Cannabis Startup Founders David Hua and Vincent Ning on Legalization, Banking, and Industry Trends

We should start by talking about what David has brought.

Oh yeah, this is different than a normal podcast.

Yeah, yeah, yeah, I bought a selection of my favorite bowls, 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. 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 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 kind of showing you how the evolution of the consumer experience has been.

Mm-hmm. And these are some of the — I've got at the Green Door, which is right around the corner. Yes, this office. It's one of my favorite shops to go to. Do you distribute any of these products?

Yes, so Northern Emeralds has actually — just talking to Kody this morning about it, and we distribute — would help with Northern Emeralds' distribution. We share an office with them actually over in Oakland. We've tried working with Papua in Berkeley, but I think they do their own distribution. So a lot of these brands do their own kind of self-distribution, but oftentimes a lot of smaller brands or boutique brands will often ask a third-party distributor to help out.

So that’d be us.

The interest, yeah. So since you guys have gotten into — yeah, let's break it apart.

Some of these, so this one is called blueberry crumb. I got this particularly because it just smelled really good. It has this like — like a really sweet nose, right?

Yeah, so you'll get this like crazy blueberry nest to it. This is a Northern Emeralds gelato. You're gonna get like kind of a cheesy, musky, you know, type of smell there.

All right, here we go. There, and then this is the full Cana.

Yeah, so this is more like the lemon. It's called orange zest. Mmm, but you get that like citrusy feel, and like when you smell flowers, I have that citrus feel.

You get way more of that uplifting, energizing head high.

Head high? Really?

Yeah, that signals what strain it is.

Yeah, usually it's like sativas have more of like a head high, like citrusy, lemony kind of aroma to it. And that's kind of just like the turkey and profile, which is basically just like what you imagine is like a flavor profile for weed.

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.

Okay, it's more of the body high.

Yeah, 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 are so many different varieties of strains that, and nowadays with the crossbreeding of all 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 freshness?

Not really, I think — so a lot of these have their THC percentages now, huh?

So if you look on the labels, you'll see how potent it is.

All right, this one says 27% — no CBD.

This one is your live resin. This has 65% THC, so it's gonna be way stronger.

This is your ha ha, and because this is a resin, you're gonna see like — you see all that's been extracted. Control it. This is like basically all the trichomes have been put — taken from the flower. All the cannabinoids are extracted and put into this resin. And so this is what people use for dabbing.

Yeah, 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 I was like a concentrate.

Yes, super concentrate.

Yeah, yeah, okay, right. And so for the amateur, what do you guys recommend?

So like, I mean your flick 5 milligram edible is that what you're talking?

Yes, so this is like — that's 5. These are 5. Those are 5.

Yeah, so this is label. Thanks.

Yeah, this is like brown butter sage black sesame cookies and cream, right? These are like gourmet low dose and that's kind of what the new consumer is going after, right? They're not trying to get blitzed on a dab that's gonna get—

Right, but there are consumers in those Instagram videos though.

Oh yeah, I cannot compete.

Yeah, there are people literally doing like 2-3 gram dabs, full dabs and — God, and just like holy cow, valedale, yeah, yeah. And they're just like all right, walk the dog.

Yeah, but like for what we're seeing in the market, new consumers want 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 just — 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 how you feel? What does the market look like these days? Now, are more people buying edibles since it's become legalized in California?

Well, at least from our standpoint as a distributor, the higher velocity items and high volume items that flow through the market are just like flour and pre-rolls still just because that's kind of the most common base of understanding of what it 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 a city, people will 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 this like brand loyalist in like a more rural area, you'll buy a larger quantity, like in denominators of eighths or maybe even larger.

And then edibles are a big part 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?

Yeah, but they're like very granular dosing.

Yeah, I mean that was great for me when I started getting into this stuff.

Yeah, but I just find that it's a completely different sensation anyway.

Yeah, yes, yeah, yeah.

You're metabolizing in through your liver, it's more of a body high, you are.

Yeah, the onset takes a little longer too.

You have — edibles you're looking at typically an hour, maybe an hour and a half.

