Managing the finances of a business operating in a legal grey area is not for the faint-hearted. Companies that sell sex toys, cannabis or other ‘taboo’ items are beholden to strict regulations and forbidden from advertising. They can even struggle to open a bank account. This makes securing suppliers, accessing capital and finding stable revenue streams extremely tricky.
Logistical and financial challenges aside, the mental strain on those responsible for having to constantly fight fires should not be overlooked. We speak to financial leaders in different taboo markets to show that it can be done.
Keeping the company in the green
The global legal cannabis market reached $21bn (£16.4bn) in 2023. But these businesses are not exactly thriving: 70% of US companies fail in the first 10 years, according to the Bureau of Labor Statistics.
Those in the UK are not faring much better. Six years after it was legalised, medical marijuana is still rarely prescribed. Cash flow is challenging due to market instability, slow-moving legislation and investor fatigue. Meanwhile, financial institutions are reluctant to get involved in what is deemed a high-risk market, making it hard for businesses to secure reliable banking and payment services.
So says William Handley, CFO at Avida Global, a medical cannabis manufacturer based in the UK. Navigating these financial challenges has left a lasting impression: “I have some war wounds,” he says grimly.
My joke is that I’m the only CFO who has had guns pointed at them
Avida’s Metro bank account was closed back in 2021. “It was a complete nightmare – none of the major banks wanted to touch us,” Handley says.
The banks needed to see growth projections that would justify the high fees they’d spend on monitoring and compliance. Resolving this not only required diligent record-keeping and reporting on where Avida’s funds came from, but also persistence and determination on Handley’s part to find a viable solution as quickly as possible.
“Financial institutions are reluctant to have a conversation and you end up paying a premium for those few that are willing,” he says.
Firms wanting to import cannabis products into the UK also face licensing and regulatory roadblocks. They must secure licences from the Home Office and be checked by the Medicines and Healthcare products Regulatory Agency.
This is a “complex and timely process,” Handley explains, which can take months, if not years. “We have been waiting for the Home Office to reinspect our site since we moved facilities almost twelve months ago. The delay to production caused as a result has led to the loss of several big clients and major cash flow issues.”
These experiences have been “frustrating and emotional”, Handley says. He describes weeks spent trying to prove to banks that revenue streams are not illegal and sleepless nights worried about keeping the lights on, when every compliance hurdle means more money lost.
An in-depth knowledge of the legal and regulatory requirements is a must, along with sharp problem-solving abilities. “It’s important to know what you’re getting into,” Handley says.
Cannabis accountants are in high demand
There is a dearth of financial leadership in the cannabis niche, even in the US where the market is more evolved, according to Sean Yoder, co-founder of Aldertine Cannabis CFOs, an advisory firm offering CFO services in this market. His entry into the world of cannabis accounting started at age 15, living in California and bookkeeping for his neighbours who were growing marijuana. This was long before it was legal. “My joke is that I’m the only CFO who has had guns pointed at them,” he says.
While the drug remains illegal at the federal level in the US, it is now legal for recreational use in 24 states. Yoder stresses the importance of “savvy accounting” where tax rules differ at federal and state level. “Today the biggest killer of businesses is not preparing for taxes,” he says.
People are uncomfortable working on anal sex. They compare us to vapes and weapons
While daily marijuana use is now more common than drinking in the US, these businesses are still struggling to make a profit. A large part of the problem is tax code 280-e, which prevents companies from deducting ordinary business expenses from income that is associated with trafficking the drug. Everything a business would normally do to drive profits down to avoid a high tax bill does not apply, Yoder explains: “Your tax rate is 70% – compared with the typical 20%. It means businesses that are doing really well in terms of gross profit are still losing money.”
There are steps that can be taken to mitigate some of this. Firstly, says Yoder, “try not to panic”. Secondly, businesses need to be able to organise their finances to track inventory, maximise expenses and forecast growth. Yoder also recommends having a reserve for any surprise tax bills, along with a clear understanding of all the relevant tax rules to ensure accurate reporting for state and IRS compliance. Lastly, he stresses the importance of strong standard operating procedures in the event of an audit.
While tax code 280-e only impacts businesses operating in the US, Yoder believes the importance of good, clean accounting applies to the entire regulated cannabis industry.
“Sadly, very few businesses have this figured out,” he says. “Many are eager to get involved in the sector but fail to organise their finances. Six months later, they’re desperate to get out.”
Overcoming stigmas in sextech
People are still hesistant when it comes to matters of sex. Businesses that sell toys, products, apps or services focused on improving sexual health and wellbeing struggle to market their products online and to be taken seriously by investors, despite rising consumer demand.
