by Y Combinator10/11/2018
David Hua is CEO and cofounder of Meadow. Meadow makes retail and delivery software for dispensaries. They were part of the Winter 2015 batch. You can check them out at GetMeadow.com. David’s on Twitter @Hua.
Vincent Ning is CEO and cofounder of Nabis. Nabis is a cannabis services group. They offer distribution, logistics, sales, and marketing. You can check them out at GetNabis.com. Vincent’s on Twitter @vcning.
00:00 – What David brought with him
5:10 – Microdosing
6:10 – What are people buying?
10:00 – Customer demographics
11:22 – CBD
14:20 – Changing vocabulary around cannabis
16:35 – What is Meadow?
17:00 – What is Nabis?
17:15 – Why did they choose to not do cannabis product manufacturing?
22:00 – Fundraising as a cannabis company
25:30 – Why is there not one dominant cannabis company?
29:15 – Legalization across Canada
31:00 – Banking as a cannabis company
35:35 – Taxes
37:00 – Price sensitivity
39:35 – Brand loyalty
42:45 – What will the market look like in 5-10 years?
49:30 – Cannabis media
51:45 – Psychedelics
56:00 – Exonerations and social equity programs
Craig Cannon [00:00:00] – Hey, how’s it going? This is Craig Cannon and you’re listening to Y Combinator’s podcast. Today’s episode is with David Hua and Vincent Ning. David is CEO and co-founder of Meadow. Meadow makes retail and delivery software for dispensaries. They were part of the Winter 2015 batch. You can check them out at getmeadow.com. David’s on Twitter @hua. Vincent is CEO and co-founder of Nabis. Nabis is a cannabis services group. They offer distribution, logistics, sales, and marketing. You can check them out at getnabis.com. Vincent is on Twitter @vcning. Alright, here we go. We should start by talking about what David has brought.
David Hua [00:00:42] – Oh, yeah, okay, cool.
Craig Cannon [00:00:44] – This is different than a normal podcast.
David Hua [00:00:46] – I brought a selection of my favorite edibles which my wife makes. They’re called mellows. I’ve also brought a bunch of flowers. I figure we would be able to smell a lot of different flowers, so you can get the terpene profiles. It’s like when you do wine tastings. I think that’s important. I’m really into terpenes. I bought some body rub, some oils that we can talk about, some live resin, and also a pre-roll. A lot of these products are all available on the market today. It’s about showing you how the evolution of the consumer experience has been. These are some that I got it at The Green Door, which is right around the corner from this office. It’s one of my favorite shops to go to.
Craig Cannon [00:01:35] – Do you distribute any of these products?
Vincent Ning [00:01:38] – Yeah, so Northern Emeralds has, I was actually just talking to Cody this morning about it, and we distribute, we help with Northern Emeralds Distribution. We share an office with them actually, over in Oakland. We’ve tried working with Papa and Barkley, but I think they do their own distribution so a lot of these brands do they own self-distribution, but then oftentimes a lot of smaller brands or boutique brands will often ask a third-party distributor to help out, so that’d be us.
Craig Cannon [00:02:03] – Interesting, so since you guys have gotten into, let’s break it apart.
David Hua [00:02:07] – This one is called blueberry cruffin. I got this particularly because it just smelled really good. It has this, really sweet nose, right? You’ll get this crazy blueberry-ness to it. This is Northern Emerald’s Gelato. You’re going to get kind of a cheesy, musky type of smell there, right, here we go there. Then this is the Flow Kana. This is more of the lemon, it’s called orange zest, but you get that citrusy feel. When you smell flowers that have that citrus feel, you get way more of that uplifting, energizing
Vincent Ning [00:03:03] – Head high–
David Hua [00:03:03] – Head high.
Craig Cannon [00:03:05] – Really, so that signals what strain it is.
Vincent Ning [00:03:11] – Usually sativas have more of a head high, citrusy, lemony kind of aroma to it. That’s just the terpene profile which is basically what you imagine is life a flavor profile for weed. Then the indica on the other hand is more of… People normally remember it by saying indi-couch. Basically you slip into the couch and you just get really lazy, it’s more of the body high. Indica and sativa are the ways that people typically like to categorize, and hybrids, but then at the end of the day there’s so many different varieties or strains, and nowadays with the cross-breeding of all of them, everything seems to be somewhat of a hybrid strain.
Craig Cannon [00:03:55] – Does the strength of the smell indicate it’s potency in any way or is that just freshness?
David Hua [00:04:02] – Not really, a lot of these have their THC percentages now, so if you look on the labels you’ll see how potent it is. This one says 27%, no CBD, this one is your live resin, this says 65% THC. It’s going to be way stronger. Because this is a resin, you’re going to see all that’s been extracted, this is basically all the trichomes have been taken from the flower, all of the cannabinoids are extracted and put into this resin. This is what people use for dabbing.
Craig Cannon [00:04:43] – Which is super strong right?
David Hua [00:04:43] – Pretty strong!
Craig Cannon [00:04:46] – How many milligrams of THC would be in that?
David Hua [00:04:48] – This says, 650 milligrams. It’s a lot.
Vincent Ning [00:04:52] – That’s like concentrate, it’s classified–
David Hua [00:04:54] – Super concentrate.
Craig Cannon [00:04:57] – For the amateur, what do you guys recommend, so like a five milligram edible, is that what you’re talking?
Vincent Ning [00:05:07] – That’s five right–
David Hua [00:05:07] – These are five. Those are five.
Vincent Ning [00:05:10] – Beautiful.
David Hua [00:05:10] – Thanks! This is brown butter sage, black sesame, cookies and cream, right? These are gourmet low-dose. That’s what the new consumers going after. They’re not trying to get blitzed on a dab. But there are consumers–
Craig Cannon [00:05:29] – Have you been watching those Instagram videos though?
David Hua [00:05:31] – Oh yeah! I cannot compete! There are people literally doing two, three gram dabs, full dabs–
David Hua [00:05:43] – For what we’re seeing in the market, the new consumer wants to do more micro-dosing. Micro-dosing has revolutionized how I think about cannabis consumption. Because we never knew back in the day what you were really getting. You just were like, “Alright!”
Vincent Ning [00:06:11] – You just show up at the store–
David Hua [00:06:12] – It’s green! It’s good! But now, the consumer can understand how many milligrams it is, smell the profile, understand what’s within it, and then build their relative scale on how it effects them.