Yeah, there are some like beverages like California Dreamin' which is a YC batch; they take theirs quicker, 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, 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 at AC/DC, 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 to CBD often.

That's probably the cartridge I switch out the most, and then I have this Nina Simone here, which is — oh sorry, Nina Lamone, which is a sativa, and this is from Legion of 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 and I, you know, doesn’t smell, it's discreet.

Yeah, and you know, I think that's what people are looking for is that's kind of what edibles do for people as well.

They can just put it in their bag, they can eat it. Flour still has that smell. I love it, yeah personally, but there are people that have that stigma attached to it to have that, you know, oh I don't want small likes dirty.

Yeah, my neighbors gonna find out or my landlord, yeah.

So it's, you know, I recommend if that's a thing you can go with the concentrates or find a vape like a Mighty from Storz and Bickel where you can store it like, you know, a vape without 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 in deck 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, right?

Which is super ironic because this is the generation that kind of brought us the war on drugs supportive, you know, this movement that — and for us, you know, "D.A.R.E.," they worked, it there — all right, "worked." They pushed their 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, you know, because of their health ailments and, you know, feelings have changed, which is good—

Right? Yes, it's a positive direction and I think there's this whole kind of branding around 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 it’s kind of seen as somewhat of like an herbal remedy or, you know, something like that that helps your general day-to-day lifestyle.

Can you break down CBD for people who aren't?

Yeah, so I think it stands for cannabidiol, if the — I don't know how to actually set cannabidiol in a bad... I'll yeah, and it basically comes from — you can actually derive it from two different plants: like marijuana and hemp.

And so the hemp-based CBD is legal and you can sell that anywhere, so you can get it 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, 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 off THC.

Okay, the crazy thing about CBD is if you look at — you know, if you watched that CNN special, "Weed" from Sanjay 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 out in Colorado; they were growing Charlotte's Web and what's crazy is if you looked at the history of cannabis growing, a lot of it was bred for potency. It was also bred for smell, you know, 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 THC, CBD, CBN, CBG — all these different cannabinoids are helping people identify ways to help them in their — in their life.

And with CBD especially, if you just take it from hemp-derived, the problem is there 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 fact.

And so that's why when you look at something like Popham, Barclays, like 3 to 1, yeah, and you're putting this on, you know, sore spots, it has a better effect than if you're just gonna get a CBD lotion, right?

You kind of need one, you know, to balance, to complement each other, yeah.

And like products nowadays apart from just 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 or...

And 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 wash, and that's just driven by becoming more mass appeal, right?

Because the customer goes in the store and they're slightly — dude, I want to feel this way, like yah, I don't know all this lingo.

Yeah, or is that not true?

I think there's — I think the lexicon is continuing to build. I mean, a lot of people don't know.

Yeah, and I think it's kind of like wine, right?

Where you have your percentage of alcohol, yeah, but then you have your tannins and kind of how, you know, how it smells, you know?

I think that next frontier is really gonna be around the terpenes, right?

You're gonna have your THC and CBD percentages, yeah, but you know, if you put this red Congo against, you know, this lemon meringue, the smells are completely different and you're gonna feel a little bit different as well.

And, you know, that's just how I've been human trialing myself.

Stuff like this, like this rub, how do you derive the different strains or rather the CBD, for instance?

Like how do you pull the CBD out but not everything else?

Yeah, so there's a number of extraction methods; now that's kind of bucketed into two categories.

You have solventless and then you have solvent.

Okay, so solventless is kind of like with Mel, she uses actually this gold seal red Congolese through an ice water extraction.

So 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, you know, extracted with anything else but just water and some movement agitation.

Then you have, you know, 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, right?

And so when you look at something like a 3:1 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.

Gosh, okay now, so is Meadow making any product?

No, okay.

Yeah, so Meadow — 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.

Yeah, so we're very much software-based and working with a lot of people within the supply chain.

Okay, and Vincents, similarly, you guys are making anything, your distribution?

Exactly. So, companies called Nabis, and we basically do distribution — like licensed 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 manufacturing with the actual like higher level of the business?

That's a good question. I think for me at least it was — 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.

