'Roll Up' Takes On New Meaning: Medical Marijuana Industry Consolidating?

Entrepreneurship is alive and cookin'. The flip side of selling capitalists enough rope to hang themselves is giving them an opening to make money and then watching them do so. Banks began to stop illegal home foreclosures when lawyers perceived a chance to win lawsuits from which they could profit. Marijuana profits began accruing to people other than Mexican drug cartels when it became apparent that the market was huge and the downside medical risk, if not crystal clear, was at least debatable. Now the industry, such as it is, has lept from start-up to consolidation. A 'roll up' is when someone begins acquiring small businesses in an industry sector to create a large business. Hey, it worked for bankers. This capitalism concept is like, awesome.

Gary Silverman smokes out the truth in the Financial Times:

"One of the great adages of American business is that old tongue-in-cheek definition of a gold mine as a hole with a liar standing next to it.

It captures the spirit of those enterprising citizens who have made something out of nothing through the years by positioning themselves next to one pit or another and directing people into it. They are the analysts, advisers, experts and promoters who sing the praises of things that we could do without – such as pets.com or synthetic collateralised debt obligations linked to subprime mortgages – and earn their suppers in the process.

But now this national capability has reached an even higher level than nearly any American would have thought possible only a few years ago. The evidence came this month in the form of a registration statement for a public offering of common stock filed by a company in Costa Mesa, California, called General Cannabis Incorporated.

General Cannabis describes itself as “a service provider to the medicinal cannabis industry”. What this means is that we’ve reached the point where Americans can’t even light up a joint without handing over some cash to a crowd of consultants.

General Cannabis, of course, never touches the stuff itself. As it says in its US Securities and Exchange Commission filing, it does not partake “in the growing, harvesting, cultivation, possession, or distribution of cannabis”. It is, to use the language of Wall Street, a marketmaker, helping “physicians, dispensaries and end users within the medicinal cannabis industry in finding each other and in managing their business”.

The public manifestation of this effort – which also includes providing billing services and other back-office help – is a website called www.weedmaps.com. The core of the site is a listing of medicinal cannabis dispensaries but it also features extras – pictures, for example, of different kinds of marijuana in a “weed porn” section – and personal advertisements from people such as an “18-year-old stoner” in Arizona named Michelle who “needs some friends” but worries that “no one wants to or has the time to get high these days”.

The market that General Cannabis serves was created by laws in 15 states and the District of Columbia allowing the use of medicinal marijuana under a doctor’s supervision. Whether this is a good idea, I will leave to others, although I would admit that having seen the best minds of my generation smoke sufficient dope to come to conclusions such as “the Grateful Dead will change your life”, I remain dubious (or should that be spelt doobie-ous?) about the benefits of this particular palliative.

But I can’t help but be impressed by how quickly the marijuana mavens have materialised in the face of a rolling-paper-thin opportunity. As General Cannabis acknowledges in its SEC submission, it’s a business that could easily go up in smoke.

The immediate problem is that, while some states allow medicinal marijuana, federal law does not. In the eyes of Washington, the General Cannabis filing says, marijuana is a “Schedule I” controlled substance that is “viewed as highly addictive and having no medical value”, which is a definite stumbling block for promoters of the product.

“Because the business activities of some of our customers is illegal under federal law, we may be deemed to be aiding and abetting illegal activities through the services that we provide to those customers,” General Cannabis said. “As a result, we may be subject to actions by law enforcement authorities.”

But federal law isn’t the only hurdle facing General Cannabis. It also faces “intense competition” in what is obviously a highly developed marketplace for medicinal marijuana. General Cannabis lists more than a dozen online competitors in its SEC filing, including Pot Locator, THC Finder, Los Angeles Cannabis Clubs, WeedTracker, Herban Tracker, Roll it Up and Daily Buds.

Indeed, there are already so many cannabis capitalists moving and grooving in the market that it’s easy to imagine this sector attracting the attention of other fee-generating souls, such as Wall Street bankers.

Clearly, the medicinal marijuana industry is heading for consolidation. A savvy dealmaker could make a series of acquisitions and create a bigger marijuana services company with inevitable economies of scale. In investment banking parlance, it is called, fittingly enough, a “roll up”. Imagine the great marijuana roll up – what a long, strange trip that would be.