Craig Cannon [00:06:47] – What does the market look like these days? Are more people buying edibles, since it’s become legalized in California?
Vincent Ning [00:06:55] – Well at least from our standpoint as a distributor, the higher velocity items and the higher volume items that flow through the market are flower and pre-rolls, still, just because that’s the most common base of understanding of what weed is, and so people generally buy a lot of these single pack pre-rolls, and it depends on the market as well. If you’re in the middle of a city, people will buy smaller quantities, just because there’s a lot of tourists and they want to walk into a dispensary these days, when they come visit San Francisco. It’s part of their to-do list, and then they’ll pick up something small, versus if you’re kind of this brand loyalist. In a more rural area you’ll buy a larger quantity, in denominators of eighths or maybe even larger. Edibles are a big part of it as well and I think it’s typically for the newbie weed, I guess experiencer? I guess for edibles, the argument for that eventually being a bigger market is that for people who haven’t consumed weed before or smoked before, they have to get their head around two levels of friction. One is smoking, first, anything, and then second, the weed part. Well for edibles, they eat anyway, so this is just one step away from consuming weed.
Craig Cannon [00:08:16] – Right. But not very granular dosing. That was great for me when I started dipping into the stuff. But I find that it’s a completely different sensation anyway.
David Hua [00:08:28] – It is. You’re metabolizing it through your liver, it’s more of a body high. The onset takes a little longer too, with edibles you’re looking at typically an hour, maybe an hour and a half. There’s some beverages like California Dreamin’ which is a YC batch, they’re quicker, their onset’s quicker. The category that we see that’s growing pretty quickly is in the concentrate market, but through vapes. Here are a couple of examples. I brought some Eras, and then within each one of these I have a different pod. I carry around different pods for different feelings. This one is a forbidden fruit, so this like an indica, it’s a little bit more of a chilling out type of strain. You have over here ACDC, that’s a pine, it’s a CBD strain. When I’m not looking to get really high but I’m looking to take the edge off a little bit, I really turn to CBD often. That’s probably the cartridge I switch out the most, and then I have this Nina Simone here, which is, or sorry, Nina Limone. Which is a sativa, and this is from leischen a bloom. This is way more when I just want a little kick-up, and what’s great about it is I can take a little bit of a puff, doesn’t smell, it’s discreet, and I think that’s what people are looking for. That’s what edibles do for people as well. They can just put it in their bag, they can eat it. Flower still has that smell, I love it personally, but there are people that have that stigma attached to it that have that, “I don’t want to smell like weed.”
Vincent Ning [00:10:13] – It’s dirty–
David Hua [00:10:15] – Or, “My neighbor’s going to find out or my landlord.” I recommend, if that’s a thing you can go with a concentrate, or find a vape, like a mighty, from Storz and Bickel where you can store it. Do a vape without combustion and it’s not that smelly.
Craig Cannon [00:10:32] – In terms of your market, your average customer for you guys in particular, is it across the board growing? Is there a certain segment where people are really taking it up in terms of age or demographic?
David Hua [00:10:45] – The fastest demographic we’re seeing is actually the baby boomers– They are coming in and they are replacing a lot of their prescription drugs. There’s also this feeling of, “I don’t want to feel old.” Which is super ironic, because this is the generation that brought us the war on drugs, and supported this movement that for us, D.A.R.E.,
Craig Cannon [00:11:15] – They worked at D.A.R.E.
David Hua [00:11:17] – They worked, they pushed D.A.R.E. They were kind of hippies, or they knew about it but they bought into this war on drugs mentality, and it’s funny and ironic that they’re coming back to this because of their health ailments. Their feelings have changed, which is good. Positive direction–
Vincent Ning [00:11:37] – There’s this whole branding around wellness as well for weed. Not just the fact that it gets you high but also there’s CBD effects that have medicinal properties or herbal, it’s seen as an herbal remedy or something like that that helps your general day-to-day lifestyle.
Craig Cannon [00:11:57] – Can you break down CBD, for people who aren’t in the know? Yeah, so I think it stands for cannabidiol, I don’t know how you actually say it.
Vincent Ning [00:12:06] – Cannabidiol– Cannabidiol– – Cannabidiol– It basically comes from, you can actually derive it from two different plants, marijuana and hemp. The hemp based CBD is legal, and you can sell that anywhere, so you can get it at Costco if you want. I’ve seen hemp lotion and all that sort of stuff, but then there’s also CBD products that are derived from marijuana, that can be sold in dispensaries. Essentially what it is, is for I guess the layman it’s THC without the effects of getting high. It’ll have medicinal properties that essentially will reduce pain, and it’ll basically generally make you feel a little more chilled out, otherwise you won’t feel too much of an effect of getting high of THC.
David Hua [00:12:53] – The crazy thing about CBD is if you look at, I don’t know if you watched that CNN special, Weed from Sanjay Gupta? He had a few, a few years ago, but essentially CBD was really helpful for people with epilepsy and that had seizures. There’s a group called The Stanley Brothers Ankara, they’ve grown Charlotte’s Web, and what’s crazy is if you’ve looked at the history of cannabis growing, a lot of it was bred for potency. It was also bred for smell, but people didn’t really understand the science around what was in it. With the legalization of it, with the requirements of lab testing they started finding other cannabinoids. CBD, THC are two of perhaps hundreds of cannabinoids within the plant itself. You’re seeing research on THCV, THCA, CBN, CBG, all these different cannabinoids are helping people identify ways to help them in their life. With CBD, especially if you just take it from hemp derived, the problem is you don’t have this, what they call the entourage effect, and what that pretty much means is, each of the cannabinoids help each other with the effect. That’s why when you look at something like Papa and Barkley’s 3:1, and you’re putting this on sore spots, it has a better effect than if you’re just going to get a CBD lotion. You kind of need one or the other to balance it out.
Vincent Ning [00:14:28] – Compliment each other. Products nowadays, apart from being strain-based, as what you would normally buy back in the day, you’re like, I’ll buy some blue dream, or some of this, and based on strain, now a lot of products are ratio-based or effects-based. They’ll have higher THC content to lower CBD or one to one, or up to 10 to one.
Craig Cannon [00:14:51] – That’s driven by becoming more mass-appeal right? Because the customer goes in the store and they’re like, I want to feel this way. I don’t know all this lingo, or is that not true?
