This December, Y Combinator, the Mountain View, California, startup camp and investment firm, did something extremely rare in the world of venture capital: It said yes to (medicinal) marijuana. Among the 114 companies to enter YC’s Winter 2015 batch, which I’ve been following as part of a Fast Company series, is Meadow, a startup that allows licensed pot smokers to order their preferred buds–or, edibles or infused oils–from five Bay Area dispensaries and have them delivered within an hour.
“The founders are all cardholders,” says David Hua, Meadow’s CEO, referring to the permits that the State of California issues to would-be pot smokers with a doctor’s note attesting to a serious medical condition, such as cancer, Crohn’s disease, or depression. “We were annoyed with having to call on the phone and deal with outdated menus.” (Hua’s ailment: “tech neck,” or chronic pain from spending many hours sitting in front of a screen.) The 32-year-old graduate of Penn State (motto: “Making Life Better”) and Oaksterdam University (“an internationally recognized Cannabis College”) says that Meadow, which he cofounded with Rick Harrison, Harrison Lee, and Scott Garman, makes ordering cannabis, “Just like ordering an Uber,” the wildly popular taxi-on-demand service.
He’d decided to go public with the investment in part because Meadow is expanding. Starting today, in addition to the regular delivery service, California residents who have yet to receive a doctor’s approval to use cannabis can fire up the web app to order a house call with a pot-friendly physician. But Hua may also be thinking ahead to Y Combinator’s Demo Day, when he (and his 113 peers) will attempt to raise additional funds beyond the $120,000 he’s getting as part of YC’s investment. Hua knows this will be an uphill battle: Despite Founders Fund’s recent investment in Privateer, a cannabis-focused private equity firm, few VCs have been willing to deal with the regulatory morass that comes with the medical marijuana business, which is legal in a growing number of states but illegal as far as the federal government is concerned. The financial climate is so tough, in fact, that cannabis companies have struggled to open bank accounts, let alone raise venture capital funds.
As a result, Hua is playing it safe. He limits himself to topical cannabis creams and maybe the occasional puff on a vaporizer. Meanwhile, Meadow is carefully situated to avoid regulatory scrutiny. Whereas Hua’s startup looks, on its surface, a bit like Uber, it doesn’t actually sell cannabis. Instead, products are delivered and payments are taken (generally in cash) by the dispensaries themselves, who in turn pay Meadow a referral fee. In other words, Meadow doesn’t sell pot; it sells software, which Hua argues is a good position in an industry that did an estimated $2.7 billion in revenue last year and which is expected to grow to $11 billion by 2019. “Some people call this a ‘green rush,’” Hua says. “We’re selling the pickaxes and shovels. Investors who are progressive enough are going to get in on the ground floor.”
This is part four of a series.