#97 - David Hua and Vincent Ning

Hey, how's it going? This is Greg Cannon, and you're listening to Y Combinators 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're part of the Winter 2015 batch. You can check them out at GetMeadow.com. And David's on Twitter at Hua.

Vincent is CEO and co-founder of Navis. Navis is a cannabis services group. They offer distribution, logistics, sales, and marketing. You can check them out at GetNavis.com.

And Vincent is on Twitter at VCNing. All right, here we go. We should start by talking about what David has brought. Oh, yeah.

This is different than a normal podcast. Yeah, so I bought a selection of my favorite edibles, which my wife makes. Flours, so you can get the terpene profiles. I think it's kind of like when you do wine tastings, so I think that's important.

I'm really into terpenes. I bought some body rub, some oils that we talk about, some live resin, and also a pre-roll. And a lot of these products are all available on the market today. It's about kind of showing you kind of how the evolution of the consumer experience has been.

And these are some of the, I've got at the green door, which is right around the corner from this office. It's one of my favorite shops to go to. And do you distribute any of these products? Yeah, so Northern Emeralds, 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. And we've tried working with Hop on Barclay, but I think they do their own distribution. So a lot of these brands do their own kind of self-distribution.

But then oftentimes a lot of like smaller brands or boutique brands will often ask a third-party distributor to help out. So that would be awesome. Interesting. So since you guys have gotten into it, yeah, let's break it apart.

Let's open some of these. So this one is called Blueberry Cruffin. I got this particularly because it just smelled really good. It has this like really sweet nose, right?

Yeah. So you'll get this like crazy blueberry-ness to it. This is Northern Emeralds gelato. You're going to get like kind of a cheesy, musky, you know, type of smell there, right?

Here we go there. And then this is the Tocano. Oh, yeah. So this is more of like the lemon.

It's called orange zest. But you get that like citrusy feel. And like when you smell flowers that have that citrus feel, you get way more of that uplifting, energizing, head high. Really?

So that signals what strain it is? Yeah. Usually it's like sativas have more of like a head high, like citrusy, lemony kind of like aroma to it. And that's kind of just like the turfing profile, which is basically just like what you imagine is like a flavor profile for wheat.

And then indica, on the other hand, is more of like, I think people normally remember it by saying like in the couch, basically. It's, you know, you slip into the couch and you just get really lazy. It's more of the body high. And yeah, I think indica and sativa are like the ways that people typically like to categorize and like hybrids.

But then at the end of the day, there's so many different varieties of strains that, and nowadays with the crossbreeding of all of them, everything seems to be somewhat of a hybrid strain. Right. Yeah. And does the strength of the smell indicate its potency in any way?

Or is that just premonious? Not really. I think, so a lot of these have their THC percentages now. So if you look on the labels, you'll see how potent it is.

So this one says 27%, no CBD. This one is your live resin. This has 65% THC. So it's going to be way stronger.

This is your, and because this is a resin, you're going to see like, see all that's been extracted. This is like basically all the tricomes I've been taking from the flower, all the cannabinoids are extracted and put into this resin. And so this is what people use for dabbing. Yeah.

Yeah. Which is super strong. Right. So pretty strong.

How many milligrams of THC would be in that? So this is 650 milligrams. It's a lot. Yeah.

So it's like concentrate. Yeah. Super concentrate. Yeah.

Okay. Right. And so for the amateur, what do you guys recommend? So like a, I mean, a five milligram edible?

Is that what you're talking about? Yeah. So this is, this is like, that's fine. These are fine.

Yeah. So this is like, thanks. Yeah. This is like a brown butter sage, black sesame, cookies and cream.

Right. These are like gourmet low dose. And that's what kind of the new consumer is going after. Right.

They're not trying to get blitzed on a dab. Yeah. Right. But there are consumers.

Are you watching those Instagram videos though? Oh yeah. I cannot compete. Yeah.

There are people literally doing like two, three grand dabs, full dabs. Oh my God. And just like, full cavadil. Yeah.

And they're just like, all right, cool. Go walk the dog. Yeah. But like for, for what we're seeing in the market, new consumer, you know, wants to do more microdosing.

Really? Yeah. So, you know, microdosing, I think has revolutionized how I think about, you know, cannabis consumption. Yeah.

Right. Because, you know, we never knew back in the day what you were really getting. Right. You just like, all right.

Yeah. Just show up at the store. Yeah. Right.

But now, you know, the consumer can understand how many milligrams it is, smell the profile, understand what's within it, and then kind of build their relative scale on how it affects them. Yeah. And most people, you know, when they get too paranoid or they get a little bit like anxious. Yeah.

They just did way too much. Right. They have to, they're just way sensitive. So dial it back.

Keep dialing it back until you can then add a little bit more. Yeah. Right. And that's how I feel.

