of the cannabis plant, the legal industry has made predictable missteps.  We see evidence of insider trading among boards of large cannabis businesses. C-suites are filled with white men, while women and people of color are losing representation across the industry.  Best practices for setting up boards and executive leadership have been ignored. The people who have called out the businesses that engaged in this behaviour have been disregarded and derided.  

Why Legacy Entrepreneurs are Key to Saving the Cannabis Industry

They’re Good at Business

Entrepreneurs focus on profitability first, then growth.  They use profitability as a metric of success and business health, rather than the speed of growth, or “funded capacity”. Legacy entrepreneurs are nimble, operating in the shadows and becoming masters at getting things done. To maximize profitability, they keep their finger on the pulse of the consumer.  They know what products consumers want and how to make them. Desirable product offerings are needed to transition current legacy consumers to the regulated market, and Legacy know what they are and how to make them.  

They’re innovative

They come up with new products to help differentiate themselves in a crowded landscape.  They explore novel ways to serve their customers and make new and exciting products. Despite all the odds stacked against them, we see Legacy entrepreneurs and small businesses finding ways to make it work because of their commitment to and love for the cannabis plant.  That same sense of passion is sorely lacking in many of the corporate cannabis companies today, where money is valued above the flower, which shows in the quality of their offerings.

They’re diverse

Unlike the executive teams and corporate boards at most large cannabis companies, small business owners are often women, visible minorities, people of color, indigenous, and from the LGBTQ communities.  If you compare a group of legacy entrepreneurs to the current executives in business leadership positions in the cannabis industry, the differences are glaring.

We have a wealth of research that points to the fact that companies (and industries and societies) do better when leadership is diverse and accurately represents both their customer base and the society they serve. Diverse companies do better because they produce higher-quality work, demonstrate better decision-making, have greater team satisfaction, and generate more equality for their employees and the industries in which they operate.

The Regulations are working against Small Business Ownership and Entrepreneurship Participation

In addition to excessively restrictive regulations around things like packaging and edibles dosing, there are several reasons it’s difficult for small businesses to participate in the regulated cannabis industry.

Long timelines take between two and six months to get a new product to market

In the Legacy market, I would look at my weekend sales data on Monday, see what flavours sold best, and make new batches based on that data to sell the NEXT weekend.  My timeline was 6 days, not 6 months.  This allowed me to keep my finger on the pulse of the cannabis consumers, constantly adapting to what they were purchasing.

Regulatory structures give provincial bodies complete purchasing power

The OCS (for example; there are other provincial wholesalers) chooses every product that gets listed in Ontario, and the decision is often based on how much money the brand has put into marketing and sales support in stores across the province, not on the actual quality of the product. This is a difficult scenario for entrepreneurs with small budgets who are bootstrapping their business because it constrains their ability to compete on product quality.  How can consumers vote for my product with their pocketbook if they can’t even access it?

The Legacy market is an example of a true free market.  Consumers have a wide variety of products to choose from and they indicate their preferences with cash.  If they like a product, they buy it.  Pure and simple, and without a gatekeeper who decides what the consumers is allowed to consider. The OCS makes me compete on the amount of money I have for a marketing budget instead of the quality of my product offerings. As an entrepreneur with a small business and a tiny budget, this approach takes away the main competitive lever I have—product quality.  We make good, delicious, effective gummies, but consumers won’t purchase my products if I can’t get them to market because the single edibles buyer at the OCS didn’t decide to accept my submission.

Industry Payment Terms

Provincial wholesalers take more than 60 days to pay.  LPs don’t always pay their bills either. I’ve had invoices go more than 6 months unpaid. I recognize that everyone is struggling with their cash flow and trying to make difficult conditions work, but it is nearly impossible for a small business to survive when customers don’t pay you for months on end.

How do we get more Legacy Entrepreneurs to participate in the Regulated Market?

For small businesses to be successful, and to enable Legacy entrepreneurs to participate in the regulated industry, Canada must change its approach to regulation. Current regulations around packaging and edible dosing are conservative to the point of excluding entire market segments. Operating rules are onerous and heavy-handed, and taxation structures are in danger of stamping out craft producers and small businesses. Canada must change their approach to regulating a non-toxic plant to one that encourages business development, rather than infantilizing Canadians by protecting them from the dangers of high-dosed edibles and brightly colored packaging.

Secondly, we must encourage active participation by small businesses and entrepreneurs instead of ignoring them or paying lip service to their participation.  Legacy entrepreneurs have so much to offer!  Innovation, adaptability, consumer and product knowledge, life experience with the cannabis plant—characteristics that are often missing from corporate cannabis companies. Changing the regulations around cannabis tourism is one example of how we can encourage more cannabis entrepreneurship, especially by women, as they are more likely to start a service-based small business.

Third, we must address the issue of financing.  The challenges of raising capital faced every day by women and entrepreneurs of color are only exacerbated in the cannabis industry. The nascent nature of the industry and the fact that cannabis is still federally illegal in the U.S., where Canadian banks operate, have made it difficult for cannabis business to open operational bank accounts, let alone access debt financing.  In the absence of traditional financing options, we see some (innovative!) entrepreneurs turn to crowdfunding or bootstrapping to jumpstart their businesses, dedication and tenacity that should be honored, but that is instead often not enough to get the business to profitability because of the high level of regulation in the industry. One solution may lie in non-traditional financing via companies filling the gap for craft producers and other small cannabis businesses. More solutions should be explored and supported by government to allow for more small business participation in the cannabis industry.

Collaboration between Legacy and Legal is the only way forward

Cannabis is a non-toxic plant that has safely been used by people for hundreds, if not thousands of years. Highly regulating the cannabis industry has led to a continually flourishing underground market that actively works against the government’s goals for legalization.

Despite Health Canada’s insistence that the business case is irrelevant, it is in fact inextricably intertwined with public health and safety. Until the regulated cannabis market is robust enough to offer consumers the products they want at prices that make sense, and attractive enough for underground entrepreneurs to want to participate, consumers (both of age and underage) will continue to purchase unregulated products at illicit points of sale.

By stifling business in the name of public health, regulators work against their own goals. Look to the more established markets in the U.S., such as California or Colorado to see how small business and society can flourish when industry participants are not hemmed in by excessive regulations. These markets also demonstrate the exciting products, varieties, and packaging consumers prefer in regulated products.

Legacy cannabis business owners are smart, nimble, diverse, and dedicated to the plant. In transitioning to the regulated space, they have shown they can conform to necessary rules and structures while bringing in new perspectives to corporate cannabis.

So far, there has not been much real collaboration between Legacy and legal, and saving cannabis will require the industry to value the contributions of Legacy entrepreneurs as much as the contributions of investors. If corporate cannabis and legacy cannabis can truly come together, we can improve public health and safety, provide justice for legacy participants, increase the overall value of cannabis businesses, and offer better products to Canadians.

But if not, then only one side of the industry will survive; and I’ve got my money on the entrepreneurs.

Tabitha Fritz is the co-founder and CEO of Fritz’s Cannabis Company, a cannabis edibles company founded in 2016 that transitioned to the regulated market in 2020.