When adult-use cannabis markets began rolling out in the early 2010s, the cannabis industry was heralded as the next great opportunity for savvy investors.

Andrew Lowitz, a fractional adviser in the cannabis space and co-founder of the New York Cannabis Collective, spent the early part of his career in tech. He saw cannabis as “the last start-up frontier of my working lifetime.”

“I was originally interested in cannabis because I felt like it was an emerging market and an emerging economy,” echoed Tim Seymour, chief investment officer of Seymour Asset Management and subadviser/portfolio manager of multiple cannabis ETFs.

Some convenience retailers were also curious about whether cannabis could become a new profit center for them, and a few invested in the industry. Others watched with curiosity from the sidelines.

Fast forward to 2025: While total U.S. cannabis sales hit $38 billion to $40 billion last year, publicly traded cannabis companies’ sales are largely down—both quarter over quarter and year over year. And it’s not just among public players. The narrative across the cannabis space is increasingly bleak, with news of receiverships and bankruptcies and widespread reports of unprofitability.

To understand why the cannabis economy is struggling, it’s important to recognize the many types of businesses within the industry.

“In terms of the types of companies we look at, we talk about single-state operators and multistate operators as well as ancillary businesses,” said AnnaRae Grabstein, founder and CEO of cannabis advisory firm Wolf Meyer. “But within each of those categories are a lot of different types of businesses.”

The plant-touching side includes cultivators (growers), manufacturers (product producers), retailers and distributors. Non-plant-touching, or ancillary, businesses include legal and financial companies, tech service providers and more. Vertically integrated companies (where allowed by law) cultivate, manufacture and sell cannabis products under one business. 

The bad news? Nearly all of the types of cannabis businesses are struggling.

“There is not one part of the supply chain I can point to and say, ‘That is the profitable part,’” Grabstein said. “Aside from maybe the lawyers and the accountants.”

Others have an even more sobering perspective.

“In Washington state, it is an absolute bloodbath right now,” said Ryan Sevigny, a longtime cannabis consultant who works with multiple growers and cultivators. “We’re 10 years into it and I can’t see light at the end of the tunnel.”

So what happened to the optimism of the early days? Why is it so difficult to turn a profit in a space that generates tens of billions in annual sales? And more important, what can be done to fix it?

“It’s such a complex question: Why is it so hard to be profitable?” said Grabstein.

Here’s what industry experts had to say.

The Green Boom

Lowitz, who advised one of Oregon’s early license holders, recalled “The Green Rush” era as the period when adult-use markets opened in states such as Colorado, Washington, Oregon and California, as well as Canada.

“You had a finite number of businesses that were investible and operational, and there was so much money rushing into those businesses,” he said.

But, much like the tech bubble of the early 2000s, many of those early investments were overly optimistic.

“The valuations were blown way out of proportion,” Lowitz said. “And those valuations have never come anywhere close to coming true.”

Beyond inflated valuations, many early cannabis companies made questionable strategic decisions.

“I think that companies that did have access to capital felt that it was important to scale really quickly,” said Grabstein. “That served some companies and didn’t serve others.”

“There was overinvestment everywhere,” Lowitz added. “Too many licenses, too many manufacturing facilities, too many farms, too many stores.”

This overexpansion strained operations and diluted brand strength. Many companies attempted to be vertically integrated from the outset, without first mastering a core competency.

That ended poorly.

The Green Bust

The investment surge continued through early 2021, aided by cannabis’s designation as an essential business during the Covid pandemic.

Then the market turned.

“We took a nosedive in Q1 2021,” Lowitz said. “It’s never recovered.”

Investor focus shifted. Gone was the “growth at all costs” mindset, replaced by pressure to become profitable.

“The narrative switched to building profitable companies,” said Grabstein. “These companies needed to go from growth mode to being cash-making machines. That was a lot easier said than done.”

The result? A sharp contraction in venture capital activity.

“I don’t see any new investment capital that’s come into the industry in the last three or four years,” Seymour said. “The investment flow has been a reversal—not a trickle, but an all-out reversal.”

What funding remains is largely in the form of debt—and it’s expensive.

“It’s reflective of a different chapter in the way that people look at the cannabis space,” Grabstein said. She noted that venture capital typically seeks 10-20x returns via growth and profitability, while lenders simply want to ensure debt repayment (albeit often at higher-than-market interest rates).

This has created a more cautious environment. Cash flow management, an afterthought during the flush early years, has become the central focus. Hiring freezes, vendor renegotiations and geographic contraction have become the new norm.

“Everyone’s business is a lot smaller,” Lowitz said. “Nobody spends nearly as much time thinking about M&A or how to grow their business. They’re just trying to keep the lights on.”