Yeah, and that was not something that I was born with or it 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 and how we kind of got introduced to a lot of the brands that we work with today.

Yeah, 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 seed round.

Rats, thanks!

Yeah, and it was — 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 licensed entities.

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 gonna have to throw a bunch of their 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.

Yeah, right. And was fundraising similarly difficult for you guys for Meadow?

Yeah, well we went through YC, right?

Which I think is an unfair advantage, but we were the first company to go through. I didn't think they were gonna accept us.

We had Kevin Hale, yeah, sir, and Carolyn — I hope Carolyn Levy, yeah.

So it was ten minutes — the most intense questioning.

What did they ask you?

Everything. I mean we talked about the legal side.

Yeah, yeah, we are an ancillary business, right?

And you know, we chose that because all of us have been in tech for a while, 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.

I mean, 90% of the shops are our mom-and-pop right now in California, so — and they don't, you know — if you've looked at Prop 215 and where cannabis was, records were considered evidence, so people didn't really keep records.

Yeah, you know, heavy records.

That's why you hear about companies — it's all cash.

Oh gosh, all records coming into legalization.

Yeah, now you have to keep records for up to seven years; you have to keep attacker tax records, you have to keep patient records, you have to keep, you know, everything from who's bringing in the product to touching it to how it's getting destroyed and everything.

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

Yeah, and so this consumer will already get a lot of stuff. It's more expensive than it was, which is definitely a negative, but you know you'll get a lot of selection, you get testing, all that stuff.

So we just saw a need for it early in 2014, yeah, and when we applied to YC, you know, 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 in California, hopefully, it was gonna go — we don'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 and so that way if they were interested in weed or cannabis, they would come talk to us.

So what did you say?

Yeah, we — you know, a lot of it was like, "Hey, if you want to stand around, stand on the right side of history, come talk to us." We really did that.

So I think there was this feeling of, okay, like you have to kind of step forward with us in order to make sense.

And so, you know, when we did that, we got a bunch of interest. Did you have a — 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 like in terms of capital committed; like we do have a lot of smaller-check angels just because they're the types of people that David just mentioned.

You are like 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.

Okay, yeah, yeah, and we had over 40 angels, right?

How much money did you raise?

We raised two and a half on twelve, and so we came out of YC, it took — you know, we didn't close it all after demo day. It took probably around nine months, well, you know, just meeting with people, and we just had like a rolling close.

So already saves all on save.

Okay, and also it was a — there it's not like, hey, we're building, you know, XYZ CRM and we're good to go.

I think people had to get really comfortable with the context around cannabis first.

Yeah, and so there are 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 like, all right, do I believe this and if so, let's have another meeting and then we kind of work through.

Yeah, it is a lot of that.

I feel like angels are generally curious.

I think investors see profits and they see the upside of all this, but then at the end of the day, like a lot of them are doing their diligence as well.

So they like come talk to weed founders who are, you know, set as, you know, working in the space and they ask them a bunch of questions about like the regulations, the licensing, how we view this industry moving and shifting forward, and then, you know, they go back to 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 to the average investor and they're like, oh my god, you know?

Like how fast the industry is growing, for example.

Like I don't even know—like I know it's popular.

You have no idea how much weed people are buying.

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 were based in distributing California.

And are you — wait, are you guys distributing out of state?

No, no, no, not legally, no, not at all, yeah.

But if you look at kind of where agriculture is in California, right?

You know, most of our products are exported to the rest of the country, right?

Yeah, you know, 70% of agriculture comes out of California, right?

You know, tech comes out of California, Coulter hands out for the fifth largest economy in the world, right?

Yeah, 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.

Mm-hmm.

So there's just a lot of history here.

I think, you know, as we're turning this thing over, there's just a hope that we keep a bit of the culture and kind of what this thing — it's hard, I mean, it's hard.

I think this shit's amazing.

Yeah, I love the — I love you. I'm not a choice I get when I go to the store, yeah.

But one thing I've been curious about since the — 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 fragmented.

