How pot startups are rewriting the playbook for Silicon Valley disruption

By Dan Raile , written on January 29, 2015

From The News Desk

Software will eat everything, they say. But it has mostly abstained from the legal marijuana economy, stymied by the uncertainty of enhancing shareholder value in a line of business that was at best an extension of the health care industry and at worst a felonious traffic in dangerous drugs, depending on your jurisdiction.

But software is voracious, and hungrily seeks new inputs. At the same time, across the country, marijuana is enjoying a thaw in public opinion that, like attitudes towards same-sex marriage, seems sudden but geologic in its scale and finality. Marijuana-focused social networks, review sites and news outlets are popping up daily. On Monday the San Francisco Media Co., owner of the Examiner and SFWeekly, announced the launch of a new cannabis-focused print publication. Earlier this month, Peter Thiel’s Founders Fund announced it was taking part in a $60 million investment in Privateer Holdings, a Washington-based outfit with a number of cannabis businesses in its portfolio.

In California, home of the nation’s largest legal cannabis industry and software’s spiritual heartland, the collusion of institutional capital, code, and cannabis is getting off to a trot. And some startups are going beyond the screen and getting cannabis to your door.

The other day a young woman in a battered Toyota rolled up to my apartment in San Francisco, guided there by an illuminated line on her phone. She came to the door, pulled a vacuum-sealed 4 grams of Strawberry Ghani from her satchel, and handed it to me. I gave her $35 cash and thanked her, and she was on her way. It all happened before the cat could sneak out the door. I gave her five stars.

Eighteen minutes earlier, I had tapped the screen of my phone a few times.

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  • “The industry nationwide is in the midst of what I call a 'green tsunami,'” Steve DeAngelo told me on the phone. “There is an explosion of real business interest in this sector. It’s inevitable that people who are primarily interested in business are going to get interested in the business of cannabis. Nothing is mainstream in America until it is mainstream commerce.”

DeAngelo nearly always wears a bowler cap over his braided gray locks, but in the cannabis industry he wears a wide array of hats. He is the owner of Oakland’s Harborside Health Center, long the nation’s largest cannabis dispensary. He is also President of the Arcview Group, which invests in cannabis businesses and causes. His defiance and eloquence in the face of a string of high-profile legal battles with the Feds have made him one of the most visible leaders of the movement to normalize, decriminalize, and legalize marijuana.

DeAngelo said he sees the delivery apps as a positive thing, as long as they are in compliance.

“I’m still trying to wrap my head around their business model, and I worry about whether they are compliant. But as long as they are an online platform that connects dispensaries to patients, I think that is a great thing to do. Anything that makes life easier for patients I look on as a positive thing.”

One of the foremost founding fathers of medical marijuana in California is Dennis Peron. He started San Francisco’s first dispensary four years before the state recognized the legality of medicinal marijuna. The San Francisco Cannabis Buyers Club, established in 1992 on Market Street in the Castro at the height of the AIDS epidemic, began operations after 80% of San Franciscans voted in favor of a proposition to “urge the Mayor to urge the Police Commission and the District Attorney” to make cannabis law enforcement a low, low priority.

Peron answered when I phoned the front desk of the bed & breakfast he now runs in the Castro. He didn’t seem to have any problem with enabling access to cannabis through software, but he was concerned for the legal welfare of those involved.

“I would advise them to lead with the word 'medical' and go with the flow,” he said.

Peron, however, is not in favor of a widely-expected statewide initiative to legalize cannabis for recreational use, likely to emerge in 2016.

“We already have legal weed. What is it going to be? More legal? The term recreational just doesn’t apply to medicine.”

Both Peron and DeAngelo have earned their place in the history of cannabis policy through decades of persistence. They have both been subjected to the wrath of the federal government’s harsh cannabis laws and have preservered.

One might expect that, like the owners and operators of taxi companies in the ridesharing era, they might not be keen on the entrance of disruptive software outfits on their hard-won turf. But talking to them -- and in fact all the dispensary owners, growers, edibles makers, and trimmers that I spoke with -- I found quite the opposite to be true.

From what I can tell, San Francisco’s decades-old medical cannabis industry/community is pretty welcoming for aspiring canna-technologists. The legal part of the city’s marijuana industry is hampered by restrictions on banking, tax-deductions, advertising, and credit-card processing. The arrival of institutional investment and state-of-the-art commercial software validates the space while making it more efficient. I encountered a widespread belief that software eating cannabis is inevitable and relatively harmless.

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  • The best-funded of the new delivery web apps is Eaze, who dispatched the Toyota driver to my door. They have raised $1.5 million in angel and institutional investment, and are in full startup growth swing, distributing T-shirts and signing up drivers and brand ambassadors online and at the mid-January Cannabis Job Fair in Oakland.