And what does the market look like these days? Now, are more people buying edibles since it's become legalized in California? I think that, well, at least from our standpoint, as a distributor, the higher velocity items and higher volume items that flow through the market are just like flour and pre-rolls still, just because it's kind of the most common, like, base of understanding of what wheat is. Okay.

And so people generally buy a lot of, you know, these single-pack pre-rolls. And it depends on the market as well. So if you're in the middle of the city, people buy smaller quantities just because there's a lot of tourists and they, like, you know, want to walk into a dispensary these days. When they come visit San Francisco, it's like part of their to-do list.

Yeah. And then they'll pick up something small versus, like, if you're kind of just, like, brand loyalist in, like, a more rural area, you'll buy a larger quantity, like, in denominators of eights or maybe even larger. And then edibles are a big part of it as well. And I think it's typically for the kind of newbie weed, I guess, experiencer.

And they, because they, for, I guess, for edibles, the argument for that eventually being a bigger market is that, you know, for people who haven't consumed weed before or smoked before, they have to kind of get their head around, like, two levels of friction. One is just, like, smoking first, anything. And then second, the weed part. But for edibles, they eat anyway.

So, you know, this is just, like, one step away from consuming weed. Right. But that, like, very granular dosing. I mean, that was great for me when I started getting into this stuff.

Yeah. But I just found that it's a completely different sensation anyway. Yeah. Yeah.

You're metabolizing through your liver. It's more of a body high. You are, the onset takes a little longer, too. Yeah.

The edibles, you're looking at typically an hour, maybe an hour and a half. Yeah. There's some, like, beverages, like California Dreamin, which is a YC batch. They take, they're just quicker.

Yeah. You know, so their onset's quicker. Yeah. The category that we see that's growing pretty quickly is the concentrate market, but through vapes.

Okay. Right. So, like, here are a couple examples. I brought some eras.

And then within each one of these, I have a different pod. So, I carry around, you know, different pods for different feelings. This one is a forbidden fruit. So, this is kind of like an indica.

That's a little bit more of a, you know, chilling out type of strain. You have the, over here, ACDC. That's a, it's a CBD strain. So, when I'm not looking to get really high, but I'm looking to, you know, take the edge off a little bit, that's why I really turn CBD off in.

That's probably the cartridge I switch out the most. And then I have this Nina Simone here, which is, or, sorry, Nina Limone. Limone. Which is a sativa.

Yeah. And this is from Legion of Bloom. This is way more of when I just want a little kick up. And what's great about it is I think a little bit of a puff, you know, it doesn't smell.

It's discreet. And, you know, I think that's what people are looking for. That's kind of what edibles do for people as well. You can just put it in their bag.

You 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, you know, oh, I don't want to smell like weird to you.

Or my neighbor's going to find out. Or my landlord. So, it's, you know, I recommend, if that's the thing, you can go with the concentrates. Or find a vape, like a Mighty from Stores & Pickle, where you can store it, like, you can do a vape without, you know, combustion.

And it's not that smelly. And 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? The fastest demographic we're seeing is actually the baby boomers.

Really? Yeah. They are coming in and they are, you know, they're replacing a lot of their prescription drugs. There's also this feeling of, I don't want to feel old.

It's like a symbol of youth. Yeah. Right. Which is super ironic because this is a generation that kind of brought us the war on drugs and supported, you know, this movement that, for us, you know, DARE.

They worked at DARE. Yeah. They worked, they pushed DARE, right? They were like, you know, they were kind of hippies or they knew about it, but they kind of bought into this war on drugs mentality.

And it's, you know, funny, ironic that they're coming back to this because of their health ailments and, you know, their feelings have changed, which is good. Right, yeah. It's a positive direction. And I think there's this whole kind of like branding around like wellness as well for weed, not just the fact that it gets you high, but also there's like CBD effects that kind of have medicinal properties or just herbal.

Like you kind of see it as somewhat like an herbal remedy or something like that that helps your general day-to-day lifestyle. Can you break down CBD for people who aren't yet in the know? Yeah. So I think it stands for cannabidiol.

I don't know how to actually say it. Cannabidiol. Cannabidiol, yeah. And it basically comes from, you can actually derive from two different plants, like marijuana and hemp.

And so the hemp-based CBD is legal. You can sell that anywhere. So you can get it at like Costco if you want. I've seen like hemp lotion and like all that sort of stuff.

But then there's also just like CBD products that are derived from marijuana that can be sold in dispensaries. And essentially what it is, is it's, you know, for I guess the layman, it's THC without the effects of getting high. And, you know, it'll have like medicinal properties that essentially will reduce pain. And it'll basically generally make you feel a little more chilled out.

And, you know, otherwise you won't feel too much of an effect of getting high THC. Okay. The crazy thing about CBD is if you look at, you know, I don't know if you watch that CNN special weed from Sonja Gupta. He had a few years ago.

