Is It Wise to Fund an American Vaping Startup in 2020?

Venture capitalists and private investors are always on the hunt for interesting investment opportunities, and one of the most interesting opportunities over the past several years has been the vaping industry. Is it wise for you to fund a vaping startup? If you have some investment capital available and are considering funding a new vaping brand in the United States, you should know before you go in that vaping faces a challenging legal environment in the U.S. right now – but the potential rewards are great if your startup turns out to be the next E-Cigarette Empire. Here’s what you need to know before you go in.

What Are the Potential Profits for American Vaping Startups?

The potential profit margins for vape juice manufacturers in the United States are astronomical. Considering the costs of raw materials, bottles, packaging and shipping, a typical bottle of e-liquid costs a few dollars to manufacture. Companies that manufacture vape juice in their own facilities and buy raw materials in bulk can bring their expenses down significantly, but building a laboratory for e-liquid manufacturing requires a large initial investment. It’s more common today for vape juice companies to utilize third-party manufacturers on a contract basis. 

If you assume that a typical bottle of e-liquid costs around $3.00 to manufacture and sells for about $15.00 and up, the potential profitability for an American vaping startup is truly impressive. Considering that thousands of people around the world quit smoking and start vaping every day, the amount of money that a vape juice brand can make is limited only by the success of the brand within its chosen market segment. Some brands have done extremely sell selling bottles of low-cost e-liquid by the millions to budget-conscious buyers, and other brands sell smaller quantities of premium e-liquid at much higher prices. Most brands exist somewhere between those two extremes.

What Is the Legal Climate for American Vaping Startups?

The FDA regulates the vaping industry in the United States. In 2016, the FDA announced that it would subject vaping products to the same rules and regulations as tobacco products. In short, here’s what that means.

  • The Tobacco Control and Family Smoking Prevention Act applies to all vaping products. According to the law, after 2007, no new tobacco product can be sold without FDA approval. Obtaining FDA approval to sell a new tobacco product costs hundreds of thousands of dollars per product at minimum. At the time of writing, only two new tobacco products – Swedish Match snus and the IQOS system by Philip Morris – have been given marketing orders by the FDA.
  • The FDA didn’t announce its regulations for vaping products until 2016. By then, e-cigarettes had fully penetrated the American market. Therefore, the FDA gave all vaping product manufacturers a grace period. During the grace period, vaping products have been allowed to remain on the market until the application deadline of September 2020 is reached. The application deadline has been pushed back several times – most recently due to the COVID-19 pandemic – but it presently appears as though it won’t be pushed back again.
  • Every vape juice flavor – and each nicotine strength of each flavor – is a separate product that requires its own premarket application before it can legally be sold in the United States.

The legal climate for vaping startups in the United States is so restrictive that it would likely take an investment of millions of dollars to develop a new e-liquid brand and bring even a modest selection of products through the FDA approval process. 

There are, however, three alternatives:

  • You can buy an existing e-liquid brand that was already on the market in 2016 and is therefore still operating under the FDA’s grace period. However, the grace period is nearly over.
  • You can start a new e-liquid brand and buy intellectual property from brands that were already on the market in 2016 – but again, the grace period for selling these products without FDA approval is nearly over.
  • You can start an e-liquid brand in the United States but sell your products only outside the U.S.

What Is the Competitive Climate for American Vaping Startups?

Given the fact that getting a new e-liquid brand off the ground and in full legal compliance in 2020 will likely cost millions of dollars, many potential investors are shying away from the vaping industry right now. Given the fact that no e-liquid brand has successfully gone through the FDA approval process yet – and there’s no guarantee that the FDA will approve these applications – risk-averse investors are largely looking elsewhere.

There is, however, another side to this coin. If the FDA doesn’t extend its grace period for existing vaping products again, any e-liquid company that lacks the funds necessary to compile and submit premarket applications for its products will be forced to close or stop doing business in the United States in September. Some brands, however, will have the funds to submit applications, and the likelihood is that many of those applications will ultimately be approved.

The outlook for the U.S. vaping industry in 2021 and beyond, then, is that the competitive landscape will be forever transformed. Today, the United States has a single mega-brand with funding from Big Tobacco. That brand is JUUL. Dozens – perhaps hundreds – of smaller brands are competing for slices of the rest of the market. Although many of those brands are very successful small and medium businesses, JUUL is the industry’s only large brand. 

When the September deadline arrives, e-liquid brands without the funds to go through the FDA approval process will disappear. America’s millions of vapers will still vape, though; they’ll simply switch to the brands that are still available. The e-liquid brands that still exist in the United States will have much larger shares of the market than they do today. 

Given the changes that are likely to occur in the American vaping industry over the next several months, investing in a vaping startup might not be as bad of an idea as it seems on the surface. The industry is wide open for a new brand with deep funding to enter the market and claim an enormous share of a market that’s still growing and will soon have significantly fewer competitors.

 

Disclaimer: This content does not necessarily represent the views of IWB.