Portfolio:Starting a Cannabis Testing Laboratory

Title: Starting a Cannabis Testing Laboratory

Edition: Third

Authors for citation: Shawn E. Douglas, Alan Vaughan

License for content: Attribution-NonCommercial-ShareAlike 4.0 International

Publication date: June 2023

Note: Many aspects of the industry—from standardized test methods to federal legislation—are evolving rapidly. This article will be updated with new information when the authors can. Additionally, significant portions of the subsection "The business plan" are adapted from Alan Vaughan's Starting a Cannabis Testing Lab, originally published on LabLynx Press.

In 2023, the cannabis industry finds itself unquestionably maturing from the wild and unregulated initial frontier stage of new, uncharted territory, into a more clearly-defined, valid business ecosystem. Searching business-related social media like LinkedIn or LIMSforum, as well as online job sites like Indeed or GlassDoor, will attest to the great number of industry-related organizations, products, and services, including laboratory testing. And although testing has yet to become mandatory in every state with cannabis laws on the books, the trend is definitely moving in that direction, for both medicinal and recreational products. As of August 2022, at least 340 unique businesses are operating cannabis testing labs across the United States and Canada, offering services that range from extraction only, to full analysis (either production QA/QC or commercial) and research. However, it is clear that more will be required as various valid medicinal properties are documented, general usage proliferates, and testing regulations expand.

As such, the question many lab professionals, investors, and entrepreneurs are beginning to ask is, "what's the best way to get started in cannabis testing?".

What all do you need?

Before you do anything, the best approach is to take a close look at the industry, its players, and how you see your lab integrating with the regulatory dynamics of your state. Do you want to test only medicinal cannabis? Recreational? Both? Extraction only? Who are your customers? Can they afford to pay for the testing you want to provide? What local, state, and national regulations affect your decisions? Are changes to regulations coming soon? How much will a certification like ISO/IEC 17025 help? The answers to these and other questions will help you visualize the market and decide whether this is something you really want to do. Additionally, these questions act as fuel for defining the strategic considerations of what should turn into a vital first step: making your business plan.

The business plan

As with any business proposition, it is important to create a business plan that outlines your goals, how you intend to reach them, and what ongoing business operations are intended to look like. A business plan is commonly viewed as a means to acquire a loan or investment; however, even if you already have all the capital you need, a business plan is supremely useful. The creation process provides a valuable opportunity to visualize and clarify the necessary business components before approaching investors or requesting any other kind of participation. It can also continue to be useful for the life of your business, helping you stay on track with overall business goals. As you learn new concepts and gain additional experience, the business plan can then be updated to further improve your laboratory operations. Templates to help you begin are available from a number of sources, including free example business plans via the U.S. Small Business Administration and Palo Alto Software, as well as a proprietary cannabis testing laboratory business plan template via Spathium Limited.

Standard components of a business plan include the:

• executive summary
• general company description
• scope of business
  • products and services
• strategic considerations
• marketing plan
• operational plan
• management and organizational structure
• financial statements and projections
  • startup expenses and capitalization

Executive summary

In the executive summary, you lay out your whole vision in simple, clear terms. Some advise you to wait and make this the last section you complete so that you have a clearer understanding of the whole picture. For most of us, though, it's helpful to at least start with the laboratory's mission or vision as you understand it. Afterwards, read it back and ask yourself if it still sounds like a genuine and actionable idea. If it does, then move on. Once you've finished all of the other sections, you will want to circle back and adjust this section based on any epiphanies or aspects of the plan that perhaps you hadn't fully thought through initially. You'll also want to include who your target market is and provide a summary of what the initial start-up steps of the business would look like. If you're looking for funds or other support, then this is also the place to describe that effort, as many who you approach may only really read this section, at least initially, to determine whether the plan is worth further consideration.

General company description

What will your laboratory and overall business optimally look like? This section lets you communicate how you envision your laboratory business unfolding. A mission statement, philosophy, goals, values: these really define the "soul" of the company, and you can set these out here. Additionally, a fuller description of the industry and your place in it, how it all works organically, what you bring to the table, and how you see it all progressing over time all combine to give the reader—and you—a more gut-level understanding of just what your proposed lab is all about. You should also include the legal forms it will take, e.g., business entity set-up, state licensing, certifications, regulatory reporting, etc.

Scope of business

This section describes the core of your laboratory business. What testing will you provide, in what manner, and for whom?

Cannabis analysis has, with time, started to distill down to well-defined testing methods, standards, and instrumentation. Common attributes tested include potency (with accuracy tolerances mandated in some cases by the state) and terpenoid/balance analysis that validates product types, as well as pesticide, residual solvent, and mold/fungus testing. In most cases, the entire range will probably need to be tested since potency and safety are important aspects, regardless of whether medicinal or recreational cannabis is being tested. Increasingly, the most successful testing labs are the ones that can effectively guarantee those factors and deliver certificates of analysis (COA) at the most competitive price and speediest turnaround, all while presenting a friendly and attractive, yet professional and authoritative image.

Customer-facing web portals are becoming the standard, and pickup and delivery of samples is another increasingly attractive service to customers, especially as most markets are no bigger than statewide, with many based at the municipal level. But as laws change, scalability should always be at the forefront.

Another point to note concerns the importance of diversification. The lab that is equipped to test cannabis is equipped to test other things as well, so why limit yourself? Even though you may position yourself as primarily a cannabis testing lab, there is risk reduction in offering your services in similar areas as well. For example, many of the tests involved in cannabis testing (pesticides, mold/fungus, microorganism) are also common in agriculture, food and beverage, and environmental testing. Why not branch out and invite other types of customers as well? Of course there is overlap already, obviously in the area of edibles. But the more diversification you can inject into your lab business, the more built-in protection you have against market forces, as long as the cost in time, effort, and expense of those additional services doesn't outweigh the benefits.

With laboratory testing also comes the importance of data management. Depending on the type of testing you plan on performing, as well as the anticipated workload and regulations involved, investment in a data management system such as a laboratory information management system (LIMS) will be a scope consideration. There are, for instance, some cheap or even free cannabis LIMS available. However, given that specific and rigorously enforced regulations inevitably accompany legalization, labs should be unwilling to risk their sizable investment on anything less than a fully-compliant solution. It may also be wise to select something that is flexible and easy to modify as regulations and standards—as well as the demands of the industry itself—evolve and mature.