But, you know, essentially CBD was really helpful for people with epilepsy and, you know, that had seizures. So there's a group called, you know, the Stanley Brothers on Colorado growing Charlotte's Web. And what's crazy is if you look at the history of cannabis growing, a lot of it was bred for potency. It was also bred in for smell.

But people didn't really understand the science around what was in it. And so with the legalization of it, with the requirements of lab testing, they started finding other cannabinoids. And CBD, THC are two of perhaps hundreds of cannabinoids within the plant itself. So you're seeing research on THCV, THCA, CBN, CBG.

All these different cannabinoids are helping people identify ways to help them in their life. And with CBD, especially if you just take it from the 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 kind of help each other with the effect. And so that's why when you look at something like Poppin Barclays, like three to one, and you're putting this on, you know, sore spots, it has a better effect than if you're just going to get a CBD lotion.

You kind of need one or another to complement each other. And like products nowadays, apart from just being strain-based, which you would normally buy back in the day, you're like, I'll buy some Blue Dream or some of this based on strain. Now a lot of products are ratio-based or like effects-based. So they'll have like higher THC content to lower CBD or, you know, one-to-one or up to ten-to-one.

And that's just driven by it becoming more mass appeal, right? Because the customer goes in the store and they're like, dude, I want to feel this way. Like, I don't know all this lingo. Or is that not true?

I think the lexicon is continuing to build. I mean, a lot of people don't know. And I think it's kind of like wine, right, where you have the percentage of alcohol, but then you have your tannins and kind of how, you know, how it smells. And I think that next frontier is really going to be around the terpenes, right?

You're going to have your THC and CBD percentages. But, you know, if you put this red Congo against, you know, this lemon meringue, the smells are completely different. And you're going to feel a little bit different as well. And, you know, that's just how I've been human-trialing myself.

And so for stuff like this, like this, Rob, how do you derive the different strains? Or rather the CBD, for instance. Like, how do you pull the CBD out but not anything else? Yeah, so there's a number of extraction methods now.

This kind of bucket into two categories. You have solventless and then you have solvent. So solventless is kind of like with mellows. She uses actually this gold steel red Congolese through an ice water extraction.

So it's basically you take the flour and you trim, you 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, you know, extracted with anything else 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 flour 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. And so when you look at something like a 3-to-1 CBD or THC CBD, they most likely extracted it, probably CO2.

They were 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. Gotcha. Okay.

Now, so is Meadow making any products? No. So 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 I think everyone at Meadow is pretty passionate about cannabis in general.

So, yeah, we're very much software-based and working with a lot of people within the supply chain. Okay. And Vincent, similarly, you guys aren't making anything. You're doing distribution.

Exactly. So a company is called Navis, and we basically do distribution, like license distribution. So we'll basically just move product at a wholesale level in the supply chain. Okay.

And what caused both of you to not get into the manufacturing but the actual, like, higher level of the business? That's a good question. I think, for me at least, it's a pretty capital-intensive side of the supply chain just because you need 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, you know, a lot of people who do manufacturing will essentially white-label for a lot of other brands. And, you know, for us, like, we actually had friends who were manufacturers, who are manufacturers, rather. And that's a lot of the ways in how we kind of got introduced to a lot of the brands that we work with today. So distribution was a much lighter weight kind of business for us to be able to start up.

But you did fundraise, right? We did fundraise. We just closed a recent round, our seat round. Congrats.

Thanks. Yeah. And it was quite different. It was quite an ordeal compared to tech or finance or any of the traditional kind of VC fundraising industries just because we're a licensed entity.

So we have a distribution license in Oakland. It's a Type 11 distribution license in California. Okay. And it kind of creates a lot of friction as far as what investors feel comfortable investing in.

Meaning you're going to have to throw a bunch of cash at just getting a license from the get-go? 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, you know, 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, like, you can't invest in certain vice industries like gambling or alcohol or weed, of course. Right. And it was fundraising similarly difficult for you guys?

Right. Yeah. Well, we went through YC, which I think is an unfair advantage. But we were the first company to go through.

I didn't think they were going to accept us. Who interviewed you? We had Kevin. Kevin Hale, Casser, and Carolyn.

Oh, Carolyn. Oh, absolutely. It was 10 minutes of the most intense questioning. What did they ask you?

Everything. Everything. I mean, we talked about the legal side. We are an ancillary business, and we chose that because all of us have been in tech for a while and have been building software, and we just all need to build the system that allows dispensaries to be compliant, but also run their business effectively.

I mean, 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 records, heavy records. That's why you hear about companies, all cash. All cash, all records, and then coming into legalization, now you have to keep records for up to seven years.

You have to keep text 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. And then on top of that, you have to create a consumer experience that obfuscates all the complexity around the supply chain.

And so this, consumer land, you 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, all that stuff. So 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 were a lot of signs in other states legalizing as well. I mean, California, hopefully, was going to go, we didn't know, we saw all their attempts that 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.

