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Social equity funds
Social equity funds
To start a business, you need capital. This usually comes in the form of money, cold hard cash that you can use to buy assets or pay employees. There are a few common ways to get the money: you could have it already; you could take out a loan from the bank; or you could raise money from outside investors.
Cannabis companies run into a few problems with some of these traditional channels. For one, there are a lot of people who want to start a cannabis company that have been convicted on drug charges in the past; households with a currently or previously incarcerated family member have about 50 percent less wealth than households not affected by incarceration, on average.
This leaves the third option. Some investors will not touch the cannabis space given the uncertainty in the sector. If they do invest, it usually comes at a high cost.2 So what ends up happening is a few well-connected, well-capitalized companies eat up the limited license markets as fast as they can. Not all companies have access to Russian oligarchs.
To try to tackle this problem, states have set up social equity funds to seed businesses started by folks directly impacted by the long-standing and unjust war on drugs. And, so far, it’s not going well.
In 2022, California granted $15 million to support local weed equity programs. There’s also another $15 million pledged for this upcoming year, and $20 million was just announced to help expand licensing in areas disproportionately impacted by the war on drugs. The combined $35 million is a tiny fraction of the more than $5 billion adult-use market in the state; it will likely not go very far, either, given the high start-up costs for a legal dispensary.
Although $35 million is still a lot more than $0, which is what New York has managed to raise so far for their social equity fund. We talked last week in the State Spotlight about New York’s social equity program, a cornerstone of the program and a supposed example for other states as they continue to legalize. Whoops.
Why are the funds so important? Here’s the Cannabis Business Times with Chris Ball, the owner of a vertically integrated, Black-owned cannabis operation based in Los Angeles. The article is titled, “What Social Equity Programs Can Learn From College Sports: Q&A With Ball Family Farms’ Chris Ball.” He has a good metaphor for the challenges operations face entering the legal market, and the support they require:
I’ve been giving the same metaphor for five years now when I talk about what social equity is missing, and the metaphor is when I got my football scholarship to Berkeley. Being an inner-city kid and coming from a lower-class family without the means, Berkeley accepted me into the school and gave me my scholarship, but they also gave me free housing, they fed me three times a day, they paid for all of my books, they paid for all of my tutors. It was that type of assistance that allowed me to learn at a higher level, and it allowed me to be successful in school. If I didn’t have those things and they just accepted me to the college but didn’t provide me with the resources, I would have probably flunked out. There was no way my parents could afford the rent; there was no way they could afford to feed me [and] there was no way they could pay for tutors.
Granting social equity licenses is one thing. Providing the resources and support to be successful is another.
Descheduling cannabis would take care of this, though. Some believe SAFE Banking is just a ploy for further regulatory capture by the established incumbent corporations.