Strategic considerations

It's all well and good to decide you want to deliver analytical laboratory services to the cannabis industry, but there's more to consider if you truly want to be successful. The strategic considerations section allows you to identify and address the critical elements of your strategy necessary to succeed. Ask yourself questions like:

• What will my competitive advantages be?
• What relationships or potential partnerships should I consider? Consider growers, dispensaries, collection/delivery services, extraction labs, and subcontracted labs.
• Where should I locate my lab?
• What kind of volume am I looking at?
• Are there existing competitors? How are they doing? Can I learn from them?
• What is the regulatory landscape and how is it likely to change?

The answers to these and similar questions can prepare you for the realities of the operation you will encounter. Martin Zwilling, experienced entrepreneur and investor, provides additional advice to those planning startups:

Accept uncertainty as the norm. You will never remove all uncertainties, so accept them, and plan your activities in an incremental fashion. Too often, a business plan is seen as a mechanism for eliminating uncertainty, lulling the founder into complacency. Eliminate major uncertainties before the plan and update any plan as you learn.

Marketing plan

Your marketing plan includes two key elements: research and dissemination.

When it comes to research, you can conduct primary and secondary types of research. While this article and other resources like industry magazines, groups and communities, and blogs can provide great insight and information about the industry, you should also do your own primary research (research you conduct yourself of have performed for you, gathering information directly from a source). Meet with people in the industry, talk to competitors, potential customers, producers, and industry advocates. Check with those who failed or moved to other markets. What happened? What are the economics of the industry, e.g., size of the market, your predicted share, trends, growth, etc.? Is there a genuine opportunity, a need for what you will provide? Who are your competitors? Will your pricing be competitive?

Next, devise your marketing strategies to get the word out about your products and services and keep them in the spotlight. This includes designating how much of your overall budget you need to and are willing to apportion. It also includes your strategic thought processes that, when implemented well, will ensure your investment yields the most effective results in the most efficient manner. Additionally, you'll also want to communicate the particular qualities that comprise your uniqueness and competitive edge.

Today's marketing strategies are heavily internet-based, which can allow for cost-effective, impactful results that were unimaginable in yesterday's traditional advertising models. However, despite the benefits of internet marketing, there is never a substitute for the power of positive word-of-mouth. Indeed, successful sites such as Amazon and eBay, as well as many others, recognize this fact well, providing customer star ratings and feedback for all of their products, a more modern version of word-of-mouth with similar traditional value. Building a good reputation is a long, hard process. Tearing it down is easy and quick. That is a place where your core values and principles, as expressed in the "general company description" section, have a real impact, along with your actual performance. But the old-fashioned satisfied customer who speaks well of you to others is still one of your most precious assets.

Operational plan

Your operational plan constitutes the nuts and bolts of your overall success. This is where the visions for your business meets reality, from an operational standpoint. You need to outline exactly how things will work on a daily basis, from receiving to reporting; what software, hardware, processes, staff, and other resources are involved; and how they are all implemented, with specifications and detailed descriptions. You'll want to take the following into account when drafting your operational strategy:

Location:

• infrastructure requirements
• furniture design and logistics
• long-term production planning
• non-testing equipment, such as hardware and communication systems

Human resources:

• client services
• staffing practices
  • number of employees
  • labor type and roles
  • staff quality and competency
  • pay structure
  • training methods and requirements
  • relevant job descriptions

Testing techniques and costs:

• instruments and equipment
• submission process
• testing processes
• reporting processes

Quality control and assurance:

• accreditation management
• compliance reporting
• competency standards and training protocols
• detection limits and action levels
• safety and cleanliness management

Legal requirements:

• licensing and bonding
• permits
• health, workplace, or environmental regulations
• state, local, and any applicable federal regulations specifically regarding cannabis
• zoning or building code requirements
• insurance coverage
• trademarks, copyrights, or patents (pending, existing, or purchased; note: until federal laws change, cannabis-related brands cannot be trademarked)

Inventory and purchasing:

• operating levels
• stocks, standards, and reagents suppliers
• credit and delivery policies
• managing storage conditions and expiration
• software application (often available as part of LIMS functionality)

Financial management:

• credit and payment policy
• accounts receivable: net, aging tracking, collection policies
• accounts payable: recurring, one-time, aging, discounts
• choosing a billing service or software-based billing

Administrative functions:

• who will be responsible (internal or external management)
• periodic update to business plan
• evaluation of new services or programs
• standard operating procedures development
• continuity of operations planning

IT and data management:

• software application selection and management
• hardware selection and management (IT infrastructure or cloud-based)
• regulatory requirements for data management and reporting

Mentioned at the start, location is an important aspect of your operational plan that warrants further discussion. The design and logistics concerning the laboratory premises requires extra consideration because you will presumably be utilizing that space for a long time. First, make sure you set up zones that make sense so that all of the processes for each type of testing can be done largely within a single zone. Or, if not that, consider keeping all weighing, labeling, and other prep in one zone, all gas chromatography testing in another, etc., but arranged so that the process flow is supported. And give workers sufficient access to instruments and workspace. Keep commonly used large equipment away from heavy traffic areas yet still easily accessible. You may also want to consider extra space for potential future growth.

Second, you'll want to focus on cleanliness and safety. Keep any messy or hazardous areas away from main traffic areas, and keep critical areas such as lab surfaces and sinks clean. You'll also want to keep biosafety (if you are doing microbiology, for instance) and good laboratory practice (GLP) in mind. Lab entry should be restricted to authorized personnel to minimize risk. There should be more than one exit from the lab in case of emergencies. Install fire extinguishers, fire blankets, and emergency showers (with an easy-to-reach handle), and keep safety gloves in-stock.

Management and organizational structure

Example organizational chart

You may have noticed the operational requirement of knowing "who will be responsible" in the prior section. Indeed, you'll have to decide whether you intend to spend your time managing or performing analyses, or even concentrating more on promotion, marketing, and connecting with others in the industry. Or maybe you prefer to dabble in all these activities, with people already in those designated roles so that you pop in randomly to ensure things are running as they should. Whatever your intended role and organizational setup, you'll need to specify it all here. If your staff will number 10 or more, it's a good idea to draw up a hierarchical flowchart-style organizational diagram to make it clear how decision-making and task flows take place. Additionally, if you plan on having any advisers, consultants, or board members, then elaborate on those roles in this section, including attorneys, accountants, insurance agents, bankers, and mentors.