So what did you say? Yeah, 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 kind of step forward with us in order to make it sound make sense.

And so when we did that, we got a bunch of interest. 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? 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 kind of 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. We had over 40 angels. How much money did you raise? 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 just meeting with people. And we just had a rolling close.

All in safe? All in safe. And also, it's not like, hey, we're building X, Y, Z, C, R, M, 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 just like, introductory, here's what's going on in this space. This is where we see the world. And then they had to kind of take that in and be like, all right, do I believe this? And so let's have another meeting.

And then we kind of work through. It is a lot of that. I feel like angels are generally curious. I mean, investors see profits, and they see upside of all this.

But then at the end of the day, a lot of them are doing their diligence as well. So 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. Is there one particular stat where you're just like, you tell it's the average investor, I'm like, oh my God.

You know, like how fast the industry is growing, for example. I don't even know. I know it's popular, but I have no idea how much weed people run. Yeah.

I mean, for us, we kind of say it's the end of prohibition in California. And I don't know if this is the case anymore, but a couple 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 in distributing California. Wait, are you guys distributing out of state?

No, no, no. Yeah, that's just not for us. Not legally. No, no, not at all.

Too bad. Yeah, but if you look at kind of where agriculture is in California, you know, most of our products are exported to the rest of the country, right? You know, 70% of agriculture comes out of California. Right.

You know, tech comes out of California. Culture comes out of California. We're the fifth largest economy in the world. Right.

And so I think there's a lot that we have here, especially because cannabis, the medical cannabis movement started in San Francisco in 96 with Prop 215. So there's just a lot of history here. I think, you know, as we're turning this thing over, there's just, I hope that we keep a bit of the dude, I think this shit's amazing. I love the choice.

I love the amount of choice I get when I go to the store. But one thing I've been curious about since, I mean, legalization, but before that, when I just had a medical card, why is there not like Marlboro? Why is there not like one dominant edible company? I mean, you said like all these stores are mom and pop shops.

Why is it not like, you know, the CVS of cannabis? Yeah. I mean, I guess like for, in terms of like brands, I think it's still so, it's still fairly like fragmented. There are certain companies that are getting bigger and distributing a lot of products across California, but none are, I guess, fairly dominant.

None are dominant in multiple states. And I think that's probably a lot of the reason why you don't have like a Budweiser of wheat. What do you mean in California? Like why?

I don't get it. Like why isn't there just one place? Yeah, I think there's a lot of fragmentation in the market. And if you look at kind of 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 a lab test it, not have to go through a distributor or any of that, right? But now with all the different licenses, a grower has to, you know, cut their harvest, give it to a manufacturer. The manufacturer then brings it, or the manufacturer has a property ready for the distributor to come pick it up. The distributor then has to get quarantined and then test tested.

Test for what? Just the compliance testing. So making sure like homogeneity, potency, any sort of additives, like all that checks out. That's right.

That's right. That's my cereal. Yeah. Anything like that.

And then once it's tested and approved, then, you know, the distributor brings it to the dispensaries. Okay. Yeah. And, you know, the problem that we're seeing in California, you know, we thought this was going to be a bumper year, harvest year, right?

Yeah. We expected this to be multiples bigger than- For context, this was the first legal year. First legal year. But last year, we probably did $3 billion 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, you know, half a billion if we get there. And so 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. And 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. And so it's, 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 permits.

Now, this is to grow or sell? To grow, sell, distribution, anything. So imagine, so you're saying, why isn't there this one, you know, huge brand? And it's because there's so many hoops to jump through, and the state's massive.

It's massive. 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. And is it the same thing as you're in Colorado and the other? I mean, I assume California's the biggest state in terms of volume. Yeah, that's for sure.

And then following that is Colorado, or? Yeah, you have Colorado, Oregon, Nevada's pretty big. Nevada is a very big, yeah. And then Canada?

Canada's just federally legalized. So I think October 17th was at 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. Really? Canada's make a huge play.

Yeah. I don't know. I think you ask a lot of people in California, Canada's like, if they can name all these provinces a year and a half ago, they're probably like, no. But now, you know, with 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, right?

Now these huge, massive Canadian companies that are listed got all this capital, and now they're investing it into their own operations, but not bringing that capital down into legal states like California. Yeah, yeah. And we've seen a lot of that as well. I think part of the whole consolidation pattern that will come, just because the market's so fragmented right now will be heavily pressurized by Canadian, like, 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.

Yeah. And so that's just to, you know, go back to why isn't there this massive brand? It's because there's no capital, too, right? Not only do you have all these hoops to jump through on the regulatory side, but there isn't, there's not banking.

Yeah. Also, yeah, there's the other thing, right? Because the FDIC, obviously, federal. Federal, yeah.

And it is not federally legal. So what do people do? For banking? Yeah.

