3 Keys To Launching A New Business In The Burgeoning Hemp Industry

By Matthew Wolf, of Joorney Business Plans.

A provision in the 2018 Farm Bill opened the door for hemp growth, lifting the federal ban that deemed the plant a controlled substance. From that decision, we’ve seen a surge in startups around the nation who are venturing into the hemp industry.

While many are flocking to cash in on the now-legal hemp — a budding industry projected to more than double in revenue by 2022 to $2.6 billion — there are a handful of crucial factors to keep in mind for any entrepreneur or business group aiming to get in on the action.

Get To Know Your Government Regulations

Although the 2018 Farm Bill legalized much of the industry across the country, startups must dig into the rules and regulations on a state-by-state basis. For example, in Iowa, both marijuana and hemp-derived CBD are jointly considered a Schedule I controlled substance (and, therefore, illegal, with some exceptions). This is the law until the Iowa Hemp Act becomes fully implemented in 2020. Until then, farmers cannot legally grow hemp in Iowa and production will likely not be legalized until the 2020 growing season.

Hemp/CBD startups should plan for and seek the advice of an experienced industry lawyer that can help them navigate the constantly moving rules and regulations of individual states, and it’s best to have legal advice from the very beginning.

Position Yourself Well With Investors

This market is still so new that some banks may still be a bit apprehensive about lending in this arena. And due to the fairly steep startup and capital expenditures with entering the space, startups are seeking investments anywhere from $6 to $30 million or more, depending on what part of the value chain they are focused on.

The industry is like the Wild West right now, producing a lot of hucksters with flimsy plans trying to strike it rich. Investors (who very well may not be well-versed in the industry themselves) are looking for a strong team that has the operational hands-on experience across the value chain from farm to product and go-to-market strategy. Having a team member that is close to lobbying bodies and key legislators in states in which they want to operate is definitely an added bonus. Other types of startups in other industries may not require actual hands-on experience (and can still raise money as a first-time entrepreneur) and more than likely won’t have a team member with government relations.

Distinguish Yourself

Startups in this space need to create competitive advantages that are real and not simply product features. Let’s take an upstream CBD product company as an example. Many times, startups will have ideas for products that have some unique feature that’s not currently a feature in another competitor product. What if that startup launches a product with that feature and within a year a competitor simply decides to copy it over to their existing product? That startup no longer has a competitive advantage because it never was one in the first place – it was simply a feature. This is how startups confuse features with competitive advantages.

Many commoditized goods and processes can struggle with this, which is why they try to differentiate themselves with brand value (e.g. we are a pioneer in the industry, we are the only one with this particular ingredient, etc.). When a startup showcases features as a way to differentiate, it tells the investor that the path to ultimate success could be more challenging than one that showcases competitive advantages. When a feature can’t easily be replicated by a competitor, you have a competitive advantage. Perhaps it is a secret manufacturing process that yields better operational results than the competition, or a proprietary end product formula that has gone through a scientific study where it has been proven to be effective and it is backed up by a patent.

Differentiating features are good. Competitive advantages are great.

The companies that have everything together will have the best chance of raising money, while those that don’t have a plan in place are going to be left out of the hemp gold rush. Now is the time to jump in. But, before you do, make sure you understand the stakes.

Photo by Javier Hasse.

Matthew Wolf is Head of Advisory at Joorney Business Plans. He has advised over 40 clients across different industries and geographies. He is fluent in development project pre-feasibility and the life-cycle of transactions ranging from $10MM to $250MM and having led such transactions from valuation and deal structuring to distribution, capital raising and negotiation for a variety of corporations at different stages of their development. For more information, visit http://joorney.com.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.