From Capital to Cannabinoids While Avoiding Landmines
The one thing that experience in the extraction world has taught us is that short-term mistakes can lead to a very costly future of corrections. To help you navigate around some potential pitfalls, we've made a list of six major mistakes cannabinoid processors make.
Part 1: Getting Started
Four more states have officially become recreational, and the advancement of adult-use markets only confirms the inevitable; federal legalization is coming. As the industry continues to explode, there’s no denying that massive growth is coming, and it’s heralded by the recent surge of new players. This competition will continue to flood in as the number of adult-use states keeps growing, so it’s important to start positioning your business to be in front of this wave of change and secure your spot in the ever-evolving playing field.
So you think you can be a cannabis processor?
So you’re like many of the green-inspired individuals out there - you have a love for cannabis and are intrigued by the endless possibilities of moving into the extraction space. While lucrative in theory, it’s important to remember that this industry, still in its infancy stages, is as temperamental and as volatile as a two-year-old child. But like all children, the space has the potential to grow into something great, especially if those involved are well-prepared and work to think ahead. As Chess Grandmaster Sevielly Tartkaower once said, “Tactics is knowing what to do when there is something to do. Strategy is knowing what to do when there is nothing to do.”
We at Eighth Revolution provide services from capital raising to cannabinoid extraction guidance and all the areas in between. We pride ourselves on our qualitative, analytics-driven approach, one that blends both the science and business perspectives to maximize potential outcomes. Ultimately, as problem solvers, we’re often approached by those seeking guidance at various starting points, wherever they may be, and that’s why we’ve compiled this list. We know how hard it is to start from the bottom and trust us, we’ve dealt with the pitfalls along the way. Whether it's not validating incoming raw materials or completely ignoring the tiny nuances of temperature and pressure adjustment and their effects on derivative products, we’ve made and seen our share of mistakes. It’s a long journey that’s not for everyone, but for the few that are intrigued, we bring you this offering.
To help you decide whether or not to take the plunge, we’ve outlined eleven key considerations that you need to mull over before you jump into processing and extraction with both feet. Good luck, godspeed, and if you have any questions, feel free to shoot us an email or a DM.
Now let’s get to it.
Unlock more free content.
Create an account.
Start with WHY and HOW, then walk backwards.
When entering into an industry, especially the cannabis space, it’s critical to understand your WHY, which will lead you to your HOW. Once you know your HOW you can easily work backward. Understanding where you want to end up helps dictate the necessary steps to build an environment to get to you where you want to go.
A common conversation we have with newer clients in the space typically starts with the goal of having a specific customized product. Straight out of the gate, they seem to know what they want to produce, but rarely can answer the most important question of all: why? Why do you think bringing this new product or service into the market will be a lucrative venture? Why do you want to make or provide it? Why did you choose to set your sights on this particular endeavor?
In our experience, it’s more important to start with the WHY and the HOW and then work backward from there. The WHY helps build the framework of the company, prompting eager companies to formulate a concrete mission statement, which in turn will motivate employees and consumers to follow them through the good and bad. The HOW helps focus the client’s attention on the type of product, extraction, scale, and brand they want to develop so that there are clear, actionable steps outlined to move forward. Together, the answers to these two questions will allow you to organically pave your company’s way to success and bypass any friction along the way.
For instance, picture that someone who wanted to enter the industry had their blinders on and fixated only the goal of creating a tincture. Initially, this doesn't seem like a problem, right? He knows what he wants and he’ll find a way to get there.
Ah, ah, ah...not so fast. The problem is that because he barely considered the HOW, he ended up three months into the facility buildout process only to realize that part of his WHY (and part of his theorized branding) involves helping the environment but his HOW relies on using fossil fuels like hydrocarbon to fuel his processing. Now you see the issue!
At first, it can seem daunting to break down your vision into such black and white responses. It’s often seemingly impossible to take what you have in your mind and whittle it all down into a few lines on a sheet of paper, so here are some of the questions we use to kickstart the journey: Do you want to produce bulk distillate for the coming commodity market? Is your passion tailored toward the cannabis connoisseur in which supporting local farmers who cultivate high quality material representing a farm to table boutique brand? On what scale do you foresee your manufacturing moving into? Have you considered cGMP in your cost allocation?
If you can answer these without breaking a sweat, you’re in pretty good shape.
THE CANNABINOID INDUSTRY TODAY: Compelling monthly stories, market news and a glimpse at the intricacies of the space as we know it.
