• In some of the most mature legal cannabis markets across the U.S., sales are declining after surging earlier in the pandemic. 
• Investment money is also drying up, making it harder for small businesses and startups to succeed in a crowded marketplace.
• The industry is awaiting federal regulation that could help it scale nationwide.

After enjoying a sales surge during the pandemic, the U.S. cannabis industry is showing signs of a slowdown as it faces economic and regulatory challenges and people choose to spend their money elsewhere.

In states with established marijuana markets such as Oregon and Washington, sales at retail outlets and dispensaries have declined from a year ago, according to a report from cannabis data firm Headset. In Colorado, one of the country's most established markets, sales in June were down 11.4% from a year ago.

"What we saw in 2020 was a massive spike in sales tied to the pandemic as people stayed home, had government stimulus money, and not a lot to do," said Chris Wash, CEO of Marijuana Business Daily.

Between March 2020 and March 2021, average monthly year-over-year sales were up 25.8% in Colorado, according to Headset. But as the pandemic began easing last summer, the report found, both the frequency of marijuana purchases and the amount of money people spent began declining.

In July, for example, people spent an average of $55.21 per visit at the median Colorado store. That was about $4 less than the average of $59.73 in July 2021, according to Headset research.

"Retailers are discounting in a time of high inflation because they're trying to move product from the shelves," said Wash, adding that businesses are also facing intense competition from a "thriving" illegal market that isn't taxed.

"We are operating in an incredibly challenging and competitive landscape, with our biggest competitor being the illicit market," said Troy Datcher, CEO of The Parent Company, a cannabis company in California.

Overall retail sales across the industry are still rising and are still projected to do so as new large markets come online, including New York, Maryland and Missouri.

According to an analysis by Marijuana Business Daily, combined U.S. medical and recreational cannabis sales could reach $33 billion by year's end, up from $27 billion last year. Sales are projected to reach $52.6 billion by 2026.

"The long-term horizon is extremely bright," Wash said. "This is just what industries go through."

For now, however, investment money is drying up as the market gets more crowded.

According to Viridian Capital Advisors, a New York-based cannabis advisory firm, total U.S. marijuana capital raised year to date is down 62.6% from a year ago, and equity financing is down 96.3%, from $2.1 billion a year ago to $78 million currently.

Part of the problem, experts said, is that investors are tired of waiting for federal regulation.

The lack of federal regulation means cannabis businesses in states where recreational sales are legal still can't access traditional banking services or institutional capital. A congressional bill called the Secure and Fair Enforcement Banking Act, or SAFE, would lift such restrictions but hasn't made it through the Senate, despite passing in the House several times.

"A lot of investors had jumped in under the assumption that there would be some movement at the federal level to either reschedule the drug or pass a sort of banking legislation," said Matt Hawkins, founder of Entourage Effect Capital, a cannabis investment firm.

Hawkins said he and other investors have become more selective in the types of businesses they finance, prioritizing those that already have significant market share. That could end up hurting smaller players hoping to get their footing, he said.

"The industry remains in an internal consolidation state, with the new licensees finding it difficult to find capital and scale with efficiency," said Robert Beasley, CEO of Fluent, which holds medical licenses in Florida, Pennsylvania and Texas.

Despite the economic headwinds, however, Beasley said he's hopeful that "a few small measures of regulatory relief" will help get the industry back on track.