David Hua [00:15:02] – The lexicon is continue to build. A lot of people don’t know, I think it’s like wine, where you have your percentage of alcohol, but then you have you have your tannins and how it smells. That next frontier is really going to be around the terpenes. You’re going to have your THC and CBD percentages, but if you put this red congo against this lemon meringue, the smells are completely different, and you’re going to feel a little bit different as well. That’s how I’ve been human trialing myself. For stuff like this rub, how do you derive the different strains or rather the CBD for instance? How do you pull the CBD out but not everything else? There’s a number of extraction methods now, that’s bucketed into two categories. You have solvent-less, and then you have solvent. Solvent-less is kind of like with mellows. She uses, actually this gold seal red congolese, through an ice water extraction. It’s basically, you take the flower and you trim, you’ve run it through cold water and ice and then you sieve out the runoff into bags, and those bags produce hash. You dry it out and you have this hash that hasn’t been extracted with anything else
David Hua [00:16:25] – but just water and some movement agitation. Then you have CO2, you have BHO which is butane, you have alcohol distillation, and so they put the flower through there, they actually rip apart everything. They take away the terpenes, they take away the cannabinoids, and then they reconstitute it at the end of it to bring it back to what it is. When you look at something like a three to one CBD, or THC to CBD, they most likely extracted it, probably CO2, they’re left with different compounds, then they measured it, see what the concentration was and then they put it back to the ratio that they wanted.
Craig Cannon [00:17:07] – Gotcha, okay, now so is Meadow making any products?
David Hua [00:17:11] – No– Meadow builds software for dispensaries, but we spend a lot of time with our dispensaries, understanding the products, understanding inventory, helping them with compliance, and everyone at Meadow is pretty passionate about cannabis in general. We’re very much software based, and working with a lot of people within the supply chain.
Craig Cannon [00:17:35] – Okay, and Vincent, similarly, you guys aren’t making anything. You’re doing distribution–
Vincent Ning [00:17:38] – Exactly. The company’s called Nabis and we basically do licensed distribution, so we’ll basically move product at a wholesale level in the supply chain.
Craig Cannon [00:17:49] – What caused both of you to not get into the manufacturing, but the actual higher level of the business?
Vincent Ning [00:17:56] – That’s a good question. For me at least it’s a pretty capital intensive side of the supply chain, just because to buy all the equipment and machinery, and have the expertise to produce everything, and that was not something that I was born with or came with. And so, a lot of people who do manufacturing will essentially white-label for a lot of other brands. For us, we actually had friends who were manufacturers, who are manufacturers rather, and that’s a lot of the ways in how we got introduced to a lot of the brands that we work with today. Distribution was a much lighter weight kind of business for us to be able to start up.
Craig Cannon [00:18:37] – But you did fundraise right?
Vincent Ning [00:18:37] – We did fundraise. Wwe just closed a recent round, our seed round. Thanks. Yeah, and it was quite different, it was quite an ordeal compared to tech or finance, or any of the traditional VC fundraising industries, just because we’re licensed entity. We have a distribution license in Oakland, it’s a Type 11 distribution license in California, and it creates a lot of friction as far as what investors feel comfortable investing in.
Craig Cannon [00:19:10] – Meaning you’re going to have to throw a bunch of their cash at just getting a license from the get-go?
Vincent Ning [00:19:15] – Yeah, so that was something we had to do. It wasn’t too expensive, it was several thousand bucks to get the process done, but on the fundraising side, it creates a lot of friction just because for a lot of institutions that can write larger check sizes, they have LPs for their funds that basically they sign LP agreements that say you can’t invest in certain vice industries like gambling, or alcohol or weed of course–
Craig Cannon [00:19:37] – Was fundraising similarly difficult for you guys? For Meadow?
David Hua [00:19:45] – We went through YC, which is an unfair advantage but we were the first company to go through. I didn’t think they were going to accept us. I really didn’t–
Craig Cannon [00:19:55] – Who interviewed you?
David Hua [00:19:58] – We had Kevin Hale, Qasar, and Carolynn.
Craig Cannon [00:20:04] – Carolynn Levy.
David Hua [00:20:08] – It was 10 minutes of the most intense questioning.
Vincent Ning [00:20:12] – What did they ask you?
David Hua [00:20:12] – Everything! Everything! We talked about the legal side, we are an ancillary business, and we chose that because all of us have been in tech for awhile, and have been building software, and we just saw a need to build this system that allows dispensaries to be compliant, but also run their business effectively. 90% of the shops are mom and pop right now in California. If you look at Prop 215 and where cannabis was, records were considered evidence, so people didn’t really keep heavy records.
Craig Cannon [00:20:55] – That’s why you hear about companies, all cash–
David Hua [00:20:57] – All cash, all records, and then coming into legalization, now you have to keep records for up to seven years. You have to keep tax records, you have to keep patient records, you have to keep everything from who’s bringing the product to who’s touching it, to how it’s getting destroyed, everything. Then on of that you have to create a consumer experience that obfuscates all the complexity around the supply chain. This, consumer land, you can get a lot of stuff. It’s more expensive than it was which is definitely a negative, but you get a lot of selection, you get testing and all that stuff. We just saw a need for it early in 2014, and when we applied to YC, we ended up getting accepted and fortunately as this stuff was happening in Colorado, there a lot of signs in other states legalizing as well. We knew California hopefully was going to go, we didn’t know, we saw other attempts that had failed before, and then we did a pitch during demo day that tried to bifurcate the audience as much as possible. So that way, if they were interested in weed or cannabis, they would come talk to us–
Craig Cannon [00:22:12] – What did you say?
David Hua [00:22:17] – A lot of it was like, “Hey, if you want to stand on the right side of history, come talk to us.” We really did that, so I think there was this feeling of okay, you have to step forward with us in order to make this happen.
Craig Cannon [00:22:36] – Did you have, both of you guys, did you have a lot of funds or were they angels that could just spend their own money on whatever they wanted?
Vincent Ning [00:22:43] – For us, it was about half-half in terms of capital committed. We do have a lot of smaller check angels just because they’re the types of people that David just mentioned, who are forward thinking and they think this is like the end of prohibition era, the new age for weed, and they’re super interested. A lot of family offices, and then a couple of institutions here and there.
Craig Cannon [00:23:05] – Okay, and you?
David Hua [00:23:05] – We had over 40 angels.
Craig Cannon [00:23:11] – How much money did you raise?