Financial statements, projections, and startup capital

First, what you and any partners, stockholders, or investors bring to the table should be presented here as a personal financial statement, shown in a balance sheet format that lists both assets and liabilities. This need not be made available to everyone who sees the plan. It can be on an "available upon request" basis for only those parties for whom it is a necessary component (bank, additional investors). A high-level view of this is, however, part of your executive summary.

As for the financial projections based on those statements and other particulars, you'll need to develop a sturdy financial plan. Creating a realistic financial plan with accurate data (where they are known) and sticking to (or going under) its budget is crucial for your project to be successful. Even then, unforeseen economic or business factors may emerge and threaten its fulfillment.

Some elements of a good financial plan include:

1. Important assumptions: Here you'll include current interest rates and sensible predictions of their likely changes over time, tax rate projections, market and other business factor projections, etc. All need to be considered and factored in as assumptions that impact the projected financial performance of your lab.

Additionally, you'll want to conduct a break-even analysis, which takes monthly income and expenses into account to calculate the monthly income needed to both break even and become profitable.

2. Business ratios: Business ratios are a measure of the company's actual net worth at any given point in time, essentially a snapshot of its financial health. Like your personal financial statement, it shows the ratio between your company's liabilities and assets. However, in this context it plots the predicted ratio over several years and also compares it to overall industry averages.

3. Projected profit and loss: Your monthly projection of profit and loss provides a useful guideline both for initial planning and for maintaining adherence to the plan month by month. If you start to see significant deviation—and not in a good way—then you can make adjustments in real time before things get too far out of control. Include an annual projection for a higher-level view, showing the emergence from deficit operations to profitable business operations.

Additionally, weekly projections will help you identify problems even earlier and make necessary adjustments well before they are seen in the monthly numbers. Any additional profit or loss projection tools will all add to the risk management of your lab project.

4. Projected cash flow: Having cash on hand, available for emergencies or just unforeseen contingencies, is as important as falling close to your profit and loss predictions. Businesses have been forced to shut down because they were operating too close to full cash flow while dealing with unanticipated expenses. The ongoing cash flow becomes more important over time as initial capital is expended. Incoming revenue, therefore, must make up the difference in maintaining a healthy buffer. As with all projections and actual records, it is important to make sure you have included everything that applies, including asset depreciation, interest, etc.

5. Opening day balance sheet: Your opening day balance sheet provides the baseline for tracking your profitability and net worth going forward. The reality of it may be a little different than what you had predicted in your startup expenses and required capital balance sheet, but it's important that this one reflects reality.

6. Projected balance sheet: Along with the profit or loss and cash flow projections, a projected balance sheet broken down by year provides another perspective to help gain a comprehensive view of what your financial plan predicts. Like the business ratios, it provides annual snapshots of predicted net worth and shows when that is projected to become positive.

Finally, you'll need to address startup expenses and required capital. Obviously, starting any laboratory requires capital, in the form of premises, equipment, qualified staff, and the money to acquire them. Your personal financial statement brings into focus what you are able to invest in the project. This section catalogs every facet of your startup costs, from any licensing, legal fees, etc. to your instruments, property costs, stocks, and the like, down to the last sample container. As you may imagine, getting this right is one of the more critical—and expensive—parts of your business plan.

You are the best judge of what equipment and stock you will need, based on your own experience and training. Getting used equipment where possible can save some expense, as long as it's in good condition and is likely to last until you are able to upgrade. You can use the "operational plan" section to help you list the items you'll need to make that happen. You may need to categorize items as "essential" vs. "nice to have." Even the essentials can be phased in to ease up cost flow, as you can start out doing limited testing and expand as income allows.

Traditionally, it is more costly for a startup lab to lease commercial space with existing lab facilities than it is to establish a lab in an incubator facility.

As for "required capital," include operating expenses for the first year, or a reasonable period while income is uncertain, with enough reserve to cover any issues arising. These can be derived from the projections in your financial plan.

Purchasing tips

Here are some purchasing tips from others who have gone through the lab startup process:

• Safety glasses can vary wildly in price, from around $2 to around $11 or more. Shop around.
• Use less precise balances where tolerances aren't as critical, and save the more accurate ones for processes where it matters.
• It's much better to buy tools and routine equipment (e.g., duct tape) at a hardware store than through science vendors.
• Buy in bulk and buy early. Delays happen.
• Some used equipment can be a great bargain. Maybe avoid the used liquid chromatography–mass spectrometry (LC-MS), but perfectly good rotary evaporators, vacuum ovens, centrifuges, fraction collectors, etc. are readily available. Check out the surplus lab supply companies and call them directly with your wishlist. They have warehouses full of stuff that may or may not be on their websites.
• Ultrasonic cleaners can be found for about a third of the usual price if you buy them from jeweler supply companies.
• Ask for discounts. They are more available than you think and can be up 30 to 40 percent.
• Check surplus outlets.
• Look out for labs that are closing down.
• eBay, restaurant supply companies (stainless steelware, etc.), and other non-lab sources can save you money on the same items you may use in your lab.
• Sites such as labx.com and DoveBid (not so much for used analytical instruments; they can be difficult to get running again) are resources for both new and used items.
• Watch out for auction houses' fees, and remember you will have to pick up or have it shipped.
• Always buy service contracts for big items.

What are the financial considerations and available sources for financing?

Since the U.S. federal government still considers marijuana to be illegal, by extension banks and credit unions—which are regulated by a patchwork collection of federal (and state) laws—put themselves into potentially dangerous territory by accepting money from depositors engaging in federally illegal activities; the bank can be punished by federal institutions such as the Federal Deposit Insurance Corporation (FDIC). In an attempt to ease the concerns of industry players as well as banks in states that had implemented legalization efforts, the Treasury Department's Financial Crimes Enforcement Network (FinCEN) released a guidance document in February 2014 that "does not grant immunity from prosecution or civil penalties to banks that serve legal marijuana businesses" but rather "directs prosecutors and regulators to give priority to cases only where financial institutions have failed to adhere to the guidance." However, the guidance has remained just that: guidance; it doesn't prevent federal law enforcement or regulating agencies from taking action. An August 2016 attempt to reclassify marijuana into a lower classification than Schedule I failed, keeping the FinCEN guidance in place as a recommendation for how federal authorities should enforce existing law.

