Talking Weed Business with America's First Cannabis-Focused Startup Accelerator
We talked with the founder of Canopy, an accelerator that adopts fledgling weed-related companies and helps them get ready for the next level.
In the two years since Colorado began selling marijuana for recreational use, it has become the epicenter of a booming industry, one that will gross over $1 billion in sales this year. That number has been predicted to grow nationally to the point where it's larger than the organic food industry as vast swaths of the United States, as well as Canada, gear up for seemingly inevitable legalization.
With opportunity skyrocketing, Colorado has found itself in the midst of a modern-day "green rush." Entrepreneurs—many from out of town, transplants from corporate America or Silicon Valley—are touching down with ideas to innovate in the cannabis industry and make a fortune on the crop.
If The Social Network or Silicon Valley taught us anything, it's that there's much more to a startup's success than an idea. From the operating agreements and nitty-gritty legal documents to the fire-tested business plan and brand formation, new companies have a lot to organize before investors will put money on the table. Navigating these market hula hoops successfully can make or break a fledgling business, especially in an industry with so much legal uncertainty and increasing competition. Thus, it should come as no surprise that there's a specialty firm out there looking to help the seeds of cannabis startups grow into big, profitable buds.
CanopyBoulder is the nation's first cannabis-related startup accelerator. Each spring and fall, it accepts ten cannabis-related companies and prepares them for the next level. With its well-developed network, it can serve as an "in" for entrepreneurs looking to get plugged into the industry. It also provides $20,000 in exchange for 9.5% equity. The ten fledgling companies accepted into Canopy's 13-week program will have their needs sated and ideally grow into valuable enterprises, while Canopy also invests a stake in the companies' future success.
Canopy only deals with ancillary products and services—businesses that do not directly produce or handle the plant. This is to avoid the hellbroth of shifting legal stipulations that growers must constantly keep track of. There aren't restrictions on interstate commerce, residency requirements, and so on with ancillary businesses, so scaling them on a national level is much more feasible.
Examples of such ancillary companies Canopy has mentored include Tradiv, a business-to-business wholesale cannabis online marketplace. And Ganja Boxes, a subscription service that delivers curated cannabis-related accessories. There's also Black Rock Originals (not associated with Canopy), a Colorado-based startup that sells a smell-proof, sturdy "safety case" consumers can store their paraphernalia in while on the move.
"Canopy helped our company go from being just an idea in southern California to an actual investor backed-business," Lisa Buffo told VICE over the phone. Lisa is a former employee of Canopy and is now CMO of one of its portfolio companies, Tradiv. "They help entrepreneurs get involved in the industry thorough connections and set you up with information about the industry and the layout of it... they partner with the ArcView Group [a major cannabis industry investment firm], which creates market research reports, so having access to the guys who wrote the market research reports is incredibly helpful."
I was interested in how the Canopy operation goes down, so I called its founder and CEO, Patrick Rea. Early in his career, Rea was a consultant at a boutique venture capital firm that was focused on the natural products industry—"the stuff you'd find at Whole Foods or GNC," he told me. He made his way to Boulder for work, doing consulting on the side, making small investments, enjoying working with smaller companies "because of the big impact one could have on an organization when it was still small." He then partnered with seasoned entrepreneur Micah Tapman and gained backing from the ArcView Group to start CanopyBoulder late last year.
VICE: What was appealing about the cannabis industry to you?
Patrick Rea: Well, you often don't get an opportunity to be part of the birth of an industry in your career. And you know, it was in my backyard, so we had to leap at it and we did. My partner Mark and I went all in. And that was not a decision that was made lightly—we spent over a year doing our own research on the industry and trying to understand the dynamics and players before we really sat down and did something.
What are some of your favorite startups that Canopy has worked with?
We like Compliant Cannabis, they're a seed-to-sale inventory management software company. They're a young bunch of guys, coming from Fortune 500. They were in our fall class. Another company that we really like is Ganja Boxes, it's a subscription box of accessories like Dollar Shave Club.
So Canopy is just focused on weed-related products?
We don't just work with new players in the cannabis industry, but also the hemp industry as well. In the hemp industry, there's no really good data on how big the market is, how fast it's growing, and there's not really any conferences or trade shows around that space. So, we found a seed investor in the hemp industry who was struggling with that, he couldn't tell what was going on so he couldn't make smart investment decisions.