It’s not Texas Holdem, but you better be all in.
The most common obstacle we see with our client base is the expectation of a quick profit. We hate to be the bearer of bad news, but here it goes: don’t expect to make any money at all for at least 18 months. Climbing a mountain takes time, and whether you’re starting this journey for the first time or looking to expand into another state, it’s vital to make sure that your business plan is rock solid and your team is experienced before you finally set out.
As with any company, unforeseen obstacles are expected, but this is particularly true for an industry that, as of this moment, still hasn't had Congress pass a Safe Banking Act. To combat this shaky financial ground, resilient companies have developed creative solutions. Sale-leaseback deals are a great example, cleverly allowing processors and extractors to quickly receive millions through the facility’s sale while operations remain largely unchanged.
Even in the most solid of industries, raising capital is its own, unique challenge, and there’s unfortunately no step-by-step guide that we can give you to walk you through it. The only thing that we can definitively say is that networking is your best friend and that many of our clients have found success by nurturing strong connections with other players in the space. This is especially true if you’re planning on attending any capital-raising events. It’s always much easier to make a lasting impression with your capital-raising presentation if you have a few supporters in the crowd willing to vouch for your idea and your business plan.
If you’re in the process of raising capital, make sure you have a long enough runaway to account for massive obstacles as well minimal to no sales for at least 18 months. It may seem like a big ask, but in our experience, investors appreciate the transparency and radical candor. This conserative timeline should ideally provide you with enough operating capital to start developing your business as you weather whatever setbacks the cannabinoid industry throws your way.
ONCE A MONTH. ONE EMAIL. ONE REPORT.
You’re not the first and you won’t be the last.
Alright, now you understand your WHY and HOW and you have an idea of how to raise capital, so let’s avoid the next set of pitfalls: scaling and hiring. By far the two most repeated mistakes we see in the industry are rushing to scale big and hiring the right people for the wrong position. While it’s incredibly exciting to begin stacking the building blocks of your new business, it’s a process that has to be done bit by bit, not all at once.
Scaling is more than changing a number in your P&L!
The dollar signs in our clients eyes are often blinding, and we can recognize them with this statement: “If we run an A,B, and C shift from Day 1 / begin production by Day X with Y units / insert your best case scenario here, then we can be profitable by Month Z!”
We wish this was true, but alas, it is not.
Someone has to be the bearer of bad news, and we hate to say it, but bigger scaling doesn’t automatically equate to quicker or more sizable profits. While true in a straight-forward, idyllic world, we find that the success of this type of plan is incredibly rare and near impossible for any client to obtain. Remember that old saying, “If it’s too good to be true, it probably is”? Unfortunately, that applies here, too.
Manufacturing a clean consistent product is a massive challenge, and finding a buyer for your product is an even larger obstacle. In order to generate realistic projections of when you can expect profit based on the scale of your operation, you need to analyze the historic prices of the crop and its derivatives. It’s also vital to understand the financial burden and output that an operation of your desired scale will produce. At Eighth, we use the commodity market as a basis of understanding for present and future market conditions. In other words, we analyze the past and current price ranges to create data-based projections of market sales. These figures are then adjusted to reflect other factors such as target geographic region, pending legislation changes, and current and potential market demand so that we can use the most accurate calculations to tailor a processing facility that fits the needs of the processor.
We call this process the Eighth Genie because, quite frankly, it’s magical. Being able to take all of these factors and tie them together to give you a comprehensive plan for scaling your facility is a combination of thorough analysis and a thorough understanding of the industry. The result is an outline for a processing facility that will allow you to output your desired amount of product but leaves plenty of room for you to scale within a comfortable time frame.
Right people, wrong place.
The next common mistake we see newer companies make involves the misalignment of candidates and roles. There’s an old Dr. Seuss quote that talks about how you can’t judge a fish by its ability to climb a tree, and that’s exactly what happens when people are put in roles that simply don’t make sense for them.
Most of the entrepreneurs our firm encounters are people that have backgrounds in business that want to enter into the processing and extraction space. Because these people typically don’t have formal chemistry or scientific training, they’re often looking for science-savvy individuals that can help them fill this knowledge gap. Sound like you? We thought so!
In any organization, it’s crucial to have individuals with the correct skill set to excel in the role, and in the cannabinoid space, this is doubly true. The intricacies of processing and extraction are so involved that if the scientific background of the candidate you're interviewing doesn’t seamlessly align with your intended goal, it could mean lost profits and massive staff changes in the future. We’ve seen it happen time and time again. Here’s how the saga usually goes:
Part 1. A scientist was hired but isn’t quite sure what he’s doing.