According to an Associated Press report in April 2016, the guidance has had some sort of impact, with banks and credit unions willing to handle any money associated with marijuana, increasing from 51 in March 2014 to 301 in March 2016, and up again to 411 in March 2018 and 755 in September 2021. However, this hasn't prevented those in states with newly minted medical and recreational marijuana legalization laws from being worried about how cannabis money will be handled, particularly with wavering stances across multiple Federal government branches. California, which in November 2016 legalized recreational use of marijuana beginning in 2018, petitioned the administration to clarify its policy early on. "We have a year to develop a system that works in California and which addresses the many issues that exist as a result of the federal-state legal conflict," wrote California Treasurer John Chiang to Trump. "Uncertainty about the position of your administration creates even more of a challenge." An attempt by the state in the summer of 2018 (Senate Bill 930) to "license privately financed banks that would issue checks to [cannabis-related] businesses to pay rent and state and local taxes and fees" was rejected, complicating the matter further. However, California's Department of Business Oversight offered some minor respite in the fall of 2019 in the form of its Cannabis Banking Guidance, which "offers a comprehensive compliance framework for [California's] financial institutions and demonstrates that there is momentum around finding a workable solution to effectively provide banking services to cannabis-related businesses."

Similar legalization changes in Massachusetts prompted its senator, Elizabeth Warren, along with nine other senators, to write to FinCEN in early 2017 requesting even clearer, more friendly guidance for marijuana vendors. Yet it remains to be seen if entities outside of grow-ops and dispensaries will see banking relief. In particular, testing laboratories continue to struggle with managing cash flow and acquiring bank lending for their operations, causing some to believe consolidation of such labs will occur before the industry can really even take off. In early 2018, one of three testing laboratories in Alaska was forced to suspend its operations after Wells Fargo said it would foreclose on their space if they did not move out, demonstrating the continued difficulties and tensions laboratories are facing with banks.

In September 2019, what was thought to the be the best chance to update cannabis banking regulation—in the form of the Secure and Fair Enforcement (SAFE) Banking Act—saw overwhelming approval in the U.S. House of Representatives. The SAFE Banking Act would prevent federal banking regulators from cancelling deposit insurance, penalizing banking institutions, and incentivizing a bank to not do business with cannabis businesses, among other actions. This would mean banks wouldn't see federal retaliation for complying with state-mandated cannabis law. However, the proposed legislation was inevitably held up in the Senate in early 2020, primarily due to the efforts of Senate Banking Committee Chair Mike Crapo, and the support of 12 other lawmakers. However, in February 2020, Senators noted they were "close to finding common ground to getting everyone signed off to move this forward." Ultimately, the SAFE provisions made their way into the HEROES Act COVID-19 relief bill, which passed in the U.S. House in May 2020, as well as another proposed bill in October. Those attempts failed within the Senate, and an additional push to include the SAFE Banking Act provisions in the 2020 end-of-year COVID-19 stimulus failed. Additional attempts have been made to reintroduce SAFE in 2021, 2022, and 2023. As of June 2023, SAFE Banking is likely at it's closest point of passing yet, which would be a relief to cannabis businesses who've fought for its approval for so long.

What are your funding options?

Investment in legal U.S. cannabis businesses was reportedly up to $13.8 billion in 2018, compared to $3.6 billion the year before. This suggests at least private funding of cannabis businesses is climbing, even if state and federal banks aren't handing out credit. So where do you go then if you want to set up a cannabis testing laboratory? While funding options aren't as clear as non-cannabis businesses, options indeed exist. The following represent some of your most realistic options.

1. Acquire funding from the people you know best: your family and friends. This probably takes the most pride to swallow, but if your aunt Mary or friend Dante see the value of your start up and can be convinced with a strong business plan (and common stock or other future benefits), it makes sense to start here.

2. If you don't have family and friends who can help, or you simply don't want to inject personal life into your enterprise plan, you'll want to look for other private and institutional investors. In 2017, for example, cannabis testing laboratories such as Steep Hill and Cannalysis have turned to the likes of private investors and celebrity-led venture firms, respectively, for their seed funding.

3. If the concept of crowdfunding interests you, you may be surprised to learn you have a few options. Platforms such as Fundanna and Arcview Capital specialize in connecting startup businesses with investors. However, crowdfunding does come with its own share of problems, such as still requiring a bank account, platform bank issues, and lack of public exposure.

4. Though few and far between, you may be able to luck upon a state-chartered financial institution that is willing to provide some sort of support.

Ultimately you're looking to gain enough starting capital to meet any necessary state regulatory requirements and gain traction through your initial beta clients and limited personnel and equipment. Those clients can then provide references to any future early-stage investors. As you gain ground you can scale up to normal operations and start in on initial public relations efforts.

Also, remember that whether you're looking to promote your cannabis testing laboratory to private investors, crowdfunding platforms, or major institutional investors, you'll need to give them reasons to be excited about your startup. Of course, your well-crafted business plan is going to be vital in that regard, but you'll also want to sprinkle in other reasons for them to invest. Cannabis consultancy Be Green Legal provides talking points related to the state of California, but that can largely be applied regardless of your location:

• Demand for clean and consistent medicinal and recreational cannabis products is going up.
• If quality is ensured, significant gross profits are realizable from a steady customer base.
• That steady customer base is almost exclusively also a licensed and state-vetted operation.
• Competition is limited, as a majority of entrepreneurs are looking to start in other areas along the cannabis business chain.
• Barrier to entry is relatively high compared to other businesses on the chain, requiring significant capital.
• The business is scalable, not only to other states but to other aspects of analytical testing (agriculture, food and beverage, environment, etc.).
• There may be ways to still avoid some aspects of the IRS section 280E penalty as a testing lab (consult a legal firm).

