Dreaming of the Billion-Dollar High in California's Marijuana Green Rush
It is Friday night and I am standing on the doorstep of my San Francisco apartment looking down in disbelief at the neatly packaged, vacuum-sealed bag of green-grey marijuana buds in my hands which has just been delivered by a friendly and courteous driver, 16 minutes after it was ordered online. An eighth of an ounce (3.5g) of Purple Platinum cost $25 after a $20 promotional discount. The payment was cash only. The label lists the strain – apparently a classic of the state’s marijuana-growing region – along with the retail dispensary that supplied it. Everything is legal.
Let me explain. In California, medical marijuana is allowed, and my husband ordered the drug through the delivery service Eaze . It was, well, easy. Earlier that day, for a separate fee of $25, the site connected him to a marijuana doctor who, over a video chat, was happy to give him a good-for-a-year medical recommendation for his occasional migraines (the drug, it seems, can be used either as acute or prophylactic therapy).
Though the doctor was not available immediately – the service is in high demand – when it did happen the consultation took five minutes. After uploading the recommendation, it was a case of browsing Eaze’s site and selecting a strain from the 18 available (which include varieties such as Funk You Up, Green Crack and Headstash Cookies). Delivery time averages 15 minutes. There was no physical visit to either a doctor or a dispensary, which has been the process for Californians in the past.
Eaze started in San Francisco in July 2014 but has since spread to more than 80 cities in California, mostly in the Bay Area. The separate service that connects patients with marijuana doctors over video was added this summer. The idea is that of Keith McCarty, an early employee of business social network Yammer, sold to Microsoft in 2012 for $1.2bn.
Looking around for how to catch the next wave of technology, McCarty decided to focus on consumer delivery on demand. Since the success of ride services Uber and Lyft , startups have sprung up in San Francisco to deliver everything from fancy restaurant meals to clean clothes. Eaze quickly raised $1.5m in funding and by June 2015 an additional $11m, the lion’s share of which came from top-tier Silicon Valley investment firm DCM Ventures but which also reportedly attracted the investment firm of rapper and marijuana aficionado Snoop Dogg.
‘Cannabis hasn’t really had a lot of technology, and now it is coming’
“Eaze is like the Uber of marijuana,” says McCarty. Drivers employed by a local medical marijuana dispensary cruise the streets with a set inventory in the back. When a patient selects a product online, Eaze algorithms alert the closest driver and ask them to make the delivery.
The company and its investors are at the vanguard of a new trend in Silicon Valley: bringing software technology and business models to bear in the marijuana industry. “It is called the green rush. It is already a growing industry and we are just getting started,” says McCarty.
“Cannabis hasn’t really had a lot of technology, and now it is coming,” says Eddie Miller, co-founder of New York-based eCann Media , which is hosting a series of summits across the US and overseas, including London, for those interested in investing in cannabis technology companies.
Splashy investments have hitherto been rare in the marijuana industry – the drug remains illegal at the federal level. There is also a stigma attached to the industry which is seen as rife with people who overindulge, adds McCarty (he says he doesn’t use it). But as more and more states open up to medical or recreational marijuana or both (24 so far, including Washington DC) and the move to legalise it for recreational use in California gathers steam, the business opportunities are obvious.
The market is likely to reach $3.1bn (£2bn) this year in wholesale and retail cannabis legal sales, estimates the industry publication the Marijuana Business Factbook . Aiding things too is the so-called Cole Memo , which makes clear that the US federal government will take a hands-off approach to enforcement as long as state laws are complied with. (A bill to protect states’ medical marijuana laws from federal interference is also making its way through congress, recently clearing the US House of Representatives).
California’s voters are poised to consider legalising cannabis for recreational use in 2016 funded by the likes of tech billionaire and former Facebook president Sean Parker. If the state embraces it, it will not have been the first to do so. Incentivised by tax revenues, Colorado, Washington, Oregon, Alaska and DC have already legalised it for recreational use. But California has the largest population of any US state, more than double the combined population of the states that have already fully legalised it. California is the world’s largest cannabis market, based on legal medicinal use alone. Particularly popular with investors are the so-called ancillary companies, of which Eaze is an example. Not growing or selling the product themselves, they represent far less legally risky business opportunities (remember that the dispensary-employed driver – not Eaze – collects the customer’s cash, even if Eaze gets a cut later).
