Seed stage: How “marijuana tech” is attracting a new crop of Silicon Valley investors
You don’t have to grow and sell legal pot to be a marijuana startup.
For the first time in history, a majority of Americans favor cannabis legalization, and institutional investors are taking notice. The “marijuana tech” boom is in response to a growing industry that desperately needs data science to survive, and it’s attracting Stanford CS grads and mainstream tech VCs alike.
The following is an excerpt from The Signal: “How Silicon Valley uses data science to help legal weed grow”, in which founders talk about how they’re taking part in the “green rush” of legal marijuana.
Investor interest: it’s not (just) about the money
Silicon Valley insiders are predicting that “vice tech” startups will yield the next crop of unicorns, representing a market with a combined (predicted) value of over $341.8 billion.
Marijuana tech startups are one subset of a subset of this market, and they are increasingly grabbing the attention of mainstream venture capitalists and erstwhile tech founders. “Marijuana tech” strikes the perfect balance of risk vs. reward among those who see the massive potential of using data science to capitalize on what is, essentially, a brand new industry.
But the stakes are high, as flaunting federal law can have serious business implications. When it comes to state-legal marijuana, there’s precious little room for error, but in turn there’s almost unlimited opportunity.
There are no incumbents, only innovators.
According to the ArcView group, the commercial cannabis market is predicted to swell from $5.7 billion in 2015 to $22 billion by 2020, which would be nearly double the revenue of the NFL. The first state to legalize the recreational use of marijuana, Colorado, has already reached $270 million in sales of marijuana products in Q1 2016 alone.
Given how public opinion is shifting, legal marijuana has all the appearance of a sure thing, and commercial cannabis micro-VCs are giving way to funding from Y Combinator and Peter Thiel’s Privateer Holdings.
“One of our angel investors came from the tech investment world,” says Cy Scott, CEO and co-founder of Headset, a SaaS startup co-founded by the team who also co-founded Leafly, the world’s largest cannabis website.
“I asked him, ‘What are the differences that you see when you’re investing in cannabis versus when you’re investing in technology?’ He said with technology, you’re betting on something that you think is really good. You hope that the mass market will adopt it and see the value in it at some point in the future. He said with cannabis investments you know the demand is there. It’s a product that already sells.”
Even faced with hazy legalities, the possibilities appear endless when one realizes they don’t have to grow and sell legal marijuana to be a marijuana startup. So, why haven’t more investors started to dip their toes in the water?
It’s simple: marijuana regulations affect everything.
Imagine building software for an industry where the rules can change from one month to the next, where you can’t write off your business expenses, where you can’t use AdWords to promote, and your customers’ customers can’t use credit cards. That’s what “cannabusiness” is up against.
Founders have to get things right the first time in very, very fundamental ways. Shipping product isn’t so clear cut when the usual “shoot first, aim later” ethos could land you, or your customers, in jail. How, then, does a legal marijuana startup position itself when the stroke of a lawmaker’s pen could wipe out your entire business model?
“It’s difficult to really scale or be profitable in this industry,” says Christian Nitu, co-founder of Weave, a software company based in Boulder, Colorado that offers supply chain management and product analytics for dispensaries and POS menus for consumers.
With their mission of “simplifying cannabis through data science,” Weave is focused on helping shed light on these uncharted waters, creating an app ecosystem that streamlines solutions for inventory management, customer feedback, and regulatory compliance.
“Startups don’t know where things are going to be in a couple of months or a couple of years,” Christian continues. “Data integrity, from the very first time we entered the industry in 2014 to today, is still a huge issue.
“We thought that if we could tackle the burden of data integrity, we could make these businesses a lot more efficient, and in turn maybe we could help bring down the price of marijuana for consumers and patients, and we could actually help industry progress forward.”
The drive to move things forward for the legal marijuana industry via tech is a common thread among the founders I talked to. It’s because everyone in the legal marijuana product ecosystem must rely on one another to ensure laws and opinions change for the better. And their best lever is data.
Legal cannabis needs data to grow
I f one were to mention data science and the legal marijuana industry in the same sentence five years ago, there wouldn’t be much to talk about.
The norm for “analytics” in weed at that time was (and sometimes continues to be) wild guesses, numbers crammed into spreadsheets, and a lot of crossed fingers. Data was barely being collected, much less being put to good use.
Founder and CEO Keith McCarty made data science a priority at the outset of Eaze. He sees data as critical to every decision that they make. Eaze considers itself a logistics and technology company first and foremost. Fully one-fifth of their growing team are data scientists, led by Shri Ganeshram, their VP of Growth. It’s a staggering challenge from both a compliance and logistics perspective, but by keeping real-time data analysis front and center, Eaze is able to tackle it with agility.
