What the Cannabis Industry Can Learn From Mortgages

I have spent much of my career in the mortgage industry, a business where regulation is not something you deal with occasionally. It shapes how companies are built, how products are marketed, how employees are trained and, ultimately, whether a company gets to stay in business.

As I have become more involved in the cannabis industry, one thing has surprised me more than anything else: just how familiar that environment feels.

Cannabis is regulated at multiple levels of government. Federal requirements can still reach cannabis businesses through agencies such as the Environmental Protection Agency, particularly when it comes to cultivation and pesticide use. States establish their own licensing, testing, packaging, tracking and operating requirements. Depending on the market, counties and municipalities may add another layer of zoning, permitting and local rules.

Mortgage professionals know this feeling well. Federal regulators set one collection of requirements. States have their own licensing and enforcement regimes. Individual jurisdictions can introduce additional considerations. The details are completely different, but the operating reality is similar.

If you are going to build a company in either industry, compliance cannot be something you bolt on after the business starts growing.

In mortgages, I have watched companies run into serious trouble for three broad reasons: poor underwriting, bad financial market timing and compliance problems.

The same framework can be applied surprisingly well to cannabis.

Poor underwriting in mortgages means taking risks without properly understanding them. Cannabis executives make similar decisions every day, even if they do not call them underwriting. They are underwriting a market when they decide where to open a dispensary. They are underwriting demand when they expand cultivation capacity. They are underwriting a business partner when they sign a distribution agreement and they are underwriting future economics when they commit millions of dollars to a new facility.

Getting those assumptions wrong can be expensive.

Market timing creates another parallel. Mortgage companies have repeatedly expanded during periods of high origination volume only to find themselves overstaffed and overbuilt when interest rates changed and volume disappeared.

Cannabis has its own versions of those cycles. Wholesale prices fall. New licenses increase competition. Consumer preferences change. Capital becomes harder to obtain. Markets that once looked undersupplied become crowded. Operators that built their cost structures around yesterday's economics can suddenly find themselves operating in a very different market.

Then there is compliance.

A business can usually recover from a bad advertising campaign or an inventory mistake. A regulatory problem that threatens a license is a different category of risk.

Cannabis enforcement records provide plenty of examples of where businesses can get into trouble. Regulators have cited operators for problems involving track-and-trace records, packaging, surveillance requirements, age verification, inventory controls and other operating requirements. Some violations may result from mistakes rather than deliberate corner-cutting, but the distinction does not make compliance failures inexpensive.

That is something mortgage executives understand instinctively. A company may have talented salespeople, great technology and ambitious growth plans, but none of those things compensate for a fundamental compliance failure.

There is an especially interesting example of the connection between these industries.

Before co-founding Cresco Labs, Charlie Bachtell served as general counsel for mortgage lender Guaranteed Rate. That experience turned out to be remarkably relevant when he entered cannabis.

In a 2018 New Cannabis Ventures interview with Carrie Pallardy, Bachtell explained that he saw the development of what he called “the second generation of cannabis.” These emerging markets would be heavily regulated, compliance-focused and, in many cases, built around a limited number of licenses.

Instead of viewing those regulations strictly as barriers, Cresco built around them.

Illinois required cultivators to operate in a highly controlled, self-contained model. That forced Cresco to develop expertise across cultivation, processing, manufacturing, packaging and distribution. According to the New Cannabis Ventures article, the systems developed in Illinois subsequently became part of the company's framework for entering additional states.

There is an important lesson in that experience. Regulation can create costs and complexity, but expertise in navigating that regulation can also become a competitive advantage.

As Cresco evaluated expansion opportunities, Bachtell said the company was looking for healthy markets with “the right balance between regulation and appropriate access.”

That sounds very familiar to anyone who has spent time in mortgages.

Cannabis entrepreneurs sometimes hear about another rule, another filing requirement or another regulator and wonder whether their industry is uniquely burdened.

It isn't.

Mortgage banking, financial services, insurance, health care and many other large industries operate under significant regulatory scrutiny. Successful companies learn how to operate within that environment rather than constantly treating regulation as an external nuisance.

That does not mean every regulation is sensible. It does not mean operators should not advocate for better rules. It means that while the rules exist, management has to treat compliance as seriously as sales, finance and operations.

The best companies eventually stop thinking of compliance simply as the department that tells everyone what they cannot do. They turn it into an operating competency.

They build repeatable processes. They document decisions. They train employees before problems arise. They invest in systems that make compliance easier to monitor. Most importantly, they consider regulatory consequences while making business decisions rather than asking the compliance team to clean things up afterward.

The biggest lesson I would bring from mortgages into cannabis is simple: never cut corners on compliance.

Companies can survive a product that underperforms. They can adjust when a market changes. They can reduce expenses after making a bad expansion decision.

A serious compliance problem can challenge the company's ability to operate at all.

For cannabis executives frustrated by the number of agencies, licenses and regulations they have to navigate, there may at least be some comfort in knowing they are not alone. Other industries have dealt with this type of regulatory environment for decades.

Mortgage companies learned, sometimes painfully, that compliance has to be part of the infrastructure of the business.

Cannabis companies should learn that lesson before they have to learn it the same way.