Well, it's kind of like a Band-Aid solution for everyone, I would say. There's, like, small, like, credit unions that will ban cannabis companies. There's other banks. Some people just use, you know, big banks, but then they don't mention anything.

And 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 it earlier, more than, I would say for us, at least more than 90% of our transactions are in cold hard cash. And so we have safes everywhere as well as a banking solution. And how do you guys do it if you're doing delivery?

Well, so we work with 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, check your ID, make sure things, you know, on the up and up. And then they take that cash, bring it back to the dispensary.

And that's it. And they just kind of go back and forth, right? It's not like an ice cream truck. Well, so 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. And now we're actually in the proposed, we've had three different sets of regulations this year. This year?

This year. And then this proposed regulation, we've been in what we call emergency regulations land. 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 delivery operators to deliver anywhere into the state, even in prohibited areas, which is in contention with the chiefs of the cities that California definitely prides itself on local control.

So if that does open up, you'll have ice cream truck model or the taco truck model. I can carry up to $10,000 worth of product at any time to deliver anywhere across the state. How much do you guys carry? In terms of like how much we store in our locations.

So we have two, we have an Oakland location, we have an LA location. And probably at any given point overnight, there's probably about half a million dollars worth of products in there. And then flow through, there's just millions a week of products that doesn't sit there, just kind of, you know, hits the inventory and then the next day it'll go out or something like that. So, and it comes in all shapes and sizes.

So a lot of it will come in packaged, final packaged goods. And then oftentimes it'll just come in big, just like gigantic trash bags full of 20 pounds of just raw ingredient, raw material flour, basically. Wait, seriously? Yeah.

What? Is that packaged? Are you guys packaging the dispensaries? We don't do packaging.

There's these, there's co-packages in the industry or manufacturers who can do the packaging. But for us, we basically just take final packaged goods and deliver it to retailers. That's our main business. But as far as the licensing roles and responsibility goes, no one can move product between two different licensed entities without a distributor.

So 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. And 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 kind of gatekeepers for all of these, all these products before it hits the retailer shelves. Yeah. And so we have to be in charge for like compliance testing and making sure that passes excise tax collection, cultivation tax collection, remitting back to the state.

So it's not just like money that we have to remit back to the brand. It's also money that we have to remit to the government. So we are kind of just this like hub of a supply chain that all products have to funnel through before it reaches the consumer. Okay.

So on that tax side, I'm curious, what's the rate? 20 something percent? The cultivation tax is per pound of either trim or full flower. And that's a, you know, 275 or 925, right?

Yeah. Something like that. But yeah, it's basically 150 bucks per pound around that. And then the excise tax is 15% on wholesale value.

And so, and that's also taxed again at the retail level. Yeah. So your sales tax taxes, the excise tax on all the products. So there's taxes everywhere.

And that's why the prices are high. Right. And for the most part, that upside is for the government. Like are the farmers earning more now?

No, no, no. Everyone, I mean, that's why these products are just so expensive is because it has to be baked into that. I mean, we recently learned. So like if you want to, the city of Oakland passed these just city tax laws that are 5% of gross receipts of sales.

So it's not just like 5% of your margin. It's like a gross receipts. So if you buy it at a dollar and sell it at a dollar, you're technically just making nothing. But then because the gross receipts a dollar, you have to give 5 cents to the government.

What's the limit on this stuff? Because like the value is still so high. You know, like, I mean, when I used to buy a 300 milligram bag of gummies, it would last me forever. I'm not eating 30 milligram gummies.

No, no. Pass out. Fine. Whatever.

But now it's like $28 for a 100 milligram bag. Do you guys sense that there's a lot of price sensitivity? Absolutely. Okay.

I mean, I think that's what I was alluding to with the medical market being pretty much decimated. No. The irony of legalization is that there's a lot of medical patients have gone and turned to the illicit market for their products, right? You know, the people that are medical, they're not, you know, they need it as medicine.

They're not, they want higher dosage. They want more value. Yeah. And, you know, 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. They've gone back. Yeah. I know.

Isn't that crazy? The state didn't see that coming? I think they did. I don't even understand the point of having a card anymore.

There isn't, really. Yeah. Except for, you know, higher caring limits where you want to consult a doctor that really wants to kind of give you a treatment plan. Yeah.

But for most purposes, it's the same products that get sold recreationally as they do medicinally. Yeah. Yeah. Because it's pretty complicated.

There was a dual supply chain in the beginning of the year, adult use and medical supply chain. So if you were a producer and you were producing medical products, you could only sell to medical people and vice versa. And then they combined it. And now you have people that are like, well, there's probably going to be more throughput on adult use.

So I'm going to create more product there. Yeah. Yeah. But, you know, in order to get the state official card, if you get that, then you can get your tax, your sales tax exempt.

So, but it's like 150 bucks to get it. It takes a few weeks to, you know, a couple months to get. And then once you get it, you know, it expires in a year. I was like, what's the upside?