Investors

Potential sources of capitol include:

• Ackrell Capital
• Altitude Investment Management
• Archytas Ventures
• Benchmark Capital
• Canna Angels
• Cannacord Genuity
• Canopy Boulder
• Casa Verde Capital
• CB1 Capital
• Diamond Business Loans
• Entourage Effect Capital
• Founders Fund
• Gotham Green Partners
• Green Acre Capital
• Green Growth Investments
• Greenfield Capital Partners
• Halley Venture Partners
• Hypur Ventures
• Liquid 2 Ventures
• Mazakali
• Measure 8 Ventures Management]
• Merida Capital Partners
• Navy Capital
• Phyto Partners
• Poseidon Asset Management
• Privateer Holdings
• Salveo Capital
• Serruya Private Equity
• Silverleaf Venture Partners
• The ArcView Group
• Tress Capital
• Tuatara Capital
• Upwise Capital
• Viridian Capital Advisors

Future of funding a cannabis testing laboratory

Like the previously mentioned proposed and passed state legislation to solve banking issues, the U.S. federal government and its representatives are currently involved in several activities to improve the start-up issues for small cannabis businesses. As of January 2021, two major efforts appear to be underway.

First, over the past few years, two prominent pieces of proposed legislation have been working their way through the system, with varying degrees of support among them: the Secure and Fair Enforcement (SAFE) Banking Act and the Strengthening the Tenth Amendment Through Entrusting States (STATES) Act.

The SAFE Banking Act would "increase public safety by expanding financial services to cannabis-related legitimate businesses and service providers and reducing the amount of cash at such businesses." This would include prohibiting and removing penalties against deposit insurance, daily transactions, and loans, while at the same time not discouraging cannabis-legal businesses from doing business. In 2019, the legislation passed the House with little resistance, though Idaho Representative Mike Crapo has initially proved to be a roadblock in the Senate. Ultimately, the provisions made their way into the HEROES Act COVID-19 relief bill, which passed in the U.S. House in May 2020, as well as another bill in October. Those attempts failed with the Senate, and an additional push to include the SAFE Banking Act provisions in the 2020 end-of-year COVID-19 stimulus failed. As of 2023, lawmakers continue to attempt to pass it through the U.S. Senate.

The STATES Act, on the other hand, "would amend the Controlled Substances Act (CSA) of 1970 ... to restrict federal enforcement of the CSA against individuals and companies in states where cannabis is legal." STATES was reintroduced to the House and Senate in early April 2019, but support for it seemed to fizzle. The SAFE Banking Act has largely acted as the spiritual successor, though attempts to push through STATES came in 2021 and 2022.

Second, Representatives Nydia M. Velázquez and Jared Golden have taken to working with the Small Business Administration (SBA) to draft new legislation that would "make it easier for cannabis businesses legal under state laws to get help from" the SBA. Currently the SBA disqualifies direct and indirect marijuana businesses from receiving program loans. Progress was made in December 2020, with the draft legislation making its way into the the Marijuana Opportunity Reinvestment and Expungement (MORE) Act of 2020, which passed the House and moved to the Senate for review. Additionally, the legislation "decriminalizes marijuana at the federal level while enabling states to set their regulatory policies without the threat of federal intervention."

Also worth noting is speculation that the trend of U.S. cannabis enterprises choosing to go public with their companies in Canada may see a decline, according to attorney David Feldman of Duane Morris, LLP. In prior years, some businesses decided to establish in Canada via reverse merger, thinking it easier to gain funding and trade stock in the country. Feldman points to signs such as the first cannabis-related business making it into the Nasdaq, the NYSE now allowing cannabis companies to be listed, rougher trading environments, and increased willingness from U.S. investment banks to raise money for cannabis businesses. Indeed, if the SAFE Banking Act and similar legislation pass, and federal options for loans or credit open up, the idea of U.S. businesses moving to Canada for better funding opportunities may not be so shiny.

What kind of instrumentation and data management is required?

Before ambitiously running out to buy instrumentation and data management solutions for your cannabis testing laboratory, you'll want to consider the various techniques for analytically testing cannabis and the associated equipment costs. While consensus testing standards continue to coalesce into preferred techniques, a variety of techniques remain useful for investigating cannabis constituents and their concentrations. From using gas chromatography to make determinations about terpenes in a sample to using quantitative polymerase chain reaction (qPCR) techniques to identify mycotoxins and microorganisms, these differing techniques require a wide variety of laboratory tools. The most common among cannabis testing instruments are chromatography and spectroscopy equipment, often combined together for a more complete analysis. However, this equipment can be expensive, sometimes prohibitively expensive. Initial investments may range anywhere from $75,000 up to $600,000 or more, depending on what sort of testing is being performed in the lab.

As such, the previously discussed business plan and its nod to various aspects such as business scope, startup funding, state testing regulations, and long-term strategy for growth are vital in determining your budget and requirements for instruments and software. Your business plan may see enough demand in your market for simply testing psychoactive potency (cannabinoid content) in the interim until you raise enough funds to expand your analytical offerings to other areas. Or maybe your lab is well-funded enough to take on analysis of some contaminates such as pesticides and mycotoxins from the start, but you decide to hold off on the equipment for heavy metals testing due to costs. These considerations and more will largely be based on the kind of instrumentation you want and can afford. In some cases, new labs or labs looking to expand their analytic offerings to cannabis testing may consider the purchase of previously owned equipment to save on initial start-up costs.

Testing instruments

Cannabinoids

Overall, methods used in cannabinoid testing include:

• Fourier-transform infrared spectroscopy (FTIR; has limitations, such as requiring standard samples tested w/ other methods)
• Gas chromatography-flame ionization detection (GC-FID; requires sample derivatization for both acid and neutral compounds; good with standards like 5α-cholestane, docosane, and tetracosane)
• Gas chromatography–mass spectrometry (GC-MS; requires sample derivatization for both acid and neutral compounds; good with standards like deuterated cannabinoids)
• Gas chromatography–vacuum ultraviolet spectroscopy (GC-VUV)
• High-performance liquid chromatography photodiode array detection (HPLC-PAD; stable for all forms of cannabinoids)
• High-performance liquid chromatography UV detection (HPLC-UV)
• Liquid chromatography–mass spectrometry (LC-MS; can reduce or eliminate selectivity challenges and speed up testing, though at an increased price cost and need for greater laboratory expertise)
• Supercritical fluid chromatography (SFC; newer technology w/ added benefits)
• Thin-layer chromatography (TLC; older, less common technology)
• Ultra-performance chromatography (UPC; newer technology w/ added benefits)

Also worthy of note is recent investigation of viably using nuclear magnetic resonance (NMR) spectroscopy as a more affordable and rapid solution to identifying cannabinoid contents and profiles of samples. Conferences, research, and articles over the last four or five years have advanced the use of NMR spectroscopy for cannabinoid analysis.

