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High Hopes and Blunt Truths for the $2.3 Billion Legal Marijuana Market

High Hopes and Blunt Truths for the $2.3 Billion Legal Marijuana Market
Image credit: Patients Choice of Colorado
Several strains of cannabis offered by Patients Choice of Colorado on display in glass jars.

Justin Hartfield knows weed. He founded his company Weedmaps, a sort of Yelp for marijuana dispensaries, in 2008, and now serves on the board of directors for the National Cannabis Industry Association, the Marijuana Policy Project and the National Organization for the Reform of Marijuana Laws, which most people know as NORML and for which he also serves as treasurer.

But before all that came his pot-shop epiphany, and before the epiphany he was just a California dude with a brand-new medical marijuana card burning a hole in his pocket.

Hartfield walked into his first dispensary in Los Angeles not knowing his cannabis indica from his cannabis sativa. He found himself confronting at least a dozen jars full of different strains of weed. The sheer variety and abundance blew his mind.

"Until then, I just thought marijuana was marijuana," he says now, explaining how the shop employees dissected for him the finer points of cannabis appreciation. "By the time I walked out, I saw a business."

High Hopes and Blunt Truths for the $2.3 Billion Legal Marijuana Market
Justin Hartfield, CEO of Ghost Group and founder of Weedmaps, standing in a 420-square-foot hydroponic marijuana grow facility in Orange, Calif. in December 2013.
Image credit: Ghost Group

Weedmaps provides the menus and pricing of legal marijuana dispensaries across the United States. Visitors can access the site for free, while business owners pay a monthly fee to manage their pages. Hartfield says the site is tracking half a million products in real time, "not just strains but also edibles, lotions, tinctures, salves, balms, clothing, bongs, vaporizers. Anything a dispensary sells is on our weed menu." Weedmaps brought in most of the $30 million in revenue that its parent company, Ghost Group, which Hartfield also runs, earned last year.

In early January 2014, the Weedmaps website had a special message for visitors. "Congratulations, Colorado! Now you can find adult use dispensaries near you," it said.

"Adult use" is the marijuana industry's preferred euphemism for legal recreational use of cannabis, weed, pot -- call it what you like. Marijuana became legal for recreational purchase and use in Colorado on the first of this year, and adult-use facilities are doing a booming business. Shop owners estimated that in their first day they made more than $1 million in collective sales.

At Brooke Gehring's dispensary in Edgewater, Colo., a suburb of Denver, 592 recreational customers showed up on Jan. 1. By contrast, only four patients came in for medical weed that day. Since then, more than 2,500 recreational users have come through the doors, more customers than the shop had seen in the previous two months combined. The average purchase was more than $100, with taxes levied by the state included in the price.

Colorado has high hopes for legal marijuana. The state believes the industry could rake in nearly $600 million in revenue this year. That would mean $67 million in tax revenue for Colorado, of which the first $20 million is earmarked for schools.

Related: The Half-Baked Plan for Pot Legalization

So far, the state's politicians appear to be pleased with the rollout of recreational marijuana. "I want to thank the businesses and consumers alike for acting responsibly and with great accountability today," Denver's mayor, Michael Hancock, said in a statement on Jan. 1. "Denver is a progressive city, a vibrant city, and it's incumbent on all of us to continue getting this right."

High Hopes and Blunt Truths for the $2.3 Billion Legal Marijuana Market
Brooke Gehring, owner of Patients Choice of Colorado, and Milo Yung of Big Buddha Seeds standing in one of Patients Choice of Colorado's flowering rooms in April 2013.
Image credit: Patients Choice of Colorado

Right or not, legal marijuana is here, and it's a growing market. Twenty-one states plus the U.S. capital allow medical marijuana, and two states, Colorado and Washington, decriminalized marijuana for recreational use in 2012. (Washington state's recreational pot shops will open this summer.) Along with Washington, D.C., a total of 15 states allow medical marijuana dispensaries.

A rising tide
This sea change on the state level reflects a rising tide of enthusiasm for legal marijuana. According to Gallup, 58 percent of people nationwide now say they support legalization. And they are putting their money where their mouth is. The U.S. market for legal marijuana, currently valued at $1.4 billion, is projected to grow to $2.3 billion in 2014 and $10.2 billion in five years, according to a recent report by ArcView Market Research.

In Colorado and Washington state, the combination of broad popular support and potential for extra tax revenue, along with promises to strictly regulate the industry, has convinced the federal government to reserve judgment for the time being. That is, the Obama Administration is willing to permit the adult-use experiment for now, which means in some sense overlooking the fact that marijuana is still, according to federal law, a Schedule 1 narcotic with no known medical value.

It's politically risky for the federal government to ride roughshod over state laws voted in by a majority of the people, says William McGrath, a partner at the Washington, D.C.-based Potomac Law Group. Political calculation also plays a role. "The administration is fully aware of which way the wind is blowing on the issue," McGrath says. "A majority of Americans favor legalization, and there is overwhelming support among younger voters."

In return, however, the Department of Justice has laid out strict requirements that marijuana cultivators and retailers must follow, and Colorado has issued rules of its own. Two documents, totaling more than 230 pages and issued by the Marijuana Enforcement Division, a branch of the Colorado Department of Revenue, spell out the rules for medical and recreational marijuana businesses.

"The oversight is extensive. This business is not for everyone," Gehring says. "We're in a highly regulated industry because of the federal illegalities."

Barriers to entry
For would-be weed entrepreneurs, there are primarily three barriers to entry. The first is the maze of legal requirements. In Colorado, anyone directly involved in the production or distribution of weed must have lived in the state for the past two years, at a minimum. Retail shops and grow operations need licenses, often multiple licenses, for which a public hearing and inspections are mandatory. And like casino workers, Gehring's employees have to be individually licensed by the state. Everyone must pass a background check. And that's only the tip of the iceberg. Even child-resistant packaging is required. "It's a very comprehensive scheme that will require a great deal of expertise that may be foreign to those in the marijuana trade," McGrath says.

Related: Up in Smoke: First Retail Licenses for Marijuana Distributed in Denver

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Brian Patrick Eha is a freelance journalist and former assistant editor at Entrepreneur.com. He is writing a book about the global phenomenon of Bitcoin for Portfolio, an imprint of Penguin Random House. It will be published in 2015.

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