There are certain companies that are getting bigger and distributing a lot of products across California, but yeah, none are, I guess, fairly dominant—not our dominant in multiple states.

And I think that's probably a lot of the reason why you don't have like a Budweiser of weed, even in California.

Yeah, 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, you know, pre-2018, a grower could go directly to a dispensary, not have a lab tested, not have to go through a distributor, right?

But now with all the different licenses, a grower has to, you know, cut their harvest, give it to a manufacturer; the manufacturer that brings it— or the manufacturer has a product ready for the distributor.

Then you pick it up, yeah, the distributor then has a quarantine.

And the — yeah, has tested, and I'm aptos for what?

Just the compliance — testing.

So making sure like homogeneity, potency, any sort of additives, like all that checks out, pesticides, bacterial, you know, anything like that.

And then once it’s tested or 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 gonna be a bumper year, harvest year, right, Jack?

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 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, you know, half a billion, we get there.

And so the problem is you have 33% of the state that's 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 the — 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, a local and novice to grow or so, or to do anything to get touches tribution, anything.

Yeah, so imagine — so you're saying why isn't there this one, you know, huge brand?

It's because there's so many hoops to jump through.

Yeah, there's — and the state's massive.

Yes, it is massive. This is not like Oregon, right?

Yeah, it's just a massive state.

And then you have a disconnect between areas that have licenses, areas that don't, right?

And then people trying to get licenses in these areas but running throttle because of local governments that haven't created those laws.

Hmm, yeah, and is the same thing as in, like, Germany, Colorado, and the other?

I mean, who assume California's the two biggest states in terms of volume?

Yes, sales for sure, and then following that is Colorado or?

Yeah, you have Colorado, you have Oregon, Nevada is pretty—

Nevada, yeah, and there's a very big—

Yeah, and then Canada.

What's Janet's coming? Just federally legalized, so I think October 17th was it the date that come?

They're basically — they passed the bill, and now it's gonna be fully enacted to be legalized across the country.

Really?

Yeah, so that can make a huge play.

Yeah, yeah, if there is a huge bet.

Yeah, I mean I don't know; I think if you ask a lot of people in California cannabis, like if they can name all these provinces a year and a half ago, I'm probably like no, yeah.

But now, you know, with Toronto coming up, you have Vancouver coming up, you have basically these companies that were privatized with the government.

Yeah, and now they're opening it up into public markets, yeah.

And now these huge, massive Canadian companies, yeah, listed.

Yeah, got all this capital.

Yeah, and now they're investing it into, you know, their own operations but now bringing that capital down into legal states like California.

Yeah, you know, we've seen a lot of that as well. I think part of the whole like 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 stay 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 are — there's not banking.

Yeah, right?

Because the FDIC obviously federal— federal, right?

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 credit unions that will bank 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 four 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 get it if you're doing delivery?

Well, so 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 you know, 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 then—and that's it, and they just kind of go back and forth, right?

It's not like they're — it's not like an ice cream truck.

Well, what's really interesting now is it allowed for the ice cream truck model coming into 2018.

It was a hub-and-spoke model, okay?

And, and now we're actually in the proposed — we’ve had three different sets of regulations this year.

Mm-hmm.

Okay, this — in this year, yeah.

And then this — the proposed regulation we’ve been in what we call emergency regulations land, okay?

And then we have the proposed regulations that should be coming out in the next few weeks, and in that 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 Police, Liga cities that California definitely pride itself on local control.

So if that does open up, you'll have an ice cream truck model or taco truck model, one that can carry up to ten thousand dollars’ worth of product at any time to deliver anywhere across the state.

How much do you guys carry in terms of like where — how much do we store in our locations?

So we have two; we have an Oakland location. We have an LA location.

Yeah, and probably at any given point overnight, there's probably about half a million dollars' worth of product in there.

And then flow through, there's just millions a week, a product that doesn’t sit there; it just kind of, you know, hits the inventory and then the next day it will go out, or something like that.

So typical — 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 flower base.

Seriously, yeah.

What?

Yes, never.

So are you guys packaging and the dispensaries?