‘Small marijuana growers fear general legalisation could put them out of business’
“We don’t touch the plant. We don’t touch the initial transaction. We are a technology service,” says McCarty, as if practising for a future court date. Ancillary companies are also, importantly, free to make a profit – unbounded by requirements in California that growing and retail dispensary operations be non-profit. However, new medical marijuana laws signed by the governor last month will soon put the industry on a for-profit footing and introduce licensing for the first time, which will allow the state to begin collecting tax.
Earlier this year, Founders Fund – the investment fund of Peter Thiel, the powerful Silicon Valley venture capitalist who co-founded PayPal and was Facebook’s first investor – put multi-millions into Seattle-based Privateer Holdings, a private equity firm that owns several cannabis-related companies. Following on were decisions by both Y Combinator , the Valley’s most influential startup accelerator, and San Francisco-based venture capital firm Tao Capital Partners , whose previous investments have included Uber and Tesla.
Y Combinator invested in Meadow , a San Francisco-based marijuana delivery company similar to Eaze. Tao Capital backed Florida-based MJ Freeway , which provides tracking and inventory software to the industry. Though Privateer isn’t a technology company per se, Thiel’s decision was “huge”, says Miller. “It validated to other investors that it was something they should start considering and evaluating.”
In the city of Oakland, on the other side of San Francisco Bay, cannabis investor network Arcview, formed in 2010, connects mostly individual investors with marijuana startups – tech or otherwise – in need of angel funding. This year it launched Canopy, an accelerator programme for ancillary cannabis businesses, in Boulder, Colorado. It is planning to start another programme in San Francisco next year – perfectly positioned to tap into the tech money and talent here, Troy Dayton, Arcview’s co-founder and CEO, predicts. “There is a lot of pent-up demand for innovation,” he says. “The rest of the world has been moving forward while the cannabis industry has been stuck because of prohibition.”
The largest tech ancillary companies to have emerged include Leafly and Weedmaps, based in Seattle and Denver respectively, which review cannabis strains and dispensaries. (Leafly was bought by Privateer in 2011.) Social networking apps also exist, including MassRoots , where marijuana enthusiasts interact and share cannabis-related pictures, and High There! , a dating app for cannabis users. San Jose-based Greenbits is similar to MJ Freeway, providing tracking and inventory software. Eaze also has competition from younger delivery companies including Greenrush , which works with many more dispensaries to offer far greater range, and Flow Kana , which specialises in organic, sun-grown, small-batch boutique strains. Only Eaze and Meadow, however, combine delivery with medical consultations online.
Despite the enthusiasm, cannabis-tech companies face more hurdles than the average app startup. Banking – which is federally regulated – can be a headache because growers and retail dispensaries can struggle to get accounts, making them harder to work with. Under recent rules, it is not that banks cannot provide accounts to marijuana vendors but the onus is on the banks to work out if their cash is coming from the legal or illegal cannabis trade. The result can be that many banks avoid them. “It is a real challenge that limits investment [in ancillary businesses],” says Arcview’s Dayton.
Differences in marijuana laws between states and cities within a state are also a problem. In California, some cities – including many in the Bay area – allow delivery but others don’t and some exist in a grey zone. Many states which have allowed recreational or medicinal marijuana either prohibit delivery or in effect ban it, making expansion for the delivery companies challenging. McCarty looks to the mainstream tech sector for evidence Eaze can work through these problems.
“Uber, Lyft, Airbnb, there were things that prohibited them from operating. But there comes a time when the public speaks what the public wants and the public will win,” he says. There are already some changes pleasing him. California’s new regulations will make delivery the default from which cities must opt out.
However, new challenges are likely to emerge. Keith Humphries, a professor of psychiatry and behavioural sciences at Stanford University, expects to see some “push back” against the companies as use grows with greater legalisation. (Humphries steers California’s Blue Ribbon Commission on Marijuana Policy , which looks at policy questions that would flow if California voters decided the state should adopt recreational use).
Cannabis is a drug that affects learning, memory and sometimes anxiety levels and has the potential for addiction, he points out. “People know somebody who is couch-locked, not finishing school, not getting a job and it is like, ‘Wait a minute, this is not harmless’,” he says. Arcview’s Dayton acknowledges that the drug does have risks, but also argues that it falls “well within the realm of the types of choices that we let adults make in a free society”. Some of Eaze’s marketing even suggests use before or after a weekend workout to enhance “runner’s high” – hardly a medical application.