Terpenes

Overall, various published methods for terpene identification and analysis include:

• Full evaporation technique–headspace–gas chromatography–flame ionization detection (FET-HS-GC-FID; tends to be semi-quantitative)
• Gas chromatography–flame ionization detection (GC-FID)
• Gas chromatography–mass spectrometry (GC-MS)
• Gas chromatography–tandem-mass spectrometry (GC-MS/MS)
• Gas chromatography–vacuum ultraviolet spectroscopy (GC-VUV)
• Headspace–gas chromatography–mass spectrometry (HS-GC-MS)
• Headspace–solid-phase microextraction (HS-SPME)
• High-performance liquid chromatography (HPLC; may have limitations due to coelution of terpenes and cannabinoids at certain ranges)

Contaminates

Common testing methods that have been used for pesticides include:

• Gas chromatography electron capture detection (GC-ECD)
• Gas chromatography mass spectrometry (GC-MS)
• Gas chromatography tandem-mass spectrometry (GC-MS/MS)
• Liquid chromatography mass spectrometry (LC-MS; also high-performance or HPLC-MS)
• Liquid chromatography tandem-mass spectrometry (LC-MS/MS; also high-performance or HPLC-MS/MS)

Analysis for solvents is largely standardized into a few options:

• Headspace–gas chromatography/mass spectrometry (HS-GC/MS)
• Headspace–gas chromatography/tandem-mass spectrometry (HS-GC-MS/MS; may be required when high concentrations of terpenes are present)
• Headspace–gas chromatography–flame ionization detection–mass spectrometry (HS-GC-FID-MS)
• Full evaporation technique–headspace–gas chromatography–flame ionization detection (FET-HS-GC-FID)

The following methods are most common for testing cannabis and other plants for heavy metals:

• Atomic absorption spectrometry (AAS; may struggle to meet detection limits)
• Inductively coupled plasma–atomic emission spectroscopy (ICP-AES), sometimes called inductively coupled plasma optical emission spectrometry (ICP-OES) (at times coupled with an ultrasonic nebulizer)
• Inductively coupled plasma–mass spectrometry (ICP-MS; a preferred technique)
• Inductively coupled plasma–tandem-mass spectroscopy (ICP-MS/MS)

As for microorganisms, a common test method is through the process of culturing a sample in a Petri dish, a common diagnostic method in microbiology. Enzyme-linked immunosorbent assay (ELISA) is also used, particularly to identify mycotoxins. However, Petri culture analysis isn't rigorous, and ELISA can be time consuming, as it's limited to one mycotoxin per test. The following are other, more precise techniques that are improving laboratorians' analyses, particularly using DNA snippets of microbiological contaminants:

• Quantitative polymerase chain reaction (qPCR)
• Whole metagenome shotgun (WMGS) sequencing
• Matrix-assisted laser desorption/ionization (MALDI)
• High-performance liquid chromatography (HPLC)
• High-performance liquid chromatography–fluorescence spectroscopy (HPLC–FS)
• Liquid chromatography–tandem-mass spectrometry (LC-MS/MS)
• Liquid chromatography–electrospray ionization–tandem-mass spectrometry (LC-ESI-MS/MS)
• Liquid chromatography–atmospheric pressure chemical ionization–tandem-mass spectrometry (LC-APCI-MS/MS)

Data management

LIMS

For laboratories looking for software-based data management solutions, the laboratory information management system (LIMS) is used most often to manage the wide variety of data, testing and analysis workflows, and other enterprise activities typical to a lab. This generally includes—but is not limited to—sample receipt, workflow management, sample tracking and analysis, quality control, instrument data management, data storage, reporting, and document management. The cannabis testing laboratory is no exception, though its activities differ slightly from, for example, a clinical pathology laboratory. As such, a few additional features outside of what's typically found in a generic LIMS are required, including:

• sample loading screens optimized for the industry, including differentiation between medical and recreational marijuana
• pre-loaded compliant test protocols, labels, and reports optimized and readily adjustable for a rapidly changing industry
• tools for creating new, compliant test protocols, labels, and reports
• flexible specification limit sets
• a web API or some other method to integrate with state-required compliance reporting systems
• extensive instrument integration
• chain-of-custody (CoC) tracking, when necessary
• support for inventory reconciliation
• pre-loaded and modifiable workflows and protocols
• real-time alerts
• accounting and billing support
• customer web portal
• functionality supporting regulatory compliance

The importance of LIMS data management can't be understated, particularly given the complexities involved with managing and maintaining the quality of work performed in a highly-regulated cannabis testing laboratory. Chain of custody forms, certificates of analysis, audit trails, electronic signatures, completed tests, temperature logs, client demographics, instrument calibration records, training and certification records, 24/7 client access, and automated reporting to the state government are necessary elements that can be made infinitely easier with a LIMS.

