5 hard knockouts for the successful start-up of a legal (medicinal) organization in the Netherlands

The regulation of the production of (medicinal and) recreational cannabis requires enormous efforts from all parties that want to be involved, including the government. Eric Uleman is the managing director of CannNext, a company with a state-of-the-art facility in the Netherlands where they grow medical cannabis for research purposes. “There are a number of questions which need to be answered before venturing into such a business,” he says. “ Do you have a huge passion, drive in your team and are you extremely stress resistant? Can you handle very strict financial and business supervision and can you substantiate all your income? Can you build and operate an expensive and complex professional business model cost efficiently? You have experience in setting up a challenging production and marketing model? Is there enough reserve capital for setbacks? Can you deal with a large number of stakeholders involved in the municipality, region, government and company?” Now that the Netherlands is about to kick off its tender process to establish a legal, domestic cannabis supply chain, Eric discusses the hard knockouts to take into consideration when it comes to participating in such a market via the current tenders.

The Netherlands as a forerunner in controlled legalization
“In Europe, the legalization of recreational production is being considered and the Netherlands is leading the way with partial legalization of production,” he explains. “In the first phase of the legalization, 77 coffee shops in 10 cities will purchase their production from 10 legal growers in 2021. Medicinal production has been legal under government supervision for more than 10 years.”

In the Netherlands, in addition to the tender for medicinal cultivation, there is currently also a tender to produce recreational cultivation. “The recreational market in the Netherlands and, incidentally, throughout Europe is enormous and amounts to tens of billions of Euros. It is a new legal market with strict regulations, which means extra complexity and costs when setting up a company,” he observes.

The recreational and medicinal patient/consumer both have preferences and requirements for a product: just like with other products, smell, brand and (brand) experience play a role. Medicinal production is subject to a stricter regime regarding the product and underlying processes, but recreational consumers will also place increasing demands on the product. “A new market is a challenge for any company, and this is no different with the legalization of cannabis cultivation. It is a process with enormous (financial) interests, so that the Dutch government remains closely involved in the implementation, and at the same time many foreign governments follow this process with great interest.”

Passion, commitment, and resistance to stress
“I regularly hear entrepreneurs or managers in this industry say, "if I knew how complex, tough and expensive this would be, I might not have started it,” Eric recounts.

“This is probably the most important knockout to be active in this market. The market can hardly be influenced, and dealing with many interests can in some cases be frustrating. Make sure you have a team with a huge passion and drive.”

“Of course, it is a great challenge. As an entrepreneur you want to push ahead. However, this is a complex landscape. On the one hand the government, municipality, police, politics and on the other hand a picky consumer. Even if you are successful yourself, the question is whether the rest of the chain will also perform as desired and what will happen if this is not the case. A lot of money is also involved in this market. It is a playing field of powerful parties where there is a chance of clashes and disagreements. A decent tolerance to stress is also important.”

Thus, Eric takes care to explain what the most important things to take into consideration are:

• 100% accountable income: Public Administration Probity Screening Act (BIBOB)
• Experienced management and cultivation staff
• More than enough financing and reserve capital
• Experience with start-ups and scale-ups in new markets
• Understanding of consumer preferences

100% explainable income: BIBOB
BIBOB is an extremely strict review by the Government of all parties involved in the company, such as management, financiers, and growers. “Similar to a Customer Due Diligence (CDD) process in the banking world, where the interests and income of the Ultimate Beneficiary Owner are traced,” he explains. “This is of course very drastic, regardless of the time and costs involved. If you expect staff members or parties involved to have difficulty with this, it may be useful to do this check first. If foreign organizations are involved, this can mean an increase in time and documentation required.”

Proven experience and “track record” in (medicinal) cannabis cultivation
Of course, you often hear outsiders commenting "it is just a plant no different than a chrysanthemum or tomato". “Just as often you see that experts have no experience of their own or are simply wrong,” Eric remarks. “It also does not do justice to the expertise that people have in their field. The government will not take the risk that the supply will not be produced and that consumers and distribution points elsewhere - illegally - will purchase their product. A stable supply chain is critical to the success of the Experiment. This part will weigh very heavily. Failure to meet the requirements may result in the withdrawal of a license, which has happened to several companies in Canada.”

Build a high security production company
“The government's requirements are not far from the requirements for a small bank. Building, furnishing and then training personnel entails significant additional costs. The requirements for the building, personnel, transport, and security of data are not that heavy for most companies.”

Financial risks
“In addition to the standard risks of construction, cultivation and operational management, there are of course also price risks. Is it possible for a government to conclude a 3-year forward contract to seal your price risk? To what extent are growers subject to price fluctuations? Few legal alternative sales channels have been identified. Cannabis prices have fallen dramatically in the past year.”

Reserve capital and plan B
The chance of delay is also high due to the involvement of many parties in the chain, such as municipalities, government, mayors, advisors, not to mention the interests of the consumer. “Take into account municipalities that should be included in the process,” Eric points out. “There is still a lot of catching up to do in the area of ​​knowledge. Multiple departments are involved in the experiment, making project teams less agile. Delays can also occur because the money runs out at a municipality or participants. The budgets outlined are low for setting up new projects that also have a substantial IT and compliance component, and where a strong and experienced (external) team is required. Moreover, this is a new process, in which the chances of success of IT processes in the government were sometimes less successful. “These 5 knockouts are good to realize and discuss in advance, while realizing that there are still a lot of aspects that you don't know now.”

This is part 1 of a two-part series on how to successfully set up a cannabis operation in the Netherlands