David Hua [00:23:12] – We raised two and a half on 12. And so we came out of YC, we didn’t close it up all after demo day. It took probably around nine months meeting with people, and we had a rolling close with people.
Vincent Ning [00:23:29] – All on SAFEs?
David Hua [00:23:29] – All on SAFEs And also it’s not like, “Hey we’re building XYZ CRM and we’re good to go.” I think people had to get really comfortable with the context around cannabis first, and so there’s a lot of meetings that were introductory, here’s what’s going on in the space, this is where we see the world. Then they had to take that in, and be like “Alright, do I believe this?” If so let’s have another meeting, and then we kind of worked through gaining investments–
Vincent Ning [00:23:58] – It is a lot of that, I feel like angels are generally curious. Investors see profits and they see upside of all of this, but then at the end of the day a lot of them are doing their diligence as well. They come talk to weed founders who are working in the space, and they ask them a bunch of questions about the regulations, the licensing, how we view this industry moving and shifting forward, and then they go back, do their homework, talk to some other cannabis people and then finally come back to a decision.
Craig Cannon [00:24:29] – Is there one particular stat where you tell it to the average investor, and they’re like, “Oh my God!” How fast the industry is growing for example, I don’t even know, I know it’s popular, but I’ve no idea how much weed people are buying.
Vincent Ning [00:24:44] – For us, we say it’s the end of prohibition in California, and I don’t know if this is the case anymore but a couple of years ago, including the black market, 80% of the cannabis in the United States came out of California, so that was for us a great pitch because we’re based and distributing in California.
Craig Cannon [00:25:03] – Are you guys distributing out of state?
Vincent Ning [00:25:05] – No, just California–
Craig Cannon [00:25:05] – That’s not happening yet right?
David Hua [00:25:08] – Not legally, not at all. But, if you look at where agriculture is in California, most of our products are exported to the rest of the country, right? 70% of agriculture comes out of California. Tech comes out of California, culture comes out of California. We’re the fifth largest economy in the world. There’s a lot that we have here, especially because cannabis, the medical cannabis movement started in San Francisco in ’96 with Prop 215. There’s a lot of history here, and I think as we’re turning this thing over, there’s just a hope that we keep a bit of the culture and what this thing meant, but it’s hard.
Craig Cannon [00:26:01] – Dude, I think this shit’s amazing. I love the amount of choice I get when I go to the store. But one thing that I’ve been curious about since legalization but before that when I just had a medical card, why is there not Marlboro? Why is there not one dominant edible company? You said all of these stores are mom and pop shops, why is there not the CVS of cannabis?
Vincent Ning [00:26:26] – I guess in terms of brands, I think it’s still fairly fragmented. There are certain companies that are getting bigger and distributing a lot of products across California, but none are dominant in multiple states and that’s probably a lot of the reason why you don’t have a Budweiser of weed–
Craig Cannon [00:26:47] – But even in California, why? I don’t get it, why isn’t there just one place?
David Hua [00:26:54] – There’s just a lot of fragmentation in the market, and if you look at how legalization has started in 2018, the entire supply chain has been reconfigured from what it was before. In the pre-2018, a grower can go directly to a dispensary, not have the lab tested, not have to go through a distributor, any of that. But now, with all the different licenses, a grower has to cut their harvest, give it to a manufacturer, the manufacturer has the product ready for the distributor to come pick it up, the distributor then has it quarantined and then tested, and then after…
Craig Cannon [00:27:35] – Test for what?
Vincent Ning [00:27:36] – Just the compliance testing, so making sure like homogeneity, potency, any sort of additives, all that checks out.
David Hua [00:27:44] – Pesticides, microbacterial, anything like that, and then, once it’s tested and approved, then the distributor brings it to the dispensaries. The problem that we’re seeing in California, we thought this was going to be a bumper year, harvest year. We expected this to be multiples bigger than… The problem that we’re seeing in California, we thought this was going to be a bumper year, harvest year. We expected this to be multiples bigger than–
Craig Cannon [00:28:05] – For context this is the first legal year.
David Hua [00:28:07] – First legal year, but last year we probably did three billion dollars in medical sales. This year we’ll probably do as much of that in adult use sales, and medical will be a fraction of that. Maybe half a billion if we get there. The problem is, you have 33% of the state that has some form of local laws, and then 67% of the state that has no laws whatsoever. Because of that you have this disconnect between state law, where you can get your permits, but you can’t get a permit unless you get your local permit. For this legal world that we’re in, it’s not just the compliance side, but there’s a lot of advocacy and legal work on the regulatory side, on getting local approval, local…
Craig Cannon [00:28:54] – This is to grow or sell?
David Hua [00:28:58] – To grow–
Vincent Ning [00:28:58] – To do anything–
David Hua [00:28:58] – To sell– To touch distribution– So imagine, so you’re saying why isn’t there this one huge brand, it’s because there’s so many hoops to jump through, and the state’s massive–
David Hua [00:29:13] – This is not like Oregon, right? It’s just a massive state, and then you have a disconnect between areas that have licenses, areas that don’t, and then people trying to get licenses in these areas but being throttled because of local governments that haven’t created those laws.
Craig Cannon [00:29:32] – The same thing true in Colorado and in the other, I assume California is the biggest state in terms of volume, sales, right?
David Hua [00:29:38] – Yeah, for sure–
Craig Cannon [00:29:39] – And then following that is Colorado or–
David Hua [00:29:41] – You have Colorado, you have Oregon–
Vincent Ning [00:29:46] – Nevada’s pretty big–
David Hua [00:29:46] – Nevada, yeah– It’s pretty big.
Craig Cannon [00:29:51] – And then Canada? What’s happening there–
Vincent Ning [00:29:52] – They just federally legalized, so I think October 17th, was it the date, that they’re basically, they passed the bill and now it’s going to be fully enacted to be legalized across the country.
Craig Cannon [00:30:06] – Really–
David Hua [00:30:08] – Canada’s making a huge play. I think if you ask a lot of people in California cannabis, if they can name all these provinces a year and a half ago they’d probably be like, ah, no? But now, Toronto’s coming up, you have Vancouver coming up, you have basically these companies that were privatized with the government, and now they’re opening it up into public markets, and now these huge massive Canadian companies that are listed, got all this capital. Now they’re investing it into their own operations but now bringing that capital down into legal states like California.