Newcomers to the cannabis industry may also face resistance from established players, believes Erick Eschker, co-director of the Humboldt Institute for Interdisciplinary Marijuana Research at Humboldt State University, in the so-called emerald triangle region in northern California where most of the state’s cannabis is grown. The insiders, Eschker says, are the people who have historically grown the crop: “They see the Silicon Valley entrepreneurs and investors as outsiders.” Their big worry, he says, is that the push towards commodification and commercialization, bringing as it inevitably will interest from larger companies and corporations, could hurt the many small growers. (Indeed, many in the cottage industry oppose marijuana moving to recreational use for the reason that it could jeopardize their livelihoods).
For all the rising interest, investment is still only at the beginning, even when it comes to ancillary companies, note Miller and Dayton, blaming the massive reluctance on the legal issues that do not exist in most other industries. “There is a whole class of investors and entrepreneurs that are just not in the space yet,” says Dayton. Miller adds: “There is a green rush definitely going on and I am a big believer in it, but it is very nascent right now ... [Investors are] waiting to see more Peter Thiels take the first leap and then they will follow.”
But, they add, the reluctance also makes the advantage of investing today bigger: those who get in first stand to make the most if and when the barriers vanish. So one day will it be Eaze as well as Uber pinging UK phones to say a driver is outside? Miller believes that, though it may take up to 20 years, cannabis will eventually be legal across the world. The medicinal benefits will drive the movement forward, with recreational consumption following. “Just like how the repeal of Prohibition [on alcohol] happened,” he says.
As to what my husband is going to do with his medicine, he wants to look first at evidence that marijuana can help migraine sufferers. One recent scientific review concluded that there was some evidence suggesting it could have a role, but the gold standard of proof necessary for confirmation and further evaluation – randomised clinical trials – were lacking. But it is also a long weekend and, well, the doctor thinks it is worth a shot.
LOOKING TO INVEST? TRY THESE FOR SIZE
These marijuana ancillary technology startups are all seeking money to further build their products.
What Software to help medical marijuana patients.
Based Palo Alto, California.
Potbotics wants to see more science in the medicinal cannabis industry. The company is developing three products. The first, Potbot, is a recommendation app, launching shortly, which suggests cannabis selections for patients specific to their ailment. It is based on the relative levels of different cannabinoids – the chemicals in the cannabis that give it its properties. (The best-known, which gives cannabis its psychoactive high effect, is THC, but others such as CBD are known for their therapeutic properties). The app uses scientific reviews and crowdsourced information for its data. The company is also experimenting with installing it on interactive kiosks in retail dispensaries.
The other products – BrainBot and NanoPot – are further from release. BrainBot would allow doctors to look at a patient’s brainwaves before and after consumption of different cannabinoids using standard EEG, allowing insight into which work best for their condition(a pilot programme is planned for launch in November in northern California). NanoPot looks at the genetics of cannabis seeds to better understand which might be bred to optimise for certain cannabinoids useful for certain medical conditions. “As recreational cannabis gains momentum, medical patients are being left behind,” says co-founder David Goldstein.
What Tracking for marijuana gardeners.
Based Denver, Colorado.
Marijuana may be a weed but it can be tricky to grow well, says Rob Rusher, co-founder of Growbuddy. Late last year Growbuddy launched an app to help both small-time and industrial cannabis cultivators by tracking growing methods. Growbuddy provides a way of recording a garden’s data, from fertiliser applications to waterings to lighting regimes, in one place. It is free but for an annual subscription growers also get reports to provide deeper insight into what is and isn’t working. It has 8,000 users, says Rusher, which makes it the biggest marijuana cultivation app in the world Rusher wants to grow the company and hopes a big agricultural business might one day buy it – though, he adds, federal legislation would probably have to change before it would be interested.
What A cannabis commodity exchange.
Based Boulder, Colorado.
Agricultural products such as wheat and corn are all traded on commodity exchanges. Why not cannabis? Chex is trying to introduce it to create a more efficient cannabis economy, for example by establishing pricing. Chex plans to launch its app in April 2016. Under the system, a supplier would list a quantity of a particular strain and then a buyer – a dispensary or an oil processor – would bid. A market price would develop and it would become possible to recognise trends and make forecasts, helping sellers and buyers. “Often people don’t know what the price should be for a particular strain,” says co-founder Eugene Lopin. The exchange would charge a fee for the use of its platform after the transaction, performed in cash by buyer and seller. But, notes Lopin, multiple Chex will be needed. E ach state that allows recreational or medicinal cannabis will have to have its own because marijuana cannot be traded across state lines.