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As legalized cannabis spreads, its startup economy is booming

Canada has a head start, but investors see potential for explosive growth once regulation catches up with reality.

As legalized cannabis spreads, its startup economy is booming
[Images: Paket/iStock; PytyCzech/iStock]

April 20th has long been a day of defiance for cannabis activists, but in 2019, 420 is taking on new meaning as legalization continues to sweep across the U.S.

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Weed is now legal in 33 states for medical use, and 10 states for recreational use. It’s also legal in the District of Columbia, home to the U.S. Congress, which ironically has yet to legalize marijuana on a federal level.

And therein lies a problem. With cannabis still considered a Schedule I illicit drug by the federal government, U.S. startups handling it cannot get banked, cannot go public on the NYSE or NASDAQ, and are finding themselves mired down in onerous tax laws and highly restrictive zoning that make it very expensive to operate. Yet cannabis is legal just across the border, which is enabling Canadian cannabis companies to profit from the U.S. market in ways in which stateside companies cannot right now.

For example, Canopy Growth, a Canadian cannabis company that is backed by a $4 billion investment by U.S. beverage giant Constellation Brands, has been on a tear in recent weeks, announcing high-profile partnerships with celebrities like Seth Rogen and Martha Stewart to launch new cannabis brands. Canopy recently agreed to buy one of the largest U.S. cannabis operators, Acreage Holdings, for $3.4 billion—but only if federal legalization happens before 2027.

Acreage’s lobbying tactics have included adding key political figures to its board, such as former U.S. speaker of the house John Boehner. He recently launched the National Cannabis Roundtable to advocate for legalization and has said that he believes the States Act, which would prevent federal interference with states that have legalized marijuana, may become law by early 2020.

“The opportunity for companies like Canopy to become these massive global players is a function of the U.S. market being in limbo,” says Kyle Lui, partner at venture firm DCM. “The fact that these Canadian players have been able to get the scale that they’ve gotten to, and access U.S. capital markets and go public in the U.S., when U.S. companies can only go public in a secondary exchange in Canada, has given the Canadian companies time to become world leaders here. Canopy has over a $20 billion market cap and they did something like $80 million in revenues last quarter.”

Like Uber for cannabis

As legalized cannabis spreads and matures, U.S., companies have a shot at growing in less-hobbled fashion, says Lui, who became an angel investor in 2012 after selling a company to Salesforce. “Someone introduced me to Eaze founder Keith McCarty, who was interested in picking my brain around product,” he says. “He had just left Yammer [following Microsoft’s $1.2 billion acquisition], and David Sacks [who cofounded Yammer] was an angel investor in my startup, so we had a number of overlapping circles. I didn’t end up investing as an angel, but I thought it was an interesting concept.”

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A couple of years later, DCM raised a new fund. “We were looking at industries that were starting to rise,” Lui explains. “Cannabis was a new industry that was coming online in terms of the legal market, the white market, and was already a massive industry from a black market perspective.” The firm concluded that cannabis regulation would catch up with the market being shaped by startups.

“We saw this with the on-demand economy,” says Lui. “Regulators were ill equipped to handle this concept of hopping in someone else’s car when they weren’t a taxi driver. The concept of having strangers stay in your home. These were very new concepts, so the concept of having legal medical marijuana delivered to you was a foreign concept, and for us, a really intriguing model. Eaze was trying to remove the friction, lower the barriers, and consumerize the space.” DCM made a seed investment in Eaze, then led its Series A round and is now the company’s largest investor.

Eaze recently closed its Series C round and has raised $166 million to date with investors including DCM, Snoop Dogg’s Casa Verde Capital, Winklevoss Capital, internet pioneer Jim Clark, Timothy Davis, Bailey Venture Partners, and others. Its current ad campaign, “It’s always 420 somewhere,” is “a nod to the fact that cannabis consumption is no longer constrained to one day or time of day,” says Sheena Shiravi, director of consumer communications.

Legal and curated

Eaze’s ecosystem of partners includes 40 brands and about a dozen retailers. Category leaders include PAX and Dosist for vape pens and Plus and Kiva for edibles. Most seem focused on providing a guided journey, with education and microdosing to help users—particularly new ones—achieve their desired effect.

Dosist is breaking from the pack and taking a very non-Silicon Valley approach to building its business. Rather than focusing on funding and fast growth, it’s prioritizing cultivating its experiential lifestyle brand with activations at Coachella and Soho House at Art Basel, partnerships with Barry’s Bootcamp, and the opening this week of its first standalone spa-like boutique in Venice, California.

Dosist CEO and investor Gunner Winston explains, “When I met Dosist through a good buddy of mine who was the chief marketing officer of Beats, he said if you can create a brand with a narrative that can transcend the category it will be an anomaly. For us that narrative was not about cannabis, it was about wellness and empowering people to manage their health and happiness. Because of that narrative, I eventually became the largest investor in Dosist.”

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According to Winston, the cannabis market in California alone last year was $3 billion, which is what the U.S. in its entirety spent on razor blades. But Dosist is aiming for thoughtful growth. “What you won’t find is rapid escalation of product development that less than meets our criteria of quality and advocacy,” he says. “Our goal is to ensure that our consumer can buy our product in a very comfortable environment. We actually only sell in 20% of the accounts in the state of California because a lot of them can’t properly represent our brand. Just like how you can’t get Apple or Chanel at every fashion or consumer electronics store.”

“I’ve had to turn down a lot of money because they were misaligned, people who wanted to maybe speed us up,” Winston says. “But no one can speed up the creative process. Building brands is difficult. which is why very few in this space have been able to scale. If you look at Starbucks or Shake Shack, they took six years to leave their first key geographies. So what we’re building we hope to be a forever brand. A lot of people in the context of this green rush are rushing to sell. We’re only in a rush to be great.”

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