Part 2. The scientist hires a team that doesn’t meet the right qualifications because he’s not fully aware of them and still isn’t quite sure what he’s doing.
Part 3. The scientist begins to process and extract with his team, but something goes wrong. The business partner and investors investigate, realize that the mistake is big and that profit has been lost, and fires the scientist and his team.
This whole scenario may sound dramatic, but we’re sad to say that we’ve been called in to help with situations exactly like this. It’s important to hire people that have proof that they know what they’re doing, especially when it comes to the science side of the coin. Just as trying to use an intellectual property attorney to defend you in a criminal trial is wildly foolish, so is using a botanist to set up your processing facility.
Because a processing facility is a chemical refinery, we believe it’s best to appoint chemists as your lead scientists. Even with this parameter, it can be difficult to pinpoint a great candidate because within the discipline of chemistry there are multiple different specialties, but the ones we highly recommend for facilities are analytical chemists, process chemists, and chemical engineers. Hiring people that have expertise in these fields will create a true science-driven culture in your chemical refinery rather than one based on guesses and assumptions.
Avoid expensive paperweights, invest for the future.
Equipment selection is always a tricky step, but don’t worry, we’re here to walk you through it.
Remember when we told you about asking WHY and HOW before you started making any big decisions? This is where those answers become crucial. By flushing out those concepts, you can now filter out all the equipment manufacturers that don’t fit your why, leaving you with a handful of vendors that do. An overwhelming explosion of options suddenly becomes a manageable list that can be whittled down through some additional research.
Another critical component that we’ll continue to shout from the rooftops is understanding the direction of regulatory perspectives. cGMP compliance in the states is not an if but when, and our Canadian brothers are hemorrhaging money as they rush to meet the newly enforced natural product health guidelines that other industries have already become accustomed to operating by.
We won’t lie to you, this is an expensive process that’s currently optional. If you truly have no room in the budget, it’s entirely legal to operate without being cGMP compliant. In the spirit of sharing truths, though, here’s another one: budgeting for this now will save you a massive amount of time, money, and headaches in the future. If you build with this future mandatory compliance in mind, you’ll be setting yourself up for accelerated growth. This will provide you with a competitive edge against other processors and extractors that will have to disturb their operations to allocate internal resources when the regulations inevitably change. The initial upfront investment in compliant processing equipment, while sizable, will be substantially less expensive than installing non-compliant machinery that needs to be switched out down the road.
If you’re truly unsure of what to do at this juncture, ask yourself this question: are you making a long-term investment in the cannabinoid space or are you simply trying to catch a small part of a burgeoning market? If you’re thinking like an investor, your company should be poised for positioning as a household name. If you’re only thinking about scooping up a few small fish in a massive pond, then you may soon be the main character in one of the many cannabis business horror stories. Build your foundation so that you can be a mainstay in the industry and make your life simpler by tackling these future issues in the here and now.
Stepping over dollars, picking up dimes.
Inefficiencies are perhaps the deadliest sin in the cannabis and hemp world, and cutting corners to save the capital will usually cost you ten-fold down the line.
Although most don’t plan to skimp when they initially set out, sometimes it becomes difficult to stick to your very time consuming, incredibly costly plans. When the bills start to pile up and the profits are nonexistent, it becomes increasingly harder to ignore that little voice that asks “Well, why not just do it that way? Just this once?”
We’re here to shut that voice up and tell you why not.
As you’re creating a business that can go the distance and help you reach long-term success, it’s important that you make choices that support this vision. Making concessions in the quality of your equipment, process, or materials will only do more harm than good, and this is especially true if you’re telling yourself that you’ll fix them later. “We just need the pilot plant to run for a year, and then we’ll go back and address those other factors,” has been thought so often that it should be engraved on the tombstones of all the long-dead processing facilities that have inevitably succumbed to this logic.
While QA/QC is currently not mandatory for internal testing, it’s one hundred percent necessary, and the best way to get a comprehensive look at the functionality of your facility is by using real-time sensors. Understanding your manufacturing process and the various factors that influence the efficiency and optimization of your facility will help you pinpoint any issues in your process and allow for immediate, actionable troubleshooting.