I saved like two or $3 or something. But I'm not consuming at that level. If you spend, you know, a couple grand a year on medicine, then yeah, it makes sense. But, you know, I think in today's society, it's really tough to kind of make someone jump through all the hoops to get it.

Yeah. Yeah. But the problem is it just, it came down, I think, revenue. tax revenue for the government and unfortunately i think the the community that needed it most on the medical side is the ones that are the most disenfranchised from the whole process do you find that um people are very brand loyal or do they just shop around and not care um i think people are pretty open to like there is definitely brand loyalty like papa and barclay makes these great topicals and oils and things like that and then there's certain like high-end brands like dosis that makes uh these like really great disposable eight pens that people love buying yeah um and 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 butt tender says about them butt tender being like bartender but for weed and um oftentimes a brand will go and the way the butt tender learns about all these products is brands for as part of marketing they'll go into dispensaries and do demos for these butt tenders and they'll just pitch them on things so whoever has a higher marketing budget will go in and just buy out shelves for the dispensary shelf space at the dispensary and they'll teach all the butt tenders um at you know all the major locations and that's what i get pushed through the most man i need to get some recommendations from you guys because like the people that i talk to when i go to the store i think they're sampling a little too much yeah yeah yeah there's also thing that there's there's been some pretty uh i call apocalyptic events this year where there's brands that have just been wiped off because of the regulatory side so people that are used to getting a specific brand aren't getting it anymore um i think july 1 was probably the biggest thing that we saw so so july 1 was when they implemented phase 2 testing which essentially was around pesticides and potency and then uh people that couldn't pass it essentially were dequeued from the market yeah it was pretty bad it was insane there's videos well 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 just like as evidence just like damaging all their products and just basically having a huge demolition day of like millions of dollars worth of product um yeah a lot of a lot there was a huge shortage of supply in the market and like my it's interesting my phone number is listed on our license publicly so i kept getting called for like phase 2 compliant product and i was like i mean this is a huge opportunity for us as a distributor so let's go buy as much as we can um but yeah generally speaking there was a huge shortage in the market wow so brands are coming and going it's it's almost this brand rush that we're seeing people are trying to create these different brands try to get to consumers but the market isn't that sophisticated yet where uh and i'm talking about the supply chain where you have people that do co-packing or co-manufacturing and like create this stuff this ip and then oftentimes if you don't have a license you're kind of you're at the whims of you know people that do and it's really tough from a business plan model to to have someone invest in you if you're just you know a brand yeah yeah so where do you guys see the market going then like we have all this regulation coming up like seems like a bunch of random question marks but obviously you're raising money you're in this business like what does it look like in five to ten years um i think at least from where we're sitting it's i think it'll probably be another few years before anything federally changes um and more and more states will continue to pass uh favorable regulations towards cannabis um so a lot of them will start out by decriminalizing it and then making it disneyly available and then eventually recreationally available and once enough states kind of ratify those laws then i think the federal government um will eventually see a more favorable light as well as far as the legal side of things um and 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 um so that we segregate out our business it's not interstate commerce um and you know basically expand that way from state to state and then have like a holding company that manages every other child company um so there's there's a huge just cost of upkeep of your business as well on like a legal compliance standpoint security and it's just like licensing and everything um that currently it's it's hard to build business in this industry because there's also shortage of capital too have you thought about getting capital from any of these canadian companies are they investing in yeah they are i think they're more so seeing all the players right now as like pretty young so they want to just like buy out companies here and there for their licenses um so they we have seen some distribution companies at least get bought out by uh canadian companies and i think it's hugely just like um like stock packages and like the c levels will go join the company and then the rest of the company kind of gets uh let go and so it's it's been it's been kind of this like brutal um m&a climate right now yeah um but it does provide a lot a lot of opportunity for you know small guys like us who can stay afoot yeah and how about you did what do you think the market's gonna look like yeah i mean i think um in california in five years we're in what 2023 there is something that happens in 2023 with the laws that allow uh that removes a one acre cap um you know right now if you're growing you have a one acre cap that you can grow in however people have been doing sacking so they get a bunch of licenses to stack but once 2023 hits unlimited size grows can happen um in california sure and so you know i think the small farmer is is going to be in a tough position when that comes out and so they're going to have to really think about their genetics their terroir uh where they're growing communicate value to the consumer that's buying from a small grower who puts a lot of love and attention and sustainable growing practices that the consumer can can buy instead of just these monolithic big crops um now in five years i think i personally would love to see the entire country being legalized um i we're meadow you know we build we're our goal is the best software for the industry yeah but more than that it's about access for everybody that needs it you know even if you're a kid with epilepsy you should be able to get your cbd oil in school to administer by a nurse if you need it um the i think the things that we're at odds with right now is we're such a young uh industry that is standing on the foundation of advocacy right this was all about advocacy and patient rights and access and you know legalization to some extent but it's like now with this industry model you have the capitalization side and with such a small industry that's essentially ceding a lot of ownership to uh you know the capital markets through either canadian companies or other bigger companies that are shelf or other bigger companies you're at odds you're playing a game that you're already kind of at a disadvantage from um from especially from the og people um i think 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 consolation you have rumors with coca-cola doing a cbd drink beverage right you have um consolation yep yeah so you have like uh they are the guys behind corona oh all right yeah so alcohol pharma you're going to see tobacco these are huge players that are seeing their market shares change because of cannabis and so i think 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 there's because there's only so limited access to invest that capital flow keeps coming it very much feels like internet.com like bubble that was getting created yeah 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 yeah and then we're left with you know less selection we're left with less operators that have built this you know industry and this movement um i think you're also going to see a lot more exporting globally you're already seeing contracts being made with canada and other countries um i think you're going to see a rise in spain and germany uh they're going to be coming out and being bigger players but yeah because i actually don't know like internationally in europe for instance you know if you buy cannabis somewhere where where are they growing like is that coming from california somehow uh yeah yeah i don't actually know how where they get it from they must grow it locally i imagine or bring it in from somewhere in south america i think that there's a huge grow a lot of grow-offs down there um canada too