Social equity has become one of the most salient topics within the business community in the past two years—a movement catalyzed by nationwide protests against systemic racism in 2020. Although nearly 70 percent of adult-use states have developed social-equity and reinvestment programs to address the lasting consequences of the war on drugs and the lack of racial diversity in the industry, most of these public programs have been unable to realize the promise of equity.
In nearly every market, we’ve seen a vicious cycle of White-owned medical operators backed by wealthy investors—either through family offices, high-net-worth individuals, or generational wealth—obtaining a first-to-market advantage before social-equity entrepreneurs even get licenses. Black, indigenous, and Latinx entrepreneurs from historically disinvested communities face enormous barriers to obtaining medical licenses, securing suitable real estate, and becoming early stakeholders in the industry due to systemic racism and the racial wealth gap, both of which were only exacerbated by the war on drugs. This disparity is reflected in the fact that Black Americans represent less than 2 percent of cannabis business owners despite accounting for 13 percent of the population.
Regulators have attempted to mitigate barriers to entry through social-equity licensing programs, technical assistance, and educational resources, but these well-intentioned initiatives have seen limited success. Notably, social-equity applicants in Los Angeles and Oakland, California, as well as Illinois have lost hundreds of thousands of dollars pursuing licensure or becoming operational due to licensing hurdles and delays, high tax rates, real estate costs, litigation, and legal fees with no guarantee they’ll ever have a chance to operate.
The private sector can play a critical role in setting up businesses for success—but only if they invest their time and resources strategically. As more established plant-touching and ancillary companies step up to provide the necessary support and create opportunities that help social-equity businesses succeed, they first must understand what it takes to create a successful partnership.
Empower social-equity partners to lead
Before jumping into a social-equity partnership, companies should ensure their guiding principles align with the spirit and goals of social equity. They also must do their due diligence in identifying an ideal partner. After all, it’s easier for a company to place its trust in a partner when they share common goals and expectations. Both parties should actively seek to advance equity, diversity, and opportunity in the regulated industry, especially for the communities disproportionately harmed by the war on drugs. But it’s also important for both parties to be aligned on business strategy and how business decisions will be made.
While many partner candidates may not have regulated, industry-specific experience, they should demonstrate the drive, ability to learn, judgment, and talent necessary to be competitive in the space. The established company must have faith in its social-equity partner’s potential. An equitable partnership will enable the social-equity venture to drive business decisions in a way that’s true to its mission and values. The equity business should have the ability to choose the dispensary or brand name, determine the brand tone, and provide direction on site selection, sales strategy, vendors, growth strategy, and other key decisions. Empowering aspiring entrepreneurs to take the lead cultivates a sense of ownership and is consistent with the spirit of social equity.
Enhance access to capital and operational resources
Experience and drive can go only so far. Capital is king, and without it, no one can succeed in this industry. Unfortunately, access to capital remains the most formidable barrier to entry. Opening a dispensary can cost upward of $1 million up front, while opening a cultivation facility can require tens of millions of dollars in lucrative markets like Illinois, New Jersey, New York, and Michigan.
Applying for a license requires capital as well. State and local social-equity programs may offer reduced application fees, but these programs often overlook the time and expertise required to write a winning application. As someone who has applied for and won two social-equity licensees in Illinois, I can say the process is extremely difficult, expensive, and time-consuming—even with my years of experience as a corporate and regulatory lawyer for large firms and a leading multistate operator. Access to sufficient and low-cost capital is an important predictor of success in new markets. Having sufficient capital readily available enables new owners to execute their core business and operational plans while remaining focused on their growth strategies.
Subsequently, an established industry partner should be responsible for either connecting the social-equity partner to sources of funding or finding ways to reduce costs for the equity business. Currently, few states offer licensing-fee waivers, while about six states provide financial support to social-equity businesses in other forms. In addition to bridging these funding gaps, companies also should provide guidance about obtaining reasonable loans, grants, and affordable real estate, along with technical assistance such as financial modeling and license application assistance. Information-sharing can be particularly beneficial in helping social-equity applicants understand the nuances of the regulated industry.
At Lantern, we enlist a team of subject-matter experts who guide our incubator companies through dispensary operations, delivery logistics, cultivation, pursuing a license, business and financial modeling, brand-building, marketing, and more. This is an important step in setting up social-equity businesses for success, because it saves them money on consulting services and helps them avoid common pitfalls like taking on predatory loans, inefficiently structuring business deals, and giving away too much equity at the outset.
Establish a mutually beneficial relationship
In a successful social-equity partnership, the licensee is positioned to generate wealth, direct the growth of their company, and meaningfully participate in the marketplace. In turn, the larger company receives the opportunity to bring to market its partner’s brand, products, and services, which the larger company may help produce or sell at retail. For an ecommerce marketplace like Lantern, this could include incubating delivery couriers that utilize the Lantern platform, while licensed operators might support a new consumer brand that will be manufactured and distributed at their retail locations.
Ultimately, the benefit received by the established operator need not be monetary, though it can be. Successful partnerships are a valuable opportunity to improve brand reputation and demonstrate a social-equity record—which garners additional consumer and investor affinity. Companies looking to incorporate social-equity partnerships into their strategy must be willing and prepared to offer the resources and support needed to drive their partners toward success at each stage of growth. Eventually, social-equity partners should be put in a position to decide which direction to take their business—whether to maintain their current level of operations, scale, or sell.
Emerging adult-use markets like Detroit, New Jersey, and New York are learning from the shortcomings of earlier social-equity programs and are seeking to bring social-equity companies to market at or near the start of adult-use sales. However, governmental efforts will not be enough to realize the promise of social equity. Established, successful businesses have a social responsibility to lend their expertise and resources to create the best possible outcomes for social-equity businesses.
Cannabis has been synonymous with new beginnings, wealth, and opportunities for thousands of Americans, but our industry will reach its full potential only when those same opportunities are extended to the communities most devastated by the war on drugs.
Akele Parnell is head of equity partnerships at ecommerce marketplace and delivery platform Lantern, where he leads the company’s social-equity incubators, strategies, and initiatives. He is a member of the board of directors of Chicago NORML, the Cannabis Equity Illinois Coalition, and the Cannabis Trade Federation’s Diversity, Equity, & Inclusion Task Force, as well as a principal at 11th Level Inc. Previously, he served as in-house counsel for Green Thumb Industries.