Why Profitability Remains Elusive

The current financial struggles in cannabis are about more than just dried-up investment. Experts identified three core challenges:

1. Oversupply

When a state produces more cannabis than it can sell, the results can be devastating. Cannabis is a perishable product that degrades over time. With federal law still prohibiting interstate commerce, there’s no outlet for excess supply.

“It’s not like in grocery or convenience, [where] you have discount grocers that you can offload excess supply to at a discount,” said Grabstein. “That has created this terrible, endless price compression cycle that has driven prices down to the consumer level.”

Sevigny sees the effects firsthand in Washington.

“I walked into a store yesterday, and the whole store is 40% off on a random Monday,” he said.

Over time, those low prices become the standard for consumers. Even when supply stabilizes, consumers expect discounts, which leaves cultivators, manufacturers and retailers with razor-thin or nonexistent margins.

2. Taxes

High state excise taxes, on top of standard sales tax, compound the margin problem. While some states cap excise taxes at 10%, mature markets such as Colorado and California impose 15%, Oregon charges 17% and Washington tops the list at 37%. 

“In Washington state, basically half of your purchase is all taxes,” Sevigny said.

Then there’s the issue of federal taxes. While there’s no federal excise tax on cannabis, Section 280E of the tax code prevents companies that “traffic” in Schedule I or II substances from deducting standard business expenses.

“The 280E dynamic means traditional accounting for determining profitability goes out the window,” Seymour said. “It is something that makes it almost technically impossible for companies that have strong retail exposure to cannabis to be profitable.”

The lack of deductibility means companies are often paying effective tax rates far higher than traditional businesses, sometimes upward of 70% to 80%.

3. Illicit Market Competition

Despite legal oversupply and downward price pressure, the illicit market remains a dominant force—primarily because it avoids taxes and regulatory costs.

A report from Whitney Economics estimated that 75% of U.S. cannabis sales still occur on the black market. This is unsurprising, given that roughly half the country lacks access to legal adult-use cannabis.

More alarming: The illicit market is thriving even in mature markets.

“Of cannabis purchases in Washington, 51% are legal and 49% are illicit,” said Sevigny. “Ten years in, and we’re going backward.”

What Could Help?

One of the most beneficial actions would be the elimination of the 280E tax burden.

“If retailers were able to write off some of their cost of goods, hopefully that would get passed down to other parts of the supply chain,” Sevigny said.

Rescheduling cannabis as a Schedule III substance, as proposed by the Biden administration, would solve this. Despite the recent political transition, Seymour remains hopeful.

“Ultimately, cannabis is the great American industry,” he said, pointing out that it is grown, manufactured and sold entirely in the United States. “This should be an issue that this administration cares about.”

In the absence of federal action, many are focused on state-level reform. Sevigny said advocacy groups in Washington are pushing to allow direct sales by cultivators—similar to winery or brewery tasting rooms—and to shift excise taxes from a percentage of sales to a per-milligram model.

Grabstein also suggested companies explore employee stock ownership plans (ESOPs) as a strategic exit and tax solution. Once an ESOP is in place, 280E no longer applies.

“It’s complex, and it’s not for all companies,” she said. “But for those companies with clean balance sheets, simplified ownership structures and low debt, they do have an opportunity.”

ESOPs can also help with employee retention, giving workers a tangible stake in the company’s success. 

For companies for which that isn’t viable, success increasingly depends on tightening operations and focusing on core strengths.

“Everyone’s trying to decide who they want to be when they grow up,” Lowitz said. “Not everyone’s going to be good at retail and brands and cultivation and manufacturing. Everybody’s trying to pick their lane.”

Is There Still Hope?

So is it a green rush ... or a green bust?

While the financial picture remains grim, experts still see a future.

“Because there are companies operating profitably, I remain really optimistic that those are the companies that are going to drive the future of the industry,” Grabstein said.

There’s also long-term potential in the broader cannabinoid market, which legalization has only begun to unlock.

“When I was first investing in cannabis, one of the credos that still makes a lot of sense today is that cannabis is effective,” Seymour said. “That’s the exciting part.”

“Cannabis is good for society,” Sevigny said. “And we need society to realize that quicker.”

The momentum of hemp-derived THC beverages is also fueling mainstream acceptance—and showing consumers’ growing appetite for cannabinoid-based products.

“You can make a strong argument that this is a $100 billion market right now, [among] the adult-use market, medical market, illicit market and hemp-derived THC,” Seymour said. “That’s exciting and that’s really big.”

And while profitability remains elusive for many operators today, consumer demand continues to grow year over year.

“There is enormous consumer demand for cannabinoid products,” Grabstein said. “And that demand is only going to keep growing.”