We don't do packaging; there's these — there's co-packers 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 rules and responsibilities go, 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 license party accountable for all things, like tax and legal compliance to which the distributor's were kind of gatekeepers for all of 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, permitting that to the state.

So it's not just like money that we have to remit back the brand; it's also money that we had to remit to the government.

So we are kind of just this like hub of the supply chain that all products have to funnel through before it reaches a consumer.

Okay, so on that tax side, I'm curious because what is the— what's the rate? 20 something percent?

The cultivation tax is per pound — no, either trim or full flower, and that's a, you know, 275 or 925, right?

So, yeah, something like that, yeah — it's basically 150 bucks per pound, around that.

And then the excise tax is 15% on the wholesale value.

Mm-hmm.

And so the—and that's also taxed again at the retail level.

Yeah, so your sales tax taxes the sales, the excise tax, yeah, and all the products.

Now, there's taxes everywhere, and that's why the prices are—

Right, and for the most part that upside is for the government.

Like, are farmers are any more—

No, no, no, no, everyone that — I mean, that's why these products are just so expensive is because that has to be baked into that.

I mean, we recently learned — so like if you wanted 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 of 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 is a dollar, you have to give five cents to the government, yeah, on this stuff.

'Cause like the value is still so high.

Yeah, you know, like, I mean, when I used to buy a 300 milligram bag, I was like of gummies that would last me forever.

Yeah, I'm not eating thirty milligram gummies, no, just no, no — pass out fine or whatever.

But now, it's like I think twenty-eight dollars for a hundred milligram bag.

Yeah, yeah, do you guys sense that there's a lot of price sensitivity?

Absolutely.

Okay, I mean, I think that's why you know I was looting too with the medical market being, you know, pretty much decimated.

No, the irony of legalization is that there's a lot of medical patients who have gone and turned to the illicit market for their products, right?

Right, you know, the people that are medical, they're not, you know, they need it as medicine; they're not there yet.

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, gone back, you know.

Yeah, no, it's not crazy.

Yeah, the state didn't see that coming, I think they did.

Like I mean, they didn’t — the point of having a card anymore?

There isn't really, yeah, except for, you know, higher carrying limits, or you want to consult with a doctor that really wants to kind of give you a treatment plan.

Yeah, but for most — yeah.

Yeah, I'd say for most purposes it's the same products they get sold recreationally as they do medicinally, right?

Yeah, yeah, because they — yeah.

Yeah, it's pretty complicated. There was a dual supply chain in the beginning of the year, an 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.

I know, nice.

And then they combined it, and now you have people that are like, right, well there's probably gonna be more throughput on adult use, so I'm gonna create more product there.

Yeah, yeah, but you know, in order to get your recommend, 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.

Yeah, and then once you get it, you know, it expires in a year.

Yeah, dude! I haven't — it was like what's the upside?

Yeah, yeah, I save like two or three dollars or something, yeah.

Consuming it that, if you spend, you know, a couple grand a year on medicine, then yeah, 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 became — it came down, I think, revenue tax revenue for the government.

And unfortunately, I think the community that needed it most on the medical side or the ones are the most disenfranchised from the whole process.

Mm-hmm.

Do you find that people are very brand loyal, or do they just shop around and not care?

I think people are pretty open to — right, there is definitely brand loyalty.

Like Pop, um, Berkeley makes these great topicals and oils and things like that, and then there's certain like high-end brands like Dosis that makes these like really great disposable vape pens that people love buying.

Yeah, and I — 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 a bartender but for weed.

Oftentimes a brand will go and the way that the budtender learns about all these products is brands, as part of their marketing, will go into dispensaries and do demos for these budtenders and they'll just pitch them on things.

So whoever has the higher marketing budget will go in and just buy out shelves for the dispenser like shelf space as a dispensary, and they'll teach all the budtenders at, you know, all the major locations.

And that's what will get pushed through the most.

And I need to get some recommendations from you guys, 'cause like the people that I talk to when I go to the store, I think they're sampling a little too much.

They're also — thing that there's been some pretty, 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.

I think July 1 was probably the biggest thing that we saw.

Yeah, so July 1 was when they implemented phase two testing, which essentially was around pesticides and potency.