The following LIMS solutions in Table 1 are known to specifically offer features that support the cannabis testing laboratory:

Table 1. Known LIMS solutions publically marketed as addressing the needs of cannabis testing labs LIMS solution Developer ApolloLIMS Common Cents Systems, Inc. Bika LIMS Bika Lab Systems (Pty) Ltd. and the SENAITE Foundation CannabLIS Cannabliss New England, LLC CannaLIS Specialty Testing Solutions Ca, LLC CannaQA LIMS LabLynx, Inc. CGM LABDAQ CompuGroup Medical AG Clin1 Cannabis LIS Clin1, LLC CloudLIMS|CloudLIMS and FreeLIMS CloudLIMS.com, LLC Confident Cannabis LIMS CC Software, LLC Element LIMS Promium, LLC HORIZON LIMS HORIZON Lab Systems, LLC LabWare GROW LabWare, Inc. LabFlow AINZ Corp. LabLite SQL LIMS LabLite, LLC LIMS ABC BGASoft, Inc. Lockbox LIMS Third Wave Analytics, Inc. Matrix Gemini Autoscribe Informatics, Inc. Omega LIMS Khemia Software, Inc. QBench Junction Concepts, Inc. QLIMS OnQ Software Pty. Ltd. reLIMS Carobar Business Solutions, LLC

CDS

Scientists on the research side of cannabis are certainly using chromatography data systems (CDSs) from Agilent, Thermo Scientific, Waters, and other to manage the data coming out of their chromatography equipment, and slowly but surely some of those CDSs are beginning to also support spectrometer data management in a similar way. Additionally, some chromatography system developers will collaborate with CDS vendors to develop software drivers—code that essentially acts as a translator between a device and a program—so chromatography devices can interact fully with the CDS.

The CDS likely has a place in the cannabis testing lab as well, though it may depend on the lab's data management needs and goals. In more complex labs with multiple instruments and significant daily processing workflows, a LIMS may make more practical sense.

CDS vendors

Some vendors like Thermo Fisher Scientific offer a CDS in conjunction with its other chromatography systems marketed for the Cannabis testing industry. Other commons CDS vendors include:

• Agilent Technologies' OpenLAB CDS
• Bruker Corporation's Compass Hystar
• H&A Scientific, Inc.'s PC/Chrom
• PerkinElmer Inc.'s Chromera
• Shimadzu Corporation's LabSolutions
• Waters Corporation's Empower 3

What data integrations are vital?

At least in the U.S., given the federal status of recreational and medicinal marijuana, labs operating in cannabis-legal states still have to be particularly mindful of their operations for fear of breaking even a state or local regulation, potentially putting the lab out of business. Samples are tracked internally from receipt to distribution or destruction. However, it's often not enough to issue certificates of analysis and keep careful track of the cannabis samples that move in and out of the laboratory; sample activity must be tracked every single step of the way through laboratory workflows. This is particularly true in states that mandate track-and-trace (sometimes called "seed-to-sale") monitoring and reporting. In that case, keeping data siloed in the lab isn't an easy option to work with. States mandating the use of a particular track-and-trace software platform means either manually transferring data from the lab's systems—or, worst case, from the lab's paper documentation—to the mandated track-and-trace software. This is where integration between the lab's data management platform and the state's system proves useful.

Below are representative examples of the most commonly used track-and-trace software systems that cannabis testing laboratories are required to use and integrate with:

• BioTrackTHC: As both a track-and-trace system and an enterprise resource planning (ERP) solution, BioTrackTHC streamlines data management and workflows from cultivation and processing to laboratory testing and dispensation. Compliance features include customized reporting to meet government-specific needs, tracking of destruction and waste activities, transport manifests, recall tracking, regulation labels, workflow management, and more. The software has also been adopted by state governments such as Illinois, Hawaii, New Mexico, and New York.

• Leaf Data Systems: Similar to BioTrackTHC, Leaf Data Systems is used by both industry operators and government agencies trying to regulate the cannabis industry. The system can manage data at all points along the cannabis lifecycle, from cultivation and processing to distribution, testing, and sale. Leaf can handle customized reporting depending on state or municipality, as well as customizable alerting to ensure enforcement activities are effective. The software has been adopted by the governments of Pennsylvania and Washington.

• Metrc: Developed by Franwell, Metrc represents another major solution used by not only businesses in the cannabis supply chain but also state and local governments. Special features include trend analysis, employee activity tracking, credentialing, and process metrics. States using it include California, Colorado, Massachusetts, Montana, and the District of Colombia, among others.

• SICPATRACE: Perhaps less known in the U.S., the Swiss company SICPA has been involved in security inks and financial security for many decades. It introduced its SICPATRACE software in 2007 for governments to better "fight counterfeiting, illicit trade and tax evasion." It has since been adopted for regulatory activities involving tobacco, alcohol, and now cannabis. Among its technological features is the use of multi-layer label security that incorporates multiple ways to track and trace products, batches, and samples. In the U.S., SICPATRACE has been adopted by several California counties.

Also of note is the somewhat new concept of "tag-and-trace," the molecular application of DNA markers in a plant to allow for forensic tracking across the supply chain. Products like ETCH Biotrace may eventually also be part of the integrated workflow for cannabis testing laboratories.

Other integrations

Integration, however, isn't limited to just state systems; integration between various software systems and instruments in the laboratory is also vital. The chromatography data system (CDS) should integrate with the laboratory information management system (LIMS), for example, just as an autosampler or analytical instrument should be integrated with the LIMS. In the end, the decision to connect laboratory instruments and other data systems together will depend on your compliance requirements for security and data extraction, as well as regulation-mandated data.

Another software system that may be used internally to manage laboratory operations is an enterprise resource planning (ERP) system. This type of enterprise software has been used in many industries to help collect, store, manage, and interpret a wide variety of data associated with the management and operations of a business. This may include financial, budgeting, human resources, manufacturing, order management, supply chain management, project management, and customer management activities. The cannabis testing laboratory is no exception with managing these sorts of duties, and while the more competitive LIMS today include many of these capabilities, some vendors have also developed ERP solutions tailored to the cannabis manufacturing and testing industries.

An example of ERP software systems for cannabis testing laboratories is the MJ Platform. Produced by the same company that develops Lead Data Systems, MJ Platform is described as a "cannabis business software solution" that handles both business management and seed-to-sale activities. The configurable, multilingual software provides an executive view of all operations, allowing for potentially improved decision making. Yields, analytics, and expense management are also able to be managed, among other things.

Where do you find personnel for your laboratory?

According to cannabis information resource Leafly, early 2020 saw more than 243,000 full-time-equivalent jobs across the United States' state-legal cannabis industry. Among them were scientists and laboratorians responsible for testing cannabis for safety and quality. But where did the various laboratories find their personnel, what qualifications were requested, and roughly how much did they end up getting paid?

Finding personnel

So you need qualified, motivated individuals to help propel your testing, extraction, etc. laboratory to success. You have multiple options at your fingertips.