“Data is a first class citizen internally,” says Keith. “We see the investment in our data team as critical to us sustaining our position as the best cannabis technology company in the world. Whether it be user interface changes, enhancements to the logistics engine, or enhancements to the menu to fulfill patient needs, every decision starts and ends with data.”
“In this industry, there is no benchmark for what we are doing because it is so novel,” says Shri. “We rarely make a decision without first intensely focusing on the data.” Just like all good entrepreneurs.
But there’s a huge piece of the legal cannabis industry that needs the most help from data science: marijuana itself.
Cutting through the haze with data transparency
A s the proliferation of legal marijuana-related data explodes, there is similarly massive demand for data that can transform marijuana from a “fringe” product to a legitimate consumer product.
For example, there’s no consensus on what “quality” means when it comes to legal marijuana. Neither the USDA nor the FDA regulate legal marijuana or marijuana products, and there’s no RDA for THC.
There’s no industry standard quality control, and no assurance that you’re getting what you think you’re getting.
Before legalization in Colorado, for example, only three strains of marijuana (out of hundreds) had their genetics sequenced; that number has gone up 300x and will only continue to increase, unleashing mountains of data on an industry made up of mostly small businesses that can barely keep up.
In response to the heaps of data, one startup has risen to the challenge to make this data more transparent.
“When we were thinking about starting a company in the industry, we intentionally didn’t come up with an idea,” says Steve Albarran at Confident Cannabis. The Palo Alto-based SaaS startup is working to make it easier for dispensaries, producers, and laboratories to measure, track, and share product information and ingredients.
“We didn’t say, ‘We’re going to go build this and see if someone wants it.’ Instead what we did was just very quietly ask questions about problems.
“We found out that data transparency was a big problem we felt we could solve. Nobody knows what’s being made, who’s making it and what it’s made of. The quality expectations are totally opaque and nobody can communicate it in a common language.”
Their goal is to help consumers have a more consistent experience, give regulators the information they need to monitor commercial cannabis quality and lab data, and give customers the information they need to make informed purchasing decisions.
Already, Confident Cannabis has received strain data from thousands of legal marijuana producers in California, Washington, Colorado, Nevada and Oregon, helping map and compare strains for quality control. They now have the largest database of legal cannabis in the world.
Using analytics to improve legal marijuana products or create new niches simply wasn’t a possibility even five years ago. The data precision now guiding product development was unheard of, and so too was the idea of data transparency.
Within a grey market like state-but-not-yet-federally-legal marijuana, the task of protecting customer data takes on a whole new dimension.
“We see a lot of people who are reluctant to share data with us just because of safety concerns,” says Cy Scott, CEO of Headset, the Seattle-based business intelligence startup providing both industry trends and data analytics to commercial cannabis retailers while maintaining the privacy of customers.
“That’s been a challenge, but we’re changing that conversation and working through it. Once people see the benefit of giving us the data and getting back the insights that we give them, their hesitation is usually short-lived.”
“Data-wise we definitely don’t want to touch any personally identifiable information,” says Scott Vickers, Headset’s CTO. “But understanding what people are purchasing, and what type of products are getting introduced is fascinating. It’s so sophisticated now.
“Fast forward five years from now I’ll laugh at saying that, because I’m sure it’s going to be even more sophisticated, especially compared to when we first started Leafly, when you’d go to a dispensary and there would be a few strains, and a few jars, and maybe a brownie in a ziplock bag,” he says with a chuckle.
Brian Wansolich, the CDO of Headset, agrees with Scott. “In our opinion, looking at [the complexity of] data for cannabis is more interesting than looking at data for consumer consumption of snack foods.”
“The novelty of the industry will definitely appeal to the data scientists out there. They’re going to want to sink their teeth into this whole industry, just because it’s uncharted.”
Marijuana tech startups have as many reasons to be optimistic as they do to be ambitious, but few imagined they’d be using their data science skills in support of political activism. Opinions about marijuana are shifting and changing, but there’s still an ingrained societal skepticism about their industry that can and must be replaced with data.
One of the benefits of being contrarian entrepreneurs entering this industry is that marijuana has always been contrary to the established order. In many ways, it’s a match made in heaven.
Legal marijuana gives tech founders an opportunity to be on the right side of history. Signs are pointing to cannabis being either the next big medical breakthrough or, at the very least, the next great American industry.
At first blush, this thinking feels like the sort of hyperbole that’s all too common in the Valley, where so many claim they have unlimited potential to change the world, using tech as a force for what they see as “good.”
“The biggest gift data has to give to the cannabis industry will be educating people about cannabis, how and why people use it, and its safety,” says Scott. “After all, it’s hard to argue with the data.”
This post was adapted from an earlier story on The Signal.