And then people that couldn't pass it essentially were DQ’d from the market.

Yeah, it was pretty bad.

It was insane!

There were videos — well, because for compliance, you have to record yourself disposing of the product, whether you burn it or smash it or whatever.

There are videos of dispensaries just like, as evidence, just like damaging all their products and just basically having this huge demolition day of like millions of dollars' worth of product.

Ya know 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 two compliant product, and I was like, I mean this is a huge opportunity for us, it's a distributor, so let's go buy as much as we can.

Yeah, but generally speaking, there was a huge shortage in the market.

Wow!

So brands are coming and going.

It's almost as brand rush that we're seeing, people are trying to create these different brands, you try to get into different consumers, but the market isn't that sophisticated yet we're — and I'm talking about the supply chain where you have people that do co-packing, co-manufacturing, or like create this stuff, this IP.

Yeah, 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, yeah.

And it's really tough from a business plan model to have someone invest in you if you're just, you know, a brand.

So where do you guys see the market going then?

Like we have all this regulation coming out, 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?

I think at least from where we're sitting, it's — I think it will probably be another — a few years before anything federally changes and more states will continue to pass favorable regulations towards cannabis.

So a lot of them will start out by decriminalizing it, and then making it medically available, and then eventually recreationally available, and then once enough states kind of ratify those laws, then I think then the federal government will eventually see a more favorable light 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.

It's not interstate commerce, and you know, basically expand that way from state to state and then have like a holding company that manages every other child company.

So it'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.

That currently it's hard to build a business in this industry because there's also a shortage of capital, too.

Mm-hmm, mm-hmm.

Have you thought about getting capital from any of these Canadian companies 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.

So we have seen some distribution companies at least get bought out by Canadian companies, and I think it's hugely just like stock packages, and like the sea levels will go join the company and then the rest of the company kind of gets let go.

And so it's been kind of this like brutal M&A like climate right now.

Yeah, but it does provide a lot — a lot of opportunity for, you know, small guys like us who can stay afloat.

Yeah, and how about you, David?

What do you think the market's gonna look like?

Yeah, I mean I think in California in five years, we're heading — what, 2023?

There is something that happens in 2023 with the laws that allow that removes a one-acre cap, you know, 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, sure.

And so, you know, I think the small farmer is going to be in a tough position when that comes out, and so they're gonna have to really think about their genetics, their terroir, 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 buy instead of just these monolithic big crops.

Now in five years, I think I personally would love to see the entire country being legalized.

I know we're Meadow; you know, we build — we — our goal is to build the best software for the industry.

Yeah, but more than that, it's about access for everybody, mm-hmm, 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 minister by a nurse if you need it.

The — I think 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.

All 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, you know, the capital markets through either Canadian companies or other bigger companies that are shell for other bigger companies.

You're at odds; you're playing a game that you're already kind of at a disadvantage from, especially from the OG people.

I think it's going to be really important that people band together in order to kind of move forward, but you're already seeing alcohol move in with their investment and consolidation.

You have rumors with Coca-Cola doing a CBD drink beverage, right?

You have Constellation, yep.

Yeah, so you have — those are the guys behind Corona.

Oh, all right, drinks, all pharma.

You're gonna see tobacco, you know, these are huge players that are seeing their market shares change because of cannabis.

Yeah, and so I think you're gonna see a lot more M&A activity.

You may even see — it's feeling very frothy right now like the Canadian markets, but there's — because there's only so limited access to invest, that capital keeps coming.

If they're — it very much feels like internet-dot-com like bubble is 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.

Mm-hmm.

I think you're also gonna see a lot more exporting globally.

You're always seeing contracts being made with Canada and other countries.

I think you're gonna see a rise in Spain and Germany; they're gonna be coming out and being bigger players, but —

Yeah, 'cause I don't know, like internationally, in Europe for instance, you know, if you buy cannabis somewhere, where are they growing?

Like is that coming from California somehow? How's that working?

Yeah, I don't actually know how — where they get it from.

It must grow it locally, I’d imagine, or bring it in from somewhere in South America.

