With its emphasis on social equity and opening doors for new operators, New York’s emerging adult-use cannabis program presents a great opportunity for those interested in opening up their own cannabis startup. But the existing New York cannabis market poses a distinct challenge, as well.
New York is home to one of the largest black and gray markets in the cannabis industry, making it a difficult environment for a legitimate cannabis startup to compete in. To succeed as a new cannabusiness owner in New York, you’ll need to know what you’re up against and how to make your business stand out.
Here’s what you need to know about navigating New York’s market to open a successful cannabis startup.
Social Equity in New York
New York is the first state to give its licensed hemp growers the first chance to apply for cannabis cultivation licenses, starting with 52 conditional adult-use cultivator licenses issued in early 2022.
When the state’s hemp program was first rolled out in 2017, it was haphazard and quickly became saturated. Farmers poured a lot of time and money into growing hemp, only to fail. Now, many have the opportunity to switch over to cannabis cultivation and start fresh.
On the retail side, 25 of New York’s initial 200 licenses are set aside for nonprofits — another industry first. And in a move that reflects New York’s emphasis on social equity, a vast majority of the 900-plus applicants for the remaining 175 licenses belong to minority groups or have faced previous cannabis-related convictions.
The above licenses are dedicated to helping new operators open their cannabis startup. That said, existing medical cannabis operators have the option to either pay $5 million to enter the recreational cannabis industry as a wholesaler or pay $3 million and wait three years to enter as a direct retailer.
Gray Market vs. Black Market
While there is a lot of opportunity to be had in opening up a cannabis startup in New York, especially for those who meet social equity requirements, there are also plenty of obstacles.
One of these obstacles is competing with the preexisting gray and black markets, which helped pioneer the industry but exist outside of state regulations. Neither are inherently bad, but they do pose a challenge to those trying to break into the industry as new operators.
The Gray Market
The gray market exists between the boundaries of what is and isn’t legal, and it’s where the cannabis industry itself started: with small, often unlicensed growers who ultimately helped legitimize the cannabis industry by risking their livelihoods and freedom to bring cannabis to people in pain.
In the early days of medical cannabis, these caretakers might be allowed to serve six patients each, including themselves, and to grow one plant per patient. But to produce products like edibles or tinctures for active or nonsmoking patients, these caretakers needed to get around the six-plant limit.
The solution? Paying other doctors to give them extended plant counts. This was technically legal, but only through a loophole that some states — like Colorado — were quick to close, and the practice crossed over into illegal territory when excess product had to be shipped out of state.
These are the types of operations New York is trying to eliminate by opening up the legal market, but they’re also the type of operations that still exist in other states and continue to feed into New York’s black market.
The Black Market
Like the gray market, the black market has good reason to exist and has helped move the cannabis industry forward. However, it’s also very difficult for a legal cannabis startup to compete against.
Not only is New York’s black market extremely well established, but it also tends to offer better products than the legal market — and at cheaper prices, because black-market operators don’t deal with the taxes and overhead costs that legal operators do.
Advantages of a Legitimate Cannabis Startup
With such well-established black and gray markets, anyone looking to open a cannabis startup in New York will need to communicate to consumers the value of shopping legally instead. The good news is that there are distinctive advantages to the legal market, even if it is more expensive. These include:
- Testing & safety: When people buy products from an established facility that meets safety and health standards, they know what they’re putting into their bodies. Being able to prove that your products were made without the use of pesticides, carcinogens, etc. gives you an advantage over black-market sales.
- Display: A legitimate cannabusiness can entice customers with great presentation of the products and a comfortable, welcoming environment.
- Education: Operating a legal cannabusiness is an opportunity to offer education alongside the products. People who don’t know anything about cannabis feel much more comfortable taking their questions to a legitimate dispensary, which helps them consume more safely.
The black and gray markets may complicate opening a successful cannabis startup, but they don’t make it impossible to do so, especially if you know what you’re up against and can communicate your cannabusiness’s unique value.
Don’t Overlook Extraction
If you’re looking to open a cannabis startup in New York, what type of cannabusiness should you choose? While growing is a popular choice, keep in mind that cultivation alone is limiting. There’s only so much you can do with raw product. But if you add extraction to that, you can expand your output to hundreds of different products.
Think of it this way. If you’re already building a $10 million facility, it will only cost about $500,000 more to replace one flowering room with an extraction room. With that one change, you’ve diversified your ability to enter the market, and you’re able to use and sell all of your product — even the lower-quality portions.
With more professionals wanting to use cannabis discreetly, manufactured products like edibles or vapes are rising in popularity. A cannabis startup that offers cultivation and extraction can capitalize on both raw flower and manufactured product sales.
New York: Ripe With Opportunity for New Growers
New York is about to have the largest set of inexperienced growers in a new market that have support from the state. That means they’ve been given a chance to succeed, but they’re also facing a huge challenge, especially when it comes to competing against the black market.
If you’re looking to open a cannabis startup in New York, don’t assume that you’ll manage just because everyone else is as new as you are. You’ll need to rely on someone who’s familiar with highly saturated markets — black, gray, and otherwise — and can help you compete successfully.
At HYC, we’ve been helping people navigate the cannabis industry since 2008. If you’re thinking of opening a cannabis startup in New York, reach out to us to schedule a consultation today.