Polari Group is an anorectal health and pleasure platform that aims to make preparation for anal sex easier and reduce the spread of STIs. Co-founders, Henry Blest and Anna Vybornova, recently raised $539,000 (£420,000), but convincing investors to back a critical yet often neglected area of sexual wellness was a mammoth job. “People are uncomfortable working on anal sex. They mention vice clauses and compare us to vapes and weapons,” says Blast. Vice clauses are restrictions set by investors that prevent funding in ‘taboo’ markets like weapons, gambling and sex.
“We constantly have to justify and prove to the investors that our backgrounds are legit and that our product can impact the lives of millions,” he adds. “Most people think that we are two crazy weirdos that make sex toys in a garage and won’t take calls with us. I have never experienced professional homophobia in my life until I entered the VC space – we now face it on a daily basis.”
Managing cash flow in an uncertain market
Restrictions on advertising sexual health products and barriers to accessing banking and payment platforms means many sextech businesses struggle to scale. That’s according to Shanshan Xu, CFO and co-founder of MV.Health, a company that creates medical devices to address sexual health issues like penetration pain, arousal disorder and erectile dysfunction.
M.V Health has never been able to raise venture capital funding and, because cash flow is less predictable, traditional banking loans are tough to acquire. Xu has had to seek out alternative sources of capital from private individuals and family offices. Here, ticket sizes are smaller and there is less certainty and structure to the funding. Because it takes longer to raise money, she says vendor relationships need to be managed “very carefully” in case any adjustments to payment terms need to be made.
“You have to be nimble when managing cash flow,” Xu advises. “Have backup funding sources and lower your expectations when it comes to how fast you want to grow. Always budget three times the money that you think you’ll need because you’ll always go over and nothing happens on time.”
Not everyone is cut out for it, however. “You’ve got to be comfortable with uncertainty. It all sounds exciting when you are just starting out, probably without family commitments,” Xu says. “But be warned: just because you’ve run the business for X number of years doesn’t make it any more stable. If you are someone who prefers comfort and routine, this might not be the right industry for you.”
There are certain markets where finding growth as a sextech business is easier. Despite operating in the UK, M.V Health has found more success in the US. “Healthcare is private so it’s much easier to introduce products and you can work directly with hospital clinics,” Xu explains.
Securing insurance and finding ways to scale
SheSpot is a femtech platform focused on women’s sexual wellness. Co-founder Kalila Bolton says finding insurers willing to work with the company has proved near-impossible: “When we started out we purchased a simple insurance product from a well-known firm. However, they subsequently cancelled the policy mid-term. The firm told us that we ‘breached company values’. When I asked to see the ‘values’ they told me they were not written down. The customer service agent even commented on their male-dominated broker teams who ‘didn’t understand the nature of SheSpot’s products or what women would do with them’.”
When they finally secured coverage, it came with a high premium – around ten times what similar-sized ecommerce businesses pay.
If you are someone who prefers comfort and routine, this might not be the right industry for you
Like many in sexual wellness, SheSpot has faced unique compliance issues with payment providers. Platforms like PayPal restrict the sale of sexual products and Shopify’s underlying payment processor (Stripe) does not allow transactions involving CBD, which has shown considerable promise in sexual wellness due to its pain-relieving qualities, Bolton says. “Given these limitations, we limited product listings to avoid any costly restrictions on our platform.”
One of the key ways SheSpot has scaled the business is by shipping its products internationally, although this presents more regulatory complications unique to the industry. Sex-related products face restrictions across the world, with bans on the sale of sex toys in a number of countries (such as the UAE and Thailand) and even US states like Mississippi and Alabama. “Ensuring compliance with local regulations means we have to be extra diligent when it comes to international expansion, especially as rules can change very quickly in each region,” Bolton says.
She adds: “For us, navigating these challenges is as much a part of our brand’s purpose as the products themselves. There’s no reason why sexual wellness products and content should still be so restricted and deemed ‘high risk’. Women are safer and more fulfilled when their health and pleasure is prioritised – so we won’t be letting these barriers stop us any time soon!”
Good accounting can bring structure and predictability to even the most volatile of markets. But operating in a taboo space takes more than just robust financial procedures and a good head for numbers – it takes serious grit.
Managing the finances of a business operating in a legal grey area is not for the faint-hearted. Companies that sell sex toys, cannabis or other ‘taboo’ items are beholden to strict regulations and forbidden from advertising. They can even struggle to open a bank account. This makes securing suppliers, accessing capital and finding stable revenue streams extremely tricky.
Logistical and financial challenges aside, the mental strain on those responsible for having to constantly fight fires should not be overlooked. We speak to financial leaders in different taboo markets to show that it can be done.