um yeah it's interesting when you're talking about the advocacy side um have have things like high times and like you know cheech and chong um have they been more harmful or beneficial for the industry i think on a raising awareness level it's been beneficial yeah um although sometimes the messaging isn't quite the the level that we need it to be um because a lot of times just like funny names or like some you know joke about just like your friends getting high um but i think it i guess you know to a certain extent it's a strategy to raise awareness as well because that is what captures eyeballs yeah um and then you know high times does provide a lot of just like newsworthy articles about canvas as well so i think there's there's kind of a lot of shift in media focus as well for high times and like herb.co and all these sorts of like cannabis media companies yeah i mean they're they're definitely they're pioneers in this and getting the message out yeah i mean uh you know it's hard to imagine the fear that people have had and the stigma that surrounded this yeah 10 20 years ago yeah when they're still publishing uh articles around home grows and cheech and chong coming out smoking a fat blunt you know in public yeah it's these are people that have helped push this thing with a segment of the market that could gravitate toward it i think the problem was there are a lot of people outside that didn't necessarily want to affiliate with that you know segment of the population and became more stigmatized more stereotypical as a stoner um but as we've been moving forward you know you know the biggest news that we saw in the last month was elon musk taking a puff of a blunt right and so it's starting to change you have gwyneth paltrow like looking at stuff you have whoopie goldberg uh you know partnered with maya on stuff so the the figures are stepping forward to represent cannabis are changing um or adding to uh this this movement and getting people more comfortable with it yeah but the stigma is still pretty high i just find it so silly man because yeah like so silly yeah yeah i mean i remember i grew up in massachusetts so like it was not legalized when i was in high school um so you know you exist around all that but you know obviously you knew people that were smoking yeah this is like such a crazy mismatch of media and reality yeah and now i find it happening all over again psychedelics yeah um and that's why that michael poland's book was so great yeah yeah because it was just like accessible and he's like kind of nerdy and skeptical yeah and people like oh it's not just you know um that's what i've been following so closely yeah to see the studies if it's gonna happen or not yeah yeah i was gonna say the media plays like 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 uh normal channels like google adwords or like facebook ad marketing and you know these like typical channels you would use to get your name or advertising out but they'll shut you down if you try to advertise that you're selling weed um and so really yeah yeah so how do you grow uh influencer marketing so like basically having celebrities or like people endorse your products um and going on you know kind of like newsworthy sources and outlets that those are like the high times um those are ways to get your name out there yeah i mean i think that like when you look at the psychedelic movement yeah it's following the medical piece which that's how cannabis started with prop 215 essentially what started with was the hiv community here in san francisco that um you know found relief in cannabis in this uh you know we call him the fairy uh godfather uh dennis perrone uh who recently passed away but he authored prop 215 which allowed medical collectives to uh grow cannabis and share with one another and you know with medical that provided that that tip of the sphere for people to then you know get in and then you know people with hiv finally found a little bit more relief and then other groups and other medical conditions happened yeah exactly and then we look at um the trials that are going through with mdma um it's really around ptsd for veterans for people that are trying to come over some psychological trauma uh they're having guided sessions and having a way to rise above what their their current state of consciousness is and i think you know my opinion a lot of this especially for cannabis it's like grown in the earth it comes biological it's like a biological plant it's almost to me it's a human right to have this right it's from the earth it's not like someone you know made this and you know but i think what's crazy especially in the world we live in with so much hyper connectivity so much stress and like all the day-to-day we need to find outlets to go inward a little bit more um because there's just so much stimulation outside you know one of the reasons i love cannabis is that allows you to kind of have that and then you know on the psychedelic side you know it's another leveling up and a whole another sense of awareness of yourself and and how you interact with the environment around you yeah yes yeah 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 yeah definitely yeah i don't know who's the bleeding edge on this like it might even be in the states it seems like most of the funding and studies are happening here maps is a really good organization to follow they're the ones that are really pushing the the trials and they're you know if there's people that want to fund the movement for psychedelics maps is a great organization to do that cool right on um so on the legal side i've been really intrigued by uh people being exonerated yes it's huge yeah it's amazing so what's like what's going on with that in california have you been following that part yeah yeah for sure uh i mean what's been great with legalization is that people aren't necessarily going to jail anymore uh for cannabis possession right um and another thing that's great is there's a lot of cities that had stacks and stacks of cannabis convictions that were coming and just you know toss them all out yeah uh san francisco did it there's a lot of other states or cities are doing it uh i think what you're also finding that people are realizing that with the war on drugs with people that have been more disenfranchised people of color uh in different communities there's a sense of trying to give back with social equity programs um and so not only is there a decriminalization but there's a there's a movement on on ramp for people to get into the industry um yeah i mean for us we actually have a social equity partner for our license and what that means is um it basically just incentivizes us to help incubate if you will um like a smaller like cannabis business that's run by a business owner who's been formerly convicted of a cannabis crime or like lives in a certain area that is uh has been disenfranchised due to cannabis crime activity um and so for us like we basically contribute to a thousand square foot of rent for each month to one of these social equity partners and that actually expedited our licensing process earlier this year so the government actually is creating ways to incentivize like businesses to help other businesses that are run by these disenfranchised folks in the past um to help them get their operations up and running man that's so awesome yeah there's definitely a lot more work that needs to be done um well there's a lot of it's funding right so um senator bradford uh just had ab 1294 pass or sb i think 1294 pass which is a 10 million dollar fund uh which will be given to uh different uh social equity programs to help jumpstart their business you know the issue that we still have is people you know you might have resources and rent but you still need capital and know-how to kind of right kind of run through and um you know we are there's still a lot more that needs to be done in order to help uh you know this group to move forward in this industry especially as other other players in the uh in this game board have been leveling up and yeah right that was kind of a narrative right so you're just like you know all these all these people who have been put in prison for years uh and then like a bunch of white kids come in yeah that's legal now cool and they just win the game yeah right and so yeah i mean i don't know the legal situation as well as you do but it seems like that is not figured out yeah no no not at all it's not yeah i mean because you obviously like you apply to yc you get some money and they're off the races right yeah but you know you don't have incubators like yc really you have the hood incubator you have supernova um you know hood incubators based in oakland they're gonna bring some some companies in but they don't necessarily have millions and millions of dollars in the bank to fund people.

