*This article first appeared on SFGate.com and is reposted with permission.
California’s legal cannabis market has hit another grim milestone: There are now 10,828 inactive and surrendered pot licenses in the state and only 8,514 active ones, meaning dead pot licenses now outnumber active ones, according to the Department of Cannabis Control’s data dashboard.
This inversion comes seven years after the legal cannabis market opened. While it’s not clear exactly when the threshold was crossed, because the state does not release historical licensing information, California’s legal market has been struggling for years, with thousands of companies going out of business.
Jonatan Cvetko, a cannabis advocate and executive director of the United Cannabis Business Association, said the figures show that state regulators and the entire regulatory framework for cannabis in California is a “complete failure.”
“We’ve finally hit a threshold where we’ve seen the number of participants who have come into the industry who have failed outweighs the number of people succeeding, and succeeding is probably too strong of a word,” Cvetko said.
Company failures are certainly not unique to the legal cannabis industry. Startup companies in the technology market are notorious for failing the majority of the time, with one 2023 study estimating that 75 percent of all venture-backed tech companies fail within five years. And one 2016 study found that roughly 20 percent of new restaurants in the Los Angeles area failed between 2003 and 2008.
But Cvetko said business failures in California’s cannabis industry are especially bad because California’s legal market has only a fraction of operators today compared with California’s medical market that existed prior to legalization.
“This is not anywhere near what we see with restaurants, because we already had an industry in California, and California destroyed the industry that we had,” Cvetko said.
State law requires a cannabis license from the Department of Cannabis Control before a company can legally engage in any cannabis work, with over three dozen license types. A single cannabis business often needs multiple types of licenses to do its work, so the number of surrendered licenses doesn’t directly equate to the number of failed businesses.
David Hafner, a spokesperson for the department, strongly pushed back on the idea that the data shows a market failure.
“The number of inactive cannabis licenses is not indicative to the health of the licensed cannabis market, let alone a statement on the established framework for the regulation of it,” Hafner said.
Hafner said that some of the drop in active licenses is because of a procedural change in 2023 that allowed cannabis farms to consolidate multiple smaller licenses into one large license type. This consolidation is responsible for 1,071 licenses that are now inactive but “did not involve businesses closing down or downsizing.” according to Hafner.
Even removing those 1,071 consolidated licenses, there are still 9,757 other licenses that are inactive for a variety of reasons, from being canceled to revoked or surrendered. The vast majority of dead licenses are related to growing cannabis, with over 7,100 inactive cultivation licenses. Those figures reflect a severe drop in the number of small-scale farms operating in Northern California, which used to be the capital of pot farming in America but has been diminished thanks to large-scale farming in Southern California.
There are also over 1,100 inactive distribution licenses, nearly 500 inactive delivery licenses and over 300 inactive retail licenses.
Dan Sumner, a UC Davis professor who has extensively studied California’s legal cannabis cultivation industry, said he was not surprised to see so many farming licenses go inactive. He said he’s documented many large farming operations shut down quickly because falling wholesale cannabis prices made their businesses unprofitable. Sumner added that extensive regulations have also made it more expensive to run a legal cannabis farm.
“If you want to be a lettuce grower, grow lettuce. You don’t need a license to grow lettuce, but if you want to take that same acre and grow cannabis, it’s a whole different process, and you have to engage with 10 different agencies,” Sumner said.
Cvetko said the industry is struggling because the regulations make it too expensive to get and maintain a cannabis license, and then lackluster enforcement against the illicit market has allowed unlicensed cannabis operators to proliferate and sell cheaper marijuana that undercuts legal companies.
“When you’re constantly competing against an unlicensed market that doesn’t have those taxes and overhead, and there’s no effective enforcement, then the state has completely failed to make this a viable industry,” Cvetko said.