To make sure that you’re keeping up with such a competitive market, you need to know how potent your crop is. Potency analysis should be performed multiple times everyday regardless of scale, but this process can add up. At the date this article is written, it costs roughly $100 to purchase a potency test and $1,500 for a full panel. If we were to apply this scenario to an extraction facility operating at 100 lbs/day that has an extraction efficiency of around 50%, one day of multiple tests would cost the facility $10,000. Five more days like that and you’ve already exceeded the cost of inhouse QA/QC equipment. Unless you’re operating for one week per year, that’s a pretty steep cost.
Already convinced you need Q/A? Too bad. We’ve already written the rest of this.
It takes seven days for the results of these tests to come back, and by then, your facility has already processed a week’s worth of crop. Even if you ground your operations to a screeching halt as soon as you sent out that first test, the time you spent processing that first yield still amounts to thousands of dollars of wasted days, money, and manpower.
This is especially vital for those in states that haven’t legalized adult-use where the legalities surrounding cannabis are still highly irregular and often unkind to hemp growers and processors. Those investing in the cutthroat CBD game don’t have the time or capital to waste if their product exceeds the legal THC limit, and adding real-time sensors will instantly give you the green light to go ahead or the red light to stop processing.
In short, by taking a forward-thinking approach and using real-time sensors to monitor your extraction downstream refinery procedures and final product formulation, you can set a consistent quality standard that will make a large difference in your bottom line.
ONCE A MONTH. ONE EMAIL. ONE REPORT.
Part 2: Marketing Your Product
You’ve talked the talk, but can you walk the walk?
Congratulations on making it this far! We know that the process of inception to fruition is a long and arduous one, but now that you have an unshakeable base, your business ventures will be all the more successful. Now it’s time to dive into the challenges and complexities of product marketing and find out what it takes to differentiate yourself from your peers. Without a conglomerate like McDonald’s or Coca-Cola to provide a baseline for points of parity and points of difference, how can you separate your product from the thousands of others on the market?
That’s where marketing comes in. Marketing, the beautiful combination of tried and true principles and innovative philosophies that have changed the trajectory of all industries. When crafting your organization’s marketing philosophy, remember that there are no clear cut rights or wrongs. Our experience has shown us that there’s not a one-size-fits-all strategy guide to approach the market space, especially one as complex and limitless as this one.
Sit down and study up.
Before setting out to develop the product you’ve worked so hard to create, market research needs to be conducted. This is an essential step, but one of the most missed. Researching the market allows you to understand the critical components behind your future branding process so that you can create a targeted product roadmap. Ask yourself some of these fundamental questions before you get started with your branding process: Do you plan on expanding into different product portfolios? Where will your products fit into the market in regard to their positioning? In other words, what does their pricing and messaging look like and how does it make them different from other brands? Why will a consumer select your product over the hundreds that are looking back at them from the shelves? Which companies are your closest competition, and what are they doing that makes them stand out?
If you had trouble answering any of these questions, it’s completely understandable. This is a complex process made to look simple by polished organizations like Red Bull and Geico and Ford. The goal is to uncover the strengths and weaknesses of both your brand and the brands of your main competitors so that you can find your niche as simply and quickly as possible. To help, we’ve broken down some main considerations that you should consider before going to market.
Why reinvent the wheel?
When breaking into a new space in the industry, it’s not always necessary to be completely unlike others. We know this sounds counterintuitive, but stay with us. While it’s always a good idea to make yourself stand out by utilizing key differentiators, small companies need to be strategic with their resources. By leaning on large, successful brands that have already used their reach and capital to suss out target markets and establish brand loyalty, small companies can capitalize on their trusted presence and position themselves one step ahead of the competition. How do you do this, you ask? You do this by relying upon time-worn aesthetics.
Here’s an example. Think of your standard tin of Altoids. Picture the shape, the colors, the material of the container. Chances are you’ve just visualized a rectangular tin with vivid red and white coloring and a distinctive font. Now, go check out popular CBD mint brand, Mr. Moxey’s.
See any similarities?
From the tried-and-true durability and feel of tins to the unfussy, pragmatic straight lines, Mr. Moxey’s marketing draws upon feelings of comfort borrowed from pre-existing brands. These familiar visual cues visually link them to a well-established, risk-free company that’s been a household name for decades. The result is an automatic sense of trust that prompts consumers to bypass the initial consideration phase because it feels like they already have familiarity with the brand. Minty and clever.
Life’s a peach.