And 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 some percentage of your shelf space of products created and manufactured by people from social equity programs.

So there's definitely still a lot of thinking around that needs to happen, but people are trying. And I think the key in all of this is for the consumer to really recognize that when they're buying one of these, or even Flucana, Flucana supports artisan small growers up in Mendocino and Humboldt and Trinity's Emerald Triangle. So when you're buying Flucana, you're supporting a small grower. And that's why I think more, 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 those pieces need to be connected for that value proposition, why someone would pay X dollars more for this versus that. Just kind of start a few questions. Sure. Because you've both done YC.

You didn't go through YC with your current company. No, there's a company. Sure. Were there certain elements of canonical startup advice that you found didn't always apply in the cannabis industry?

Or did you just apply the learnings? I mean, a lot of it did apply. I remember the whole do things that don't scale thing. When we first started this, we had a friend who basically ran a pre-world company that was distributing across California.

And prior to regulation this year, it was very much just like a backpacking industry where people would deliver their own products to fulfill to retailers. And so what me and my best friend June did was we just drove $100,000 worth of product in the back of our cars across California from Oakland to Palm Springs. And it was pretty romantic in a way. But, yeah, I mean, part of doing things that don't scale, that kind of helped us learn a lot about the industry, how products were being moved, and just meeting people throughout the industry as well.

So, yeah, I think a lot of it does apply. Oh, absolutely. I mean, I think probably every week there's some mantra that we're quoting either make something people want or do things that don't scale is great. We often think a lot about resilience, that cockroach, and survive and thrive mentality.

I think 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 more together. But to take that sense of community and kind of bring that within cannabis a little bit more, because there's so much going on and finding people that are aligned and kind of move forward and take care of their lane is super important. Yeah, 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 do. Yeah, it's a good time.

It's a good time to start a company. All right, we're probably going to have an Elon Musk moment if we don't stop soon. All right, thanks for coming in. Yeah, I appreciate it.

Thank you. All right, thanks for listening. So as always, you can find the transcript and video at blog.ycom. And if you have a second, it would be awesome to give us a rating and review wherever you find your podcast.

See you next time.