Vincent Ning [00:30:53] – No we’ve seen a lot of that as well. Part of the whole consolidation pattern that will come, just because the market’s so fragmented right now, will be heavily pressurized by Canadian publicly traded, heavily capitalized companies. Just because they’re coming in, and they’re buying up pieces of licensed businesses in California and other states in the United States, just so that they can have their stake in the ground for the future.
David Hua [00:31:20] – Just to go back to why isn’t there this massive brand, it’s because there’s no capital to. Not only do you have all these hoops to jump through on the regulatory side, but there’s not banking, you can’t–
Craig Cannon [00:31:34] – This is the other thing right? Because the FDIC, obviously federal–
David Hua [00:31:37] – Federal–
Craig Cannon [00:31:37] – Right, yeah. It is not federally legal, so what do people do?
David Hua [00:31:43] – For banking?
Vincent Ning [00:31:45] – It’s a bandaid solution for everyone, I would say. There’s small credit unions that will bank cannabis companies, there’s other banks, some people will just use big banks but then they don’t mention anything. Generally people have, for licensed businesses at least, they have a multitude of banks, and they spread their cash across everywhere, because you touched on earlier, more than I would say for us at least, more than 90% of our transactions are in cold hard cash. We have safes everywhere, as well as well as a banking solution.
Craig Cannon [00:32:19] – How do you guys do it if you’re doing delivery?
David Hua [00:32:21] – Well we work with the dispensaries that do the deliveries. These delivery operators collect cash on site. So, you place the order, they come to you, they give you the order, you give them the cash, you check your ID and make sure everything’s on the up and up, and then they take that cash, bring it back to the dispensary, and then–
Craig Cannon [00:32:41] – And that’s it? And they just kind of go back and forth, right? It’s not like an ice cream truck.
David Hua [00:32:48] – Well, that’s what’s really interesting. Now it is allowed for the ice cream truck model. Coming into 2018 it was a hub and spoke model. Now we’re actually in the proposed, we’ve had three different sets of regulations this year.
Craig Cannon [00:33:06] – This year?
David Hua [00:33:06] – This year! And then, we’ve been in what we call emergency regulations Len– And then we have the proposed regulations that should be coming out in the next few weeks, and in this iteration, there was a proposed reg on allowing the delivery operators to deliver anywhere into the state, even in prohibited areas, which is in contention with the chiefs of police, the league of cities, that California definitely prides itself on local control, so if that does open up, you’ll have the ice cream truck model, or the taco truck model. Whatever truck model you want, that can carry up to $10,000 worth of product at any time to deliver anywhere across the state.
Craig Cannon [00:33:54] – How much do you guys carry?
Vincent Ning [00:33:56] – In terms of, how much weed store in our locations, we have two. We have an Oakland location, we have an LA location. Probably at any given point overnight, there’s probably about a half million dollars worth of product in there, and then flow through, there’s just millions a week of product. That doesn’t sit there, it just hits the inventory and then the next day it’ll go out or something like that. It comes in all shapes and sizes, so a lot of it will come in final packaged goods, and then oftentimes it’ll just come in big, gigantic trash bags full of 20 pounds of raw ingredient, raw material flower basically.
Craig Cannon [00:34:37] – Wait, seriously? What? It’s not packaged? Are you guys packaging in the dispensaries–
Vincent Ning [00:34:43] – We don’t do packaging, there’s co-packers in the industry or manufacturers who can do the packaging, but for us, we basically just take the final packaged goods and deliver it to retailers, that’s our main business. But as far as the licensing rules and responsibility goes, no one can move product between two different licensed entities without a distributor. Even if you’re just like a farm moving your product to a manufacturer you have to contract out a distributor or get your own distributor’s license in order to move it. The reason behind that is because I think the state government wanted to hold one licensed party accountable for all things like tax and legal compliance, to which the distributors were the gatekeepers for all of these products before it hits the retailer shelves. We have to be in charge for compliance testing and making sure that passes, excise tax collection, cultivation tax collection, remitting that to the state, so it’s not just money that we have to remit back to the brand, it’s also money that we have to remit to the government. We are this hub of the supply chain that all product has to funnel through before it reaches the consumer.
Craig Cannon [00:35:51] – On that tax side, I’m curious, what’s the rate? 20 something percent?
David Hua [00:35:54] – The cultivation tax is per pound of either trim or full flower, and that’s 275 or 925, right, something like that?
Vincent Ning [00:36:07] – Something like that, yeah.
David Hua [00:36:09] – It’s basically 150 bucks per pound, around that, and then the excise tax is 15% on the wholesale value. And that’s also taxed, again at the retail level. Your sales tax is the excise tax on all the products.
Vincent Ning [00:36:29] – No there’s taxes everywhere, and–
David Hua [00:36:30] – That’s why the prices are high.
Craig Cannon [00:36:33] – For the most part the upside is for the government? Are the farmers earning more now?
Vincent Ning [00:36:39] – No, no, that’s why these products are so expensive, is because it has be weighed into that. We recently learned, if you wanted to, the City of Oakland passed these city tax laws that are 5% of gross receipts of sales. It’s not just 5% of your margin, it’s of gross receipts. If you buy it at a dollar and sell it at a dollar, you’re technically just making nothing but then because the gross receipt’s a dollar, you have to give five cents to the government, so you lose money–
Craig Cannon [00:37:11] – What’s the limit on this stuff, because the value is still so high. When I used to buy a 300 milligram bag of gummies that would last me forever. I’m not eating 30 milligram gummies, because no, I would pass out, which fine, or whatever. But now it’s $28 for 100 milligram bag? Do you guys sense that there’s a lot of price sensitivity?
David Hua [00:37:37] – Absolutely. That’s what I was alluding to with the medical market being pretty much decimated. The irony of legalization is that there’s a lot of medical patients that have gone and turned to the illicit market for their products. The people that are medical, they need it as medicine. They want higher dosage, they want more value, because they’re eating it every day, or every week to sustain their daily life. But because of the imbalance of prices on the legal market versus illicit, a lot of medical people have turned to the illicit market…
Craig Cannon [00:38:19] – They’ve gone back.
David Hua [00:38:21] – I know, isn’t it crazy?
Craig Cannon [00:38:22] – The state didn’t see that coming?
David Hua [00:38:25] – I think they did–
Craig Cannon [00:38:25] – I don’t even understand the point of having a card anymore.