1. Start specialized: Consider industry-specific hiring platforms. Vangst, for example, boasts partnering "with more than 600 companies to place 10,000 jobs across 14 states" as a cannabis industry recruiting platform.

2. Go more traditional: Specialty sites certainly have their appeal, but recruiters, businesses, and job seekers can also be seen taking to the more traditional job search sites. These sites often have their own search categories for cannabis laboratory testing jobs for technicians and laboratory managers alike. Here are but a few examples:

• Glassdoor.com
• Indeed.com
• LinkedIn.com
• Monster.com
• SimplyHired.com
• ZipRecruiter.com

3. Find a recruiter: Don't necessarily want to go through all the hoops of finding the people for your lab? Turn to a recruiter/staffing agency to help you find who you're looking for. Businesses like HempStaff, THC Staffing Group, and Viridian Staffing specialize in finding personnel for the cannabis and hemp industries.

4. Try a job fair: The company Vangst was mentioned in Option 1. They, and a few other organizers, have set up job fairs in the past. Vangst has hosted career fairs in the past, and the recruiter Cannabis Staffing Group has at least considered holding a career fair in the past. Admittedly these types of job fairs aren't common, but they do appear from time to time and should be considered as yet another option.

Qualifications

What qualifications should you be looking for in your personnel? This is a difficult question, exasperated by the increasingly unrealistic job requirements of hiring managers and other HR personnel. You certainly want qualified people with high interest in the duties of your laboratory, particularly for the highly technical and professional aspects of the business. However, you also want to be realistic about any entry-level jobs you plan on offering, particularly in regards to years of experience required; you may be limiting your candidate field otherwise. Many of your analysts will likely have analytical chemistry, biology, or pharmaceutical degrees, though for the entry-level positions candidates may come from marijuana trimming backgrounds, cannabis training schools, or from a completely different background. Most often, a bachelor's or associate's degree in a chemical or biological science and some kind of familiarity with laboratory work is required for a simple processing technician preparing samples. Analysts preferably have more verifiable experience in the laboratory than a technician and has some familiarity with chromatography practices and quality management. Lab directors or managers require some of the most rigorous requirements, with bachelor's being fine but perhaps a master's or PhD being a plus, and regulatory and hands-on experience with the various aspects of analytical laboratory testing being vital.

Compensation

Compensation for future personnel will likely vary depending upon the region and your business plan. In June 2023, ZipRecruiter showed a national average of $40,932 for a cannabis lab technician, whereas a Maryland-based cannabis testing lab ballparks it from $35,000 to $40,000. The same company puts analysts between $40,000 and $60,000 and directors/managers at "at least six figures."

What state regulations affect your lab decisions?

Not unexpected, cannabis testing laboratories are highly regulated, not only from the laboratory side of things but also because the lab is working with a differently regulated plant, based on the state of origin. As such, this creates added difficulties in creating your business plan, estimating timelines, and finding the expertise needed to be successful. Initial costs in time and money are relatively high, but once running in a professional manner, the potential for profit long-term remains realizable.

As of June 2023, thirty-eight U.S. states plus the District of Columbia have approved some sort of broad legalization of medicinal and/or recreational marijuana, and many other states have some sort of decriminalization law on the books. In the end, that leads to a lot of variation in state regulation. We've performed some preliminary work finding those specific regulations for each state:

• Cannabis testing regulations in the U.S.
• Cannabis testing regulations in California
• Cannabis testing regulations in Canada

It's beyond the scope of this guide to go over cannabis testing regulations for every U.S. state, but the above articles should help with your search. In particular, you may want to look at the generalization of California's laws, even if you won't be operating in the state. In some ways, California is more precise with their state regulations, and reading over at least the header titles (e.g., chain of custody, sample reception, sample retention, record retention, and track-and-trace requirements) provides a broad concept of all the areas you may very well have to cover in your operations. Of course, attorneys specializing in cannabis law, consultancies, and other professional organizations will also serve as valuable resources. In the end, it is ultimately up to you and your personnel (particularly your laboratory manger/director) to stay on top of existing and incoming regulations and standards in order to stay operational and lean.

Closing

Starting a cannabis testing laboratory—particularly from scratch—can appear a daunting task. Countries such as Canada have taken on the full legalization of cannabis, and other countries like Mexico are working on legalization. Yet the U.S. federal government still considers non-hemp cannabis to be an illegal substance, despite 38 U.S. states and D.C. thinking otherwise. This disarray of legality, in combination with ever-evolving laboratory testing standards of cannabis constituents, adds to the somewhat confusing aspects of starting even a more normalized business. This fractured sense of order surrounding the cannabis industry in general, however, has brought together a wide array of people from differing backgrounds to share thoughts, ideas, knowledge, and research. The end result is a community that has grown up out of others facing similar challenges in getting their cannabis businesses off the ground, analytical laboratories included.

This somewhat short but dense guide is in a way a product of that community effort. Compiling previous work by LabLynx's Alan Vaughan with a variety of research from other academic and media sources, this guide hopefully has answered many of the standard questions that entrepreneurs wanting to start or expand on an existing analytical lab into the cannabis testing industry may ask. We took a significant look at the power of a well-crafted business plan, with details as they relate specifically to the industry. The importance of this business plan can't be overstated, and it should make up a significant portion of any future planning. We also looked at financial considerations in general, and particularly at the difficulties facing U.S.-based entrepreneurs seeking loans, credit, and other funding to get their project off the ground. Despite the challenges, funding options do exist. With some of that money comes investment into analytical equipment and supplies, so we took a brief dive into the common analytical methods and instruments used in those methods, not forgetting the importance of data management solutions and integrations along the way. The importance of quality personnel and the regulations that affect their operations in the lab were addressed in the end.

This should leave you with plenty of material to ponder and act upon. We've given you some research paths to go down as well, but inevitably you'll have to do due diligence of your own to ensure that your business plan, methods, equipment, data analysis solutions, and best practices all match up with local, state, and federal regulations and requirements. The good news out of all of this, as discussed in the funding section, should be that if the aforementioned is sound and your cannabis testing laboratory is run well, the pain of initial investment should subside. You'll eventually be focused on maintenance of your existing infrastructure and cranking out more high-quality testing, without much more significant investment. Best of fortunes to you!