So we said, let's start a media company that is all about hemp business intelligence and has a conference and trade show. So that's Common Home Media, and they have Hemp Business Journal, Hemp Business Summit, and Hemp Business Expo. And that's really hot right now. There's already hemp in the door of your Mercedes Benz, it adds rigidity and sound dampening. Growth within the hemp industry is already happening, but no one really knew how big it was or how fast it was growing, who the major players were, or what were the strategic issues. Sean Murphy of Common Home Media is tackling that issue.
Apart from investing capital, how does Canopy help a cannabis-related startup grow?
We build a network of over a hundred mentors and advisors from inside and outside the industry. These are growers, dispensary owners, bud tenders, consultants, as well as lawyers, accountants, designers, and branding experts. The idea is to have resources for the companies for whatever they need—so you can get them in touch with the right people who will help them work through their problems.
We also say, look, these are the documents that need to be viewed as investment-ready. We work with entrepreneurs to get that due diligence packet prepared and the business plan super pressure tested with the market; we help them get traction in the market where we can. Then we produce a demo day, connect them with investors, and do our best to help them raise money.
You've worked with entrepreneurs and startups in many different industries. Do you find that cannabis-industry startups have a different attitude or energy?
Yeah, this is a social movement that we're a part of. A lot of the entrepreneurs have goals beyond just being successful from a business standpoint. They believe in one or many or all of the advocacy tenets, whether it's racial discrimination or profiling, judicial reform, access to medicine for patients... or they've had their own personal experiences with the plant that gives them the right in their mind to be part of this.
Are there any startups in the accelerator that are directly in competition with each other?
Oh yeah, there certainly could be. And that's something that we have to deal with. I don't think it makes sense from our standpoint to put two competitive teams together in a class when there are so many opportunities that lack strong competition in the cannabis industry. So we take a portfolio approach—we try to put the class of ten companies together in ways that we'll see synergy between the teams.
What's been the success rate of companies from the accelerator thus far?
I don't have the exact numbers right now, but what I can say is that in aggregate, the companies that have come through our accelerator have a total valuation of around 40 million dollars—and our oldest investments are six months old. So we've seen an enormous amount of investor interest in these companies.
I was talking to an investor yesterday who said he was burnt out and tired of meeting with "stoners in suits." And that's what we try to avoid. — Patrick Rea, founder of Canopy
What are some of the biggest challenges that cannabis-related entrepreneurs face?
Well, if you're going to join the cannabis industry you need to understand the industry. And the industry is not simple. It is complicated—there are different regulations and laws, state-by-state. You have essentially 23 states where there is some form of legalization. And you have to understand how the industry is developing and what the expectations are for the future. You need to become a bit of a regulatory expert, and that's a lot to handle as an entrepreneur.
What happens if the next president comes in and says they're going to crack down, how do you deal with that? So investors are going to have a lot of easy reasons to say no to you. Cannabis-related startups are definitely in a fundraising environment that's a little different than other startups, but at the same time they have to compete with them for capital.
How do you think the industry is going to develop in the next few years?
We're looking at a couple milestones in the industry where we expect to see more acquisition activity. One is the changing of banking regulations for cannabis-related businesses. When that happens, banks will be able to loan to cannabis-related businesses—when that happens, investments and acquisitions will be able to be financed, which will increase valuations across the board.
The second milestone that we're looking at is legalization of marijuana for adult use in California. Remember that's the largest state in the nation, 38 million people, I think the eighth largest economy in the world. That legalization bill which will be on the ballot in 2016, backed by Sean Parker of Napster and Facebook fame, is going to pass and that will be another milestone.
And then you have federal legalization. The timeline for that is yet to be determined but I will say that the legalization movement is moving faster than most everyone expected. Right now, 58% of Americans are in favor of legalization. It's following the same trajectory as gay marriage.
People have negative assumptions about marijuana users. Did you ever have guys come in and perpetuate those assumptions or be unprofessional?
It's certainly an issue in the industry. I was talking to an investor yesterday who said he was burnt out and tired of meeting with "stoners in suits." And that's what we try to avoid. We're really looking for intelligent, driven, diligent entrepreneurs with low egos who are open to suggestion and help and advice, who are going to be successful no matter what.
We spend a lot of time trying to vet entrepreneurs to make sure they're not "stoners in suits." People like that just don't raise money. That being said, we don't have any bias towards people who consume cannabis. Cannabis has a horrible stigma around it. There are a lot of very famous, very successful people who have consumed cannabis and they're hyper-intelligent and you would get behind them in a second. We don't hold that against anyone... that would be wrong.
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