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If you hand most people a cannabis drink, their first question is probably, “How high will this make me?”
This one unknown might just be what’s holding cannabis beverages back. Until now.
Listen in as Luke Anderson of Cann discusses the state of cannabis drinks and where he sees the category heading.
Learn more at http://www.drinkcann.com/
- Luke’s background in cannabis and how he came to start Cann
- An inside look at Cann and its mission to become the standard for cannabis-infused tonics
- Why Cann produces only low-THC tonics to target consumers that don’t wish to experience a high
- The type of effect consumers can expect from Cann’s social tonics
- Why Luke believes it’s important to take out the guesswork in cannabis beverages
- Cann’s social tonics versus beer and wine in terms of time and effect
- How Cann decided on its unique THC/CBD concentration profile
- How Luke and his team overcame challenges with emulsion and dispersion to ensure consistency in every sip
- Where Luke sees cannabis microdosing heading in the next few years
Mathew: Hi, I'm Matthew Kind. Every Monday, look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com. That's cannainsider.com. Now, here's your program.
Imagine this, you're at a party this weekend and your friends hand you a can of a cannabis beverage that they are really excited about. If you're like most people, your first question is, "How high will this make me?" This one unknown may have been the thing stopping cannabis beverages from taking off until now. Here to tell us about the state of cannabis beverages is Luke Anderson, co-founder of Cann. Luke, welcome to CannaInsider.
Luke: Hello. Thank you so much for having me.
Mathew: Give us a sense of geography. Where are you in the world today?
Luke: I am in Venice, right outside of our office where we started the company about a year ago.
Mathew: Okay. And what is Cann on a high level?
Luke: Cann is a microdose THC beverage. We like to say it's the first ready to drink THC beverage that has a dosage of under 2.5 milligrams. And unlike other cannabis products, it aims to be a direct one for one replacement with alcohol. Now it's not aiming to replace someone's alcohol consumption entirely, but it aims to be pretty good at doing the job that alcohol does in social situations on a similar type of quantity and frequency that you would drink beer or wine.
Mathew: Okay. That's a big problem. So I'm glad you're trying to crack that nut. Can you share a bit about your background and journey and how you got into the cannabis space and started Cann?
Luke: Yeah, it's interesting. I had never been to a dispensary before starting the company with my co-founder Jake and had frankly always been a skeptic of the entire cannabis market. I felt like it was meant for stoners. It was not meant for people like me who didn't find pot leaves to be appealing and didn't know how to roll a joint, and whose only experiences with cannabis involved eating a weed brownie that got them too high in college and made them leave a party because they felt embarrassed for how they were acting or coughed on a joint too hard in a circle and became much too high to function.
But my co-founder, Jake, had actually been thinking about cannabis beverages for the better part of our friendship, which started at Bain & Company about seven years ago. And he grew up in Denver, Colorado, and looked