David Hua [00:38:29] – There isn’t really, except for higher carrying limits, or you want to consult with a doctor that really wants to give you a treatment plan.
Vincent Ning [00:38:41] – I’d say for most purposes, it’s the same products, they get sold recreationally as they do medicinally.
David Hua [00:38:50] – It’s pretty complicated, there was a dual supply chain in the beginning of the year, an adult use of medical supply chain. If you were a producer and you were producing medical products, you could only sell to medical people, and vice versa on adult use. Then they combined it, and now you have people that are like, “Well, there’s probably going to be more put through on adult use so I’m going to create more product there.” But in order to get the state official card, if you get that, then you can get your sales tax exempt. But it’s 150 bucks to get it, it takes a few weeks, a couple of months to get, and then once you get it, it expires in a year–
Craig Cannon [00:39:33] – Dude, I have it, I’m just like, what’s the upside? I save two or three dollars or something? I’m not consuming at that level–
David Hua [00:39:42] – If you spend, a couple grand a year on medicine then it makes sense, but I think in today’s society it’s really tough to make someone jump through all the hoops to get it. But the problem is, it came down to revenue, tax revenue for the government, and unfortunately the community that needed it most on the medical side are the ones that are the most disenfranchised from the whole process.
Craig Cannon [00:40:12] – Do you find that people are very brand loyal or do they just shop around and not care?
Vincent Ning [00:40:18] – People are pretty open, there is definitely brand loyalty. Like Papa and Barkley makes these great topicals and oils and things like that, and then there’s certain high-end brands like dosist that makes these really great disposable vape pens that people love buying, but then I think there is a large part of it that people are just trying out new products as well and they listen to what their budtender says about them, budtender being like bartender but for weed. Oftentimes a brand, and the way that the budtender learns about all these products, is brands for as part of their marketing they’ll go into dispensaries and do demos for these budtenders, and they’ll just pitch them on things. Whoever has the higher marketing budget will go in and buy out shelf space at a dispensary and they’ll teach all the budtenders at all the major locations, and that’s what’ll get pushed through the most.
Craig Cannon [00:41:13] – I need to get some recommendations from you guys, because the people that I talk to when I go to the store, I think they’re sampling a little too much.
David Hua [00:41:23] – I also think there’s been some pretty, I call apocalyptic events this year, where there’s brands that have been wiped off because of the regulatory side. People that are used to getting a specific brand, aren’t getting it anymore. July 1 was probably the biggest thing that we saw. July 1 was when they implemented Phase II testing, which essentially was around pesticides and potency, and then people that couldn’t pass it, essentially were de-queued from the market.
Vincent Ning [00:41:59] – There’s videos, because for compliance you have to record yourself disposing of the product, whether you burn it or smash it or whatever. There’s videos of dispensaries as evidence, damaging all their products and basically having this huge demolition day of millions of dollars worth of product. There was a huge shortage of supply in the market, and it’s interesting, my phone number is listed on our license publicly so I kept getting called for Phase II compliant product, and I was like, this is a huge opportunity for us as a distributor, so let’s go buy as much as we can. But generally speaking, there was a huge shortage in the market.
Craig Cannon [00:42:40] – Wow.
David Hua [00:42:41] – Brands are coming and going, it’s almost this brand rush that we’re seeing. People are trying to create these different brands try to get to different consumers, but the market isn’t that sophisticated yet, and I’m talking about the supply chain, where you have people that do co-packing and co-manufacturing, and you create this IP, and then oftentimes if you don’t have a license you’re at the whims of people that do. It’s really tough from a business plan model to have someone invest in you if you’re just a brand.
Craig Cannon [00:43:18] – Where do you guys see the market going then? We have all this regulation coming up, seems like a bunch of random question marks but obviously, you’re raising money, you’re in this business, what does it look like in five to ten years?
Vincent Ning [00:43:31] – At least from where we’re sitting I think it’ll probably be another few years before anything federally changes, and more and more states will continue to pass favorable regulations towards cannabis. A lot of thm will start out by decriminalizing it, and then making it medicinally available, and then eventually recreationally available. Then once enough states ratify those laws then I think then the federal government will eventually see a more favorable light as well as far as the legal side of things. But until then, the way we have to expand is, although we’re currently in California, we actually have to set up a different legal entity in each state, so that we segregate out our business so it’s not interstate commerce, and basically expand that way from state to state and then have a holding company that manages every other child company. There’s a huge cost of upkeep of your business as well, on a legal or compliant standpoint. Security, licensing, and everything, that currently it’s hard to build a business in this industry because there’s also a shortage of capital too.
Craig Cannon [00:44:41] – Have you thought about getting capital from any of these Canadian companies? Are they investing?
Vincent Ning [00:44:44] – They are, I think they’re more so seeing all the players right now as pretty young, so they want to buy out companies here and there for their licenses. We have seen some distribution companies at least get bought out by Canadian companies and I think it’s hugely stock packages and the C levels will go join the company and then the rest of the company gets let go. It’s been kind of this brutal M&A climate right now, but it does provide a lot of opportunity for small guys like us who can stay afloat.
Craig Cannon [00:45:27] – How about you David, what do you think the market’s going to look like?
David Hua [00:45:32] – In California, in five years, we’re heading in what, 2023, there is something that happens in 2023 with the laws that allow, that removes a one acre cap? Right now, if you’re growing you have a one acre cap that you can grow in. However, people have been doing stacking, so they get a bunch of licenses to stack. But once 2023 hits, unlimited size grows can happen, in California, and so, I think the small farmer is going to be in a tough position when that comes out. So they’re going to have to really think about their genetics, their terroir, where they’re growing, communicate value to the consumer that buying from a small grower who puts a lot of love and attention and sustainable growing practices that a consumer can buy, instead of these monolithic, big crops. In five years, I personally would love to see the entire country being legalized. We’re Meadow, our goal is to build the best software for the industry, but more than that it’s about access for everybody that needs it, even if you’re a kid with epilepsy, you should be able to get your CBD oil in school administered by a nurse if you need it. The things that we’re at odds with right now, is we’re such a young industry, that is standing on the foundation of advocacy. This was all about advocacy and patient rights and access and legalization to some extent, but now with this industry model you have the capitalization side. With such a small industry that’s essentially seeding a lot of ownership to the capital markets through either Canadian companies
David Hua [00:47:39] – or other bigger companies that are a shell for other bigger companies, you’re playing a game that you’re already kind of at a disadvantage from. Especially from the OG people. It’s going to be really important that people band together in order to move forward, but you’re already seeing alcohol move in with their investment and Constellation, you have rumors with Coca-Cola doing a CBD drink–
Vincent Ning [00:48:09] – Beverage company–
David Hua [00:48:10] – Constellation.