I think that there's a huge grow — a lot of grow ops down there, Canada too.

Yeah, huh-huh.

Yeah, it's interesting when you're talking about the adverse advocacy said I have — have things like High Times and like, you know, Cheech and Chong?

Mm-hmm.

Have they been more harmful or beneficial for the industry?

Hmm, I think on a raising awareness level it's been beneficial.

Yeah, although sometimes the messaging isn't quite the level that we needed to be because a lot of times it's just like funny memes or like some, you know, joke about, yes, like your friends getting high.

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, and then, you know, High Times does provide a lot of just like newsworthy articles about cannabis 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 Co and all these sorts of like cannabis media companies.

Yeah, I mean, they're definitely — they're pioneers in this and getting the message out.

You know, I mean, you know, it's hard to imagine the fear that people had and the stigma that surrounded this, yeah, 10, 20 years ago when they're still publishing articles around home grows and Cheech and Chong coming out smoking a fat one.

Well 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 or more stereotypical as a stoner.

Yeah, but as we've been moving forward, you know, the biggest news that we saw in the last month was Elon Musk taking a puff of one, right?

And it's so — it's starting to change.

You have one of Paltrow looking at stuff; you have, oh, Whoopi Goldberg, you know, partnered with Maya on stuff.

So the figures that are stepping forward to represent cannabis are changing or adding to this movement and getting people more comfortable with it.

Yeah, but the stigma is still pretty high.

I just find it so silly, man, 'cause, yeah, because I mean I remember I grew up in Massachusetts.

So like it was not legalized when I was in high school, so you know you existed around all of that.

But you know, obviously, you knew people that were smoking when, yeah, like this is like such a crazy mismatch of media and reality.

Yeah, and now I find it happening all over again with psychedelics.

Yeah, yeah, and that's why that Michael Pollan's book was so great.

Yeah, yeah, because it was just like accessible, and he's like kind of nerdy and skeptical.

Yeah, and boy, oh, it's not just, you know, acid trips.

Yeah, and that's what I've been following so closely.

Yeah, to see the studies and if it's gonna happen or not.

Yeah, yeah.

I was gonna say that, and 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 normal channels like Google AdWords or like Facebook ad marketing and, you know, obvious like 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, yeah, yeah, so how do you grow?

Influencer marketing?

So like basically having celebrities or like people endorse your products and going on, you know, kind of like newsworthy sources and outlets, that’s — those are like the high times.

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, you know, found relief in cannabis and this, you know, we call them the fairy 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, you know, with medical, that provided that tip of the spear 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 without.

So Hep C, yes, exactly.

And then we look at the trials that are going through with MDMA, and it's really around PTSD, and 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.

You know, and I think, you know, my opinion, a lot of this, especially for cannabis, it's like grown earth common biological place like a biological plant.

It's almost like — it to me, it's a human right to have this, all right?

It's comforts from the right.

Yeah, 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 because there's just so much stimulation outside.

And, you know, one of the reasons I love cannabis is that allows you to kind of have that.

And then, you know, on the site that's like a del excite, you know, it’s another leveling up and a whole other sense of awareness of yourself and how you interact with the environment around you.

Yeah, yes, that's fantastic.

I mean it's so cool that people are now finally able to experience it in a safe way.

Yeah, and in a dosed way, too.

Which doesn't really exist with psychedelics yet.

Imagine in our lifetime, yeah, it's gonna be a thing.

Yeah, definitely, yeah.

I don't know who's the bleeding edge on this site; it might even be in the states.

It seems like most of the funding and the studies are happening here.

MAPS is a really good organization to follow.

They're the ones that are really pushing the trials, and they're, you know, if there's people that want to fund the movement for psychedelics, MAPS, there's a great organization to do that.

Cool, right on.

So on the legal side, I’ve been really intrigued by people being exonerated.

Yeah, 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.

I mean, what's been great with legalization is that people aren't necessarily going to jail anymore, yeah, for cannabis possession, right?

And another thing that's great is there's a lot of cities that had stacks and stacks of medical cannabis convictions that were coming and just, you know, tossing them all out.