Eaze CEO Keith McCarty was an early employee and sales executive with Yammer, and he nailed the role of the burgeoning on-demand services entrepreneur when I met a couple weeks back, at Eaze’s coworking office space amid the construction carnival at 2nd and Howard Streets.

We talked user acquisition funnels and horizontal layers, growth strategy and territorial expansion. Hoodie-clad, he drew bell curves and diagrams on the white board. One of the magic marker glyphs McCarty drew was a triangle with Eaze, a dispensary called Sparc, and the Patient as nodes, connected with vectors. Eaze hovered above and between the dispensary and the patient.

“We want to be seen as a pure technology play,” McCarty said. “Eaze is a demand-generation platform optimized for dispensaries.”

Eaze and other new SF delivery apps Meadow and Marvina (their ranks may swell before you finish reading) perform the feat of being cannabis delivery services without ever touching the plant. Their drivers work for the dispensaries, and legal good standing depends on the dispensaries’ compliance with city, county, and state regulations.

In San Francisco, compliance means passing muster with Inspector Ryan Claustnitzer, who leads the Department of Public Health’s Medical Cannabis Dispensary Program, which is responsible for issuing permits, conducting inspections, and collecting license renewal fees. California law leaves many of the details of medical marijuana regulation to city and county governments, and San Francisco has taken a notably hands-on approach.

“San Francisco is a very creative city," Claustnitzer said last week by phone. "There are a lot of new business models, people call every day with new ideas.” He told me he had worked with new companies to make sure they are in compliance with the city’s policies, including those for “technology connective services.”

Claustnitzer also said that as long as a dispensary is otherwise compliant, they can be delivery-only and obtain a permit -- which costs $8,661 up front in, and half that every year after year two.

He suggested there may even be less resistance for such a business in getting a permit because they wouldn’t encounter the zoning, accessibility, and public nuisance restrictions that hamper would-be retail owners. Not to mention the rent prices. If you’re interested here’s the application.

Does this policy open the door for disembodied cannabis collectives to operate delivery services at will in the city? Was that not previously the case? Delivery-only dispensaries have existed in the city previously, mostly in the wake of a wave of storefront evictions that began in 2011 and left many of the city’s dispensaries without brick and mortar retail properties.

Meanwhile, uncertainty is still rife in the cannabis industry. California clearly provides dispensaries the right to exist, but many of the particulars are left to the cities and counties. The Federal Government takes a less charitable view, and there are several long and ongoing cases against California dispensaries in federal court.

In medical marijuana land, knowing how to work within the longstanding state laws and the varying city and county regulations is valuable trade information.

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  • Earlier this month I went to a fundraiser/launch party for a delivery-only dispensary in the Mission, where a band played alongside a table laden with shwag -- T-shirts, stickers and the like. It was attended by a tightly packed knot of young well-wishers and open to the public. Beer runs were made, Tecates were drunk. An IndieGoGo campaign to raise $10,000 was announced.

The dispensary was launching in partnership with Marvina, through which it would provide monthly curated boxes of buds to a patient’s door. Think of it as Birchbox for blunts.

A couple weeks and a meeting with the Health Department later, that dispensary has suspended operations. Marvina has partnered with a new delivery-only collective called Medicine Bowl with a business address in Pacifica, but it underscores the unpredictability of operating in the cannabis industry.

Marvina is the product of an adorkable duo of recent East Coast transplants, with a couple startup jobs apiece under their belts. Two weeks back, under a grisly morning sky in Dolores Park, CEO Dane Pieri told me that he got his doctor’s recommendation about a year and half ago, and shortly afterwards, looking for a new project, he started to get really excited about the medical marijuana space.

“There is a huge existing demand but the supply side is totally turned on its head,” said Pieri. “It’s an opportunity for software that just wasn’t there before.”

Meadow CEO David Hua has a similar story of the origins of his interest in the medical cannabis marketplace. After the gifting and ecommerce company he was working for got acquired, he was looking for a new project to sink his teeth into.

“Being a patient and being in startup world, I thought maybe there is something we could build that was needed. That’s where the idea of on-demand delivery from trusted dispensaries came from,” said Hua.

He reached out to dispensary owners and attended classes in dispensary management at Oaksterdam University across the bay. He and his team -- who he says have built roughly 20 apps together -- spent a year and a half building the thing and doing extensive due diligence before launching Meadow as a web app in October.

Nominated in the “Best Bootstrapped Company” category for this year's TechCrunch awards, Meadow hosts the full delivery menus of a handful of dispensaries in one sleek user interface. The only thing that makes its checkout cart and registration process different from those of any other ecommerce site is that instead of entering credit card information, users send a picture of their driver’s license and cannabis prescription ID.