Craig Cannon [00:48:13] – Who are they?
Vincent Ning [00:48:14] – They are the guys behind Corona.
David Hua [00:48:19] – Alcohol, pharma, you’re going to see tobacco, now these are huge players that are seeing their market shares change because of cannabis–
Vincent Ning [00:48:28] – Weed consumption.
David Hua [00:48:31] – You’re going to see a lot more M&A activity, you may even see, it’s feeling very frothy right now, if you look at the Canadian markets. But because there’s only so limited access to invest, that capital flow keeps coming. It very much feels like internet dot-com bubble that was getting created, and sure there’s going to be a handful of winners but my fear is that there’s going to be a lot of people that are just out of the game. Then we’re left with less selection, we’re left with less operators that have built this industry and this movement. You’re also going to see a lot more exporting globally. You’re already seeing contracts being made with Canada and other countries. I think you’re going to see a rise in Spain and Germany, they’re going to be coming out and being bigger players.
Craig Cannon [00:49:29] – I actually don’t know internationally, in Europe for instance, if you buy cannabis somewhere, where are they growing? Is that coming from California somehow? How’s that working?
Vincent Ning [00:49:42] – I don’t actually know where they get it from, they must grow it locally I’d imagine, or bring it in from somewhere in South America, I think that there’s a lot of grow ops down there, Canada too.
Craig Cannon [00:50:00] – It’s interesting when you’re talking about the advocacy side. Have things like High Times and Cheech and Chong, have they been more harmful or beneficial for the industry?
Vincent Ning [00:50:17] – On a raising awareness level it’s been beneficial, although sometimes the messaging isn’t quite the level that we need it to be, because a lot of times just like funny names or some joke about you saw your friends getting high. But I guess to a certain extent it’s a strategy to raise awareness as well, because that is what captures eyeballs. High Times does provide a lot of newsworthy articles about cannabis as well. I think there’s a lot of shift in media focus as well, for High Times and Herb.co and all these sorts of cannabis media companies.
David Hua [00:50:58] – They’re definitely pioneers in this and getting the message out. It’s hard to imagine the fear that people had, and the stigma that surrounded this 10, 20 years ago, when they were still publishing articles around home grows, and Cheech and Chong coming out smoking a fat blunt in public. These are people that have helped push this thing with a segment of the market that could gravitate toward it. The problem was, there are a lot of people outside that didn’t necessarily want to affiliate with that segment of the population, and became more stigmatized and more stereotypical as a stoner. But as we’ve been moving forward, the biggest news that we saw in the last month was Elan Musk taking a puff of blunt, right? It’s starting to change. You have Gwyneth Paltrow looking at stuff, you have Whoopi Goldberg partnered with Maya on stuff. The figures who are stepping forward to represent cannabis are changing or adding to this movement on getting people more comfortable with it. But the stigma’s still pretty high.
Craig Cannon [00:52:17] – I just find it so silly man.
Vincent Ning [00:52:22] – The stigma being silly?
Craig Cannon [00:52:22] – Yeah, the stigma is so silly because I remember, I grew up in Massachusetts. So, it was not legalized when I was in high school. We existed around all of that, but obviously you knew people that were smoking. This is such a crazy mismatch, of media and reality. And now I find it happening all over again with psychedelics– That’s why the Michael Pollan book was so great. Beause it was accessible, and he was kind of nerdy and skeptical, and people were like, “Oh, it’s not just acid trips.” That’s what I’ve been following so closely, to see the studies and if it’s going to happen or not.
Vincent Ning [00:53:03] – I was going to say, and the media plays a huge part in that, and I think it’s really hard, at least for businesses in our industry to get the word out, because normal channels like Google ad words or Facebook ad marketing, and all these typical channels you would use to get your name or advertising out, they’ll shut you down if you try to advertise that you’re selling weed. And so–
Craig Cannon [00:53:25] – Really? How do you grow?
Vincent Ning [00:53:29] – Influencer marketing, so basically having celebrities or people endorse your products, and going on newsworthy sources and outlets, those are like the High Times, those are ways to get your name out there.
David Hua [00:53:45] – When you look at the psychedelic movement, it’s following the medical piece, which that’s how cannabis started with Prop 215. Essentially, what it started with was the HIV community here in San Francisco, that found relief in cannabis. We call him The fFiry Godfather, Dennis Peron, who recently passed away, but he authored Prop 215 which allowed medical collectives to grow cannabis and share with one another. And with medical, that provided that tip of the spear for people to then get in. Then people with HIV, finally found a little bit more relief, and then other groups and other medical conditions happened with it–
Vincent Ning [00:54:37] – Epilepsy–
David Hua [00:54:37] – Yes, exactly. When you look at the trials that are going through with MDMA, it’s really around PTSD, for veterans, for people that are trying to come over some psychological trauma, they’re having guided sessions and having a way to rise above what their current state of consciousness is. I think, my opinion, in a lot of this, especially for cannabis, it’s grown in the earth, it comes–
Vincent Ning [00:55:08] – It’s like a biological planet–
David Hua [00:55:09] – It’s like a biological planet, to me it’s a human right to have this, right? It’s from the earth, it’s not someone made this, but I think what’s crazy, especially in the world we live in with so much hyper-connectivity, so much stress, and all the day-to-day, we need to find outlets to go inward a little bit more, because there’s just so much stimulation outside. One of the reasons I love cannabis is that it allows you to kind of have that, and then, on the psychedelic side, it’s another leveling up, and a whole other sense of awareness of yourself, and how you interact with the environment around you.
Craig Cannon [00:55:54] – Yes! No, it’s fantastic, it’s so cool that people are now finally able to experience it in a safe way. In a dosed way too, which doesn’t really exist with psychedelics yet, but I imagine in our lifetime that’s going to be a thing–
David Hua [00:56:10] – Yeah, definitely.
Craig Cannon [00:56:13] – I don’t know who’s the bleeding edge on this, it might even be in the States, it seems like most of the funding and the studies are happening here.