Yeah, San Francisco did it, and there's a lot of other states or cities that are doing it.

I think what you also are finding, that people are realizing that with the war on drugs, with people that have 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.

Yeah, I mean 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, like a smaller cannabis business that's run by a business owner who's been formally convicted of a cannabis crime or like lives in a certain area that has been disenfranchised due to cannabis crime activity.

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 to help them get their operations up and running.

Man, it's so awesome.

Yeah, yeah, there's definitely a lot more work that needs to be done.

Like, well, there's a lot of — that's funding, right?

And so Senator Bradford just had a B12, 94 pass or SB, I think 12, 12, 94 pass, which is a $10 million fund which will be given to different social equity programs to help jumpstart their business.

You know, the issue that we still have is people, you know, you might have resources in rent, but you still need capital and know-how the kind of right kind of run.

Yeah, and you know, we — there's still a lot more that needs to be done in order to help, you know, this group, to move forward in this industry, especially as other players and the game board have been leveling up and yeah, right.

Well, 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, yeah, jail, whatever.

No, and then like a bunch of white kids come in, yeah, yeah, that's legal now, cool, and they just win the game.

Yeah, 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 applied twice.

See, you get some money, and they are racist, right?

Yeah, but it — you know, you don't have incubators like YC really.

You have, you know, the hood incubator, you have Supernovae, you know, hook appears based in Oakland.

They're incubator bringing some companies in, but they don't necessarily have millions and millions of dollars in the bank they need to fund people.

Yeah, and then you have, you know, groups in different cities that don't have unification around their programs either, right?

But there's some interesting things happening within San Francisco.

You're gonna 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.

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, you know, one of these or like even Flow Kana, Flow Kana supports artisans, small growers up in Mendocino and the Humboldt and Trinity's Emerald Triangle.

So when you're buying Flow Kana, 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 the value proposition why someone would pay, you know, X dollars more for this versus that.

Right, um just kind of start a few questions or they — there, I mean, 'cause you've both done my — say you didn’t go through YC with your current company, now would this happen?

Sure, were there certain elements of like a canonical startup advice that you found didn't always apply in the cannabis industry, or do you just apply like the learnings?

And I mean, I guess a lot of it did apply.

Like I remember, definitely, the whole I’d do things that don’t scale thing; we — when we first started this, we had a friend who basically ran like 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.

And so what me and, you know, my best friend June did was we just drove our like hundreds of thousands of dollars' worth of product in the back of our cars across California from like Oakland to Palm Springs.

And it was—it was pretty romantic in a way, but yeah, I mean, part of doing things that don't scale like that kind of helped us learn a lot about the industry, how products were being moved, and like just meeting people throughout the industry as well.

So yeah, I think a lot of it does apply.

Oh, absolutely!

Yeah, I mean, I think we probably every week there's some mantra that we're quoting, either, you know, make something people want or do things that don't scale is great.

Yeah, yeah!

We often think a lot about resilience, right? That cockroach, yeah, and you know, survive and thrive mentality.

I think one of the biggest things has helped us just to be a little bit more patient about, even with all this activities, you know, don't worry about competition, right?

Competition will kill itself; you're just focused on your team, focused on making something that people want, focused on talking to your customers.

You know, but one thing I think that I've also taken and extrapolated; it's like build a community, right?

Right?

One thing I love about YC is the community of entrepreneurs and the shared, you know, alignment on how to build something, and I think that's, you know, why we're together.

Yeah!

But you know to take that sense of community and kind of bring that within cannabis a little bit more.

Yeah!

Because there's just — there's so much going on, and then finding people that are aligned and kind of can move forward and take care of their lane, you know, it's super important.

Yeah!

Yeah, totally!

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, and look at, you know, the videos or any of the podcasts.

Yeah, there's so much, you know, gold nuggets in there.

Yeah.

Be able to do — yeah, it's a good time to get dumped start a company.

Yeah!

All right, we're probably gonna have an Elon Musk moment if we don't stop, guys.

Thanks for coming in!

Yeah!

Oh, thanks!

Yeah, thank you!