We’re sure you know this, but colors are pretty important. The colors you decide to use play a crucial role in the buying process by attracting the attention of the eyes and the subconscious, eliciting feelings based on the hues that have been selected. Think about all of your favorite fast food joints. McDonalds, Burger King, Wendy’s, Sonic, KFC, Chick-fil-A… Is it really a coincidence that they all use red in their logos?
When you’re designing your branding, think about the answers to the questions that we’ve been asking you all along, particularly about your target market. Light colors and elements of white almost always help catch the eye on the shelf because they absorb light, but are these shades right for your audience? Say you’re selling a 7:1 THC to CBD pen that’s meant to help a user fall and stay asleep. While many companies often shy away from dark colors on their packaging and website, most of them aren’t aiming a product at people craving the peaceful blue-black of a good night’s sleep. To consumers frustrated at being awake who yearn to shut their eyes and embrace the dark, bright colors reminiscent of sunshine and light might seem outright garish.
When creating a color scheme for your own brand, think about who’s buying it and why. Are they mostly men or women? Will they be using your products primarily for energy or for rest? What are three adjectives you’d use to describe a potential user? All of these questions that will help you determine an appropriate color scheme for your brand, whether it be bright or dark, muted or vivid, warm or cool, or a unique combination of all six.
By understanding exactly who’s buying their product, brands are able to create an entire visual narrative that entices those that are seeking specific results.
Note: It’s important to note that, while many are currently marketing products that will help a user achieve specific results like better sleep or lessened anxiety, there have been very few scientific studies that back up these assertions. While we’re confident that this will change, we still encourage our partners to shy away from any bold claims until there’s verified, science-based evidence to empirically support them.
Unlock more free content.
Create an account.
A rose by any other name...
We’ve talked about what your brand should look like, but what about how it should be structured? When you create your brand, it’s important that you’re not boxing yourself in by pigeonholing yourself into just CBD or just gummies or just whatever else you plan to start out with. In short, don’t name yourself ‘Jimmy’s CBD Tinctures’!
Oftentimes brands will initially start in one, extremely focused direction and then quickly decide to branch out, but at that point, they’ve already secured a very product-specific brand name, URL, and imagery. At this point, instead of redoing all of the work that they’ve spent their time and hard-earned money creating, they often decide to develop a new line that offshoots from their central brand. While flexibility and the ability to pivot are excellent ways to make sure your company remains dynamic, splitting up your company’s market presence by creating new names, new logos, and new color palettes can be confusing.
We believe when creating a brand, it’s important to make sure that it acts as an umbrella for all of your different offshoots. Take Wise, the famous snack company, for instance; rather than split up their offerings by distinguishing each and every snack product (which would involve creating an entirely new brand for potato chips, cheese doodles, and popcorn, respectively) they instead decided to lean on their existing brand equity and market them all under the same moniker. By making sure that your branding and product lines are clear, there’s no reason for the consumer to feel skeptical about your legitimacy.
Wow, that was a lot. Let’s recap.
1. Start the process by figuring out your WHY and your HOW, then work backwards.
2. Understand that profit won’t come right away and that you need to scale your facility with your growth, not grow to fulfill your facility’s scale.
3. Hire the right people for the positions you’re looking to fill.
4. Try and set your facility up so that right from the get go, it’s cGMP compliant.
5. Invest in QA/QC equipment like real-time sensors.
6. Make sure you clearly differentiate your brand by doing your market research.
7. Lean on tried and true concepts like color theory and incorporate successful strategies from large companies to help legitimize your brand.
8. Make sure you position your brand for growth.
That’s about it! We hope that this gave you a better idea of what you need to consider when you’re thinking about entering into the cannabinoid space. Though this is only a fraction of the considerations that go into setting up a processing and extraction facility with the end goal of selling product, we think it’s a pretty good start.
If you’re interested in learning more about the industry before taking the plunge, we recommend taking a look at our monthly Intelligence Report that we release for free every month. Packed with information, we spend hundreds of hours (literally, it’s kind of a labor of love) aggregating various data, conversations, and published reports so that we can chew it up and spit it out in a more comprehensive, compact way. If you want to take a peek at our latest issue before committing to an email sign up, click here.
+1 (516) 653-2006
If you have any questions at all or would simply like to talk more about any of the topics we’ve laid out, please don’t hesitate to reach out. Our motto is "To help the cannabinoid industry move forward,” so we’re always excited to talk about the industry and how we can help those in it.
SHARE THIS ARTICLE