David Hua [00:56:18] – MAPS is a really organization to follow. They’re the ones that are really pushing the trials and if there’s people that want to fund the movement for psychedelics, MAPS is a great organization to do that.
Craig Cannon [00:56:33] – On the legal side, I’ve been really intrigued by people being exonerated–
David Hua [00:56:38] – Yes, that’s huge.
Craig Cannon [00:56:38] – It’s amazing! What’s goinh on with that in California? Have you been following that part?
David Hua [00:56:45] – Yeah, for sure, what’s been great with legalization is that people aren’t necessarily going to jail anymore for cannabis possession. Another thing that’s great is there’s a lot of cities that had stacks and stacks of cannabis convictions that were coming and then just tossed them all out. San Francisco did it, there’s a lot of other cities that are doing it, what you also are finding that people are realizing that with the war on drugs with people that been more disenfranchised, people of color in different communities, there’s a sense of trying to give back with social equity programs, and so not only is there a decriminalization, but there’s a movement on creating an on-ramp for people to get into the industry.
Vincent Ning [00:57:38] – Yeah, for us we actually have a social equity partner for our license, and what that means is, it basically just incentivizes us to help incubate if you will, a smaller cannabis business that’s run by a business owner who’s been formally convicted of a cannabis crime, or lives in a certain area that has been disenfranchised due to cannabis crime activity. For us, we basically contribute to 1,000 square foot of rent each month, to one of these social equity partners, and that actually expedited our licensing process earlier this year. The government actually is creating ways to incentivize businesses to help other businesses that are run by these disenfranchised folks in the past, to help them get their operations up and running.
Craig Cannon [00:58:26] – That’s so awesome, that’s so great.
David Hua [00:58:28] – There’s definitely a lot more that needs to be done. There’s a lot of it’s funding, right? Senator Bradford just had SB 1294 pass, which is a 10 million dollar fund which will be given to different social equity programs to help jump-start their business. The issue that we still have is you might have resources in rent but you still need capital and know-how to run through, and there’s still a lot more that needs to be done in order to help this group to move forward in this industry, especially as other players in this game board have been leveling up and–
Craig Cannon [00:59:18] – Right, well that was the narrative, so you’re just like, all of these people who have been put in prison for years, get out of jail or whatever, and then like a bunch of whites kids come in, and they’re like, “Oh it’s legal now, cool!” Then they just win the game, right? I don’t know the legal situation as well as you do, but it seems like that is not figured out yet.
David Hua [00:59:40] – No, not at all, it’s not–
Craig Cannon [00:59:40] – Because obviously, you apply to YC, you get some money and then you’re off to the races.
David Hua [00:59:46] – Off to the races, right? You don’t have incubators like YC really. You have the hood incubator, you have supernova. Hood incubator’s based in Oakland, their incubator brings some companies in, but they don’t necessarily have millions and millions of dollars in the bank ready to fund people. Then you have groups in different cities that don’t have unification around their programs either. But there’s some interesting things happening. Within San Francisco, you’re going to need to hire 30% of your workforce from social equity people. You also as a dispensary, may need to have a certain amount or certain percentage of your shelf space of products created and manufactured by people from social equity programs. There’s definitely still a lot of thinking around that needs to happen, but people are trying. The key in all of this is for the consumer to really recognize that when they’re buying one of these, or even Flow Kana, Flow Kana supports artisans, small growers up in Mendocino, and the Humboldt and Trinity’s Emerald Triangle.
David Hua [01:00:56] – When you’re buying Flow Kana you’re supporting a small grower. That’s why, not just the knowledge of how to distinguish what is in cannabis and how it makes you feel, but who made it, why it was made, where it’s coming from, all of those pieces need to be connected for that value proposition of why someone would pay X dollars more for this versus that.
Craig Cannon [01:01:23] – I’ve just starred a few questions, because you’ve both done YC, you didn’t go through YC with your current company–
Vincent Ning [01:01:27] – Not with this.
Craig Cannon [01:01:31] – Were there certain elements of cannonical start-up advice that you found didn’t always apply in the cannabis industry? Or do you just apply the learnings and–
Vincent Ning [01:01:42] – I guess a lot of it did apply, like I remember the whole do things that don’t scale thing, when we first started this, we had a friend that basically ran a pre-roll company that was distributing across California, and prior to regulation this year is very much just like a backpacking industry where people would deliver their own products to fulfill to retailers. What me and my best friend June did was we just drove like hundreds of thousands of dollars worth of product in the back of our cars across California from Oakland to Palm Springs, and it was pretty romantic in a way. It’s part of doing things that don’t scale. That helped us learn a lot about the industry, how products were being moved, and just meeting people throughout the industry as well. A lot of it does apply.
David Hua [01:02:36] – Oh, absolutely! Probably every week there’s some mantra that we’re quoting, either “Make something people want,” or “Do things that don’t scale” as great. We often think a lot about resilience, that cockroach–
Craig Cannon [01:02:50] – For sure–
David Hua [01:02:53] – That survive and thrive mentality. One of the biggest things that helped us just to be a little bit more patient even with all this activity, is don’t worry about competition. Competition will kill itself, you just focus on your team, focus on making something that people want, focus on talking to your customers, but one thing I think that I’ve also taken and extrapolated is build a community. One thing I love about YC is the community of entrepreneurs and the shared alignment on how to build something, and I think that’s why we’re–
Vincent Ning [01:03:28] – We’re together, yeah–
David Hua [01:03:34] – But to take that sense of community and bring that within cannabis a little bit more. Because there’s so much going on, and finding people that are aligned and can move forward and take care of their lane, is super important. The advice has been great. I highly recommend anyone that’s thinking about building a business to look at YC, especially for that advice, or look at the videos, or any of the podcasts. There’s so much gold nuggets in there, to be able to listen to.
Craig Cannon [01:04:09] – It’s a good time to start a company. Alright, we’re probably going to have an Elon Musk moment if we don’t stop soon. Alright guys, thanks for coming in.
Vincent Ning [01:04:19] – Oh, thank you!
David Hua [01:04:19] – Appreciate it, thank you!
Craig Cannon [01:04:21] – Alright, thanks for listening. As always, you can find the transcript and the video at blog.ycombinator.com and if you have a second, it would be awesome to give us a rating and review where ever you find your podcasts. See you next time.
Y Combinator created a new model for funding early stage startups. Twice a year we invest a small amount of money ($150k) in a large number of startups (recently 200). The startups move to Silicon