Eaze and Marvina handle registration the same way, and with each of them it took me only a few minutes to get checked and verified against California’s disparate patient databases.

This quick, online verification process is novel and a notable step up from previous (legal) delivery services. One downside of pre-existing delivery operations has been that patients must register as members of each dispensary they want to join, which usually requires an in-person visit to the shop to fill out some information and get processed. With an app like Meadow, patients can order from dispensaries all over the city, without having to make a personal appearance.

Meadow’s delivery times vary depending on the dispensary, but have generally taken about an hour when I’ve ordered. Marvina does scheduled deliveries, two or more days ahead. All three are currently cash only.

By contrast, Eaze has only one dispensary partner. But they are open until midnight (most dispensary delivery ends at 8 pm), will bring you medicine anywhere in the city (i.e. not just your house), and aim to get it to your door in under 25 minutes (this has been more or less the case for me -- it has usually taken about half an hour).

With their ample funding, Eaze has made a big push to be first to market. It has drawn comparisons with Uber and hasn’t shied away from them.

The Craiglist job ads for Eaze delivery drivers proclaims the company “the Uber of Marijuana” in the subject line. McCarty told me that Eaze would “follow the playbook of Lyft and Uber” by working directly with regulators.

“We’ve worked very closely with the Health Department,” he said. “We want to have a good association with the regulators. Both sides can learn from each other.”

One notable divergence from the Uber playbook is the way Eaze and others are cooperating with marijuana industry incumbents. Due to the state’s current laws, this is a matter of necessity -- there is no other legal way.

McCarty added, “We only partner with the best dispensary, like how with Uber you know you are not getting into a ‘94 Camry."

The Lincoln Town Car to Eaze’s Uber is four-year old dispensary Sparc, nestled just a block away from the Health Department near the surging heart of the Twitterloin. It is a distinctly high-end retail operation, even winning an award from the International Interior Design Association in 2011 for its “outstanding commercial design.”

And Sparc CEO Robert Jacob is no stranger to sitting at the table with city officials -- he was the mayor of Sebastopol in Sonoma County until being termed out in December and maintains his seat on its City Council.

Sparc offers free accupuncture for members along with educational sessions, a game night, and a live jazz night. But until November, when it partnered with Eaze, it didn’t offer delivery.

Jacob told me that in the first two months, he hired over 30 driver-contractors and two new full-time employees to train and manage them. He also had to devise, from scratch, an insurance policy for his drivers that wouldn’t break the bank.

“It has been intense,” he said.

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  • The Sparc/Eaze relationship seems tailored to set investors’ mouths to water. As public opinion across the continent shifts, California is approaching a major economic event. The Bay Area’s robust venture investment ecology can’t help but take notice and get down to picking winners, inspired as it is on the heels of uncompromising forays by whales like AirBnB, Uber, and Lyft into highly regulated terrain.

DeAngelo said that the Arcview Group has quadrupled its number of investors in the past year, to 400.

“Before, it was high net-worth people that had supported cannabis initiatives in the past. Now we are seeing people with absolutely no connection to the plant.”

And though California no longer has the country’s most open marijuana laws, it has an established industry and enormous existing domestic supply. If a delivery app can prove its value in San Francisco’s relatively mature market, it’ll be all the more likely to succeed in newer markets as they come online.

“Tech is here. San Francisco is the world of early adopters and progressive, it’s like living in the future," Meadow’s David Hua said. "You can build the future you want, if people like it they use it, and it becomes the real future."

The disruption of the War on Drugs by new marijuana laws and norms is a much bigger issue than the investment market for auxillary service companies. It is a matter of civil rights and the power of voters to decide their legal regime.

In contrast to the way Silicon Valley startups have exuberantly disrupted other industries, there are early indications that when software eats the cannabis industry, the result might be more cooperative and supportive of the existing networks of growers and brokers, store owners and gardeners, drivers and trimmers -- at the moment that is the only option.

“We need to create not just a new industry but a new kind of industry," DeAngelo said, "an industry that distributes wealth fairly, takes environmental responsibility, is regulated so that small players have a place, that embraces diversity, and provides returns to the community and not just to its investors."

That's not just empty talk: DeAngelo is on a panel that crafting language for a legalization initiative to be put to voters in 2016. The panel is going to pains to avoid the pratfalls of similar legislation in Colorado and Washington, which did less to protect incumbents -- in part because those states lacked Califonia's vast incumbency -- and the failed Proposition 19 that California voted down in 2010.

If the vast existing cannabis industry has its way and remains relatively intact, it's possible that a tempering influence may flow into the Valley from the mountains of the north, replacing “innovative disruption” with “innovative validation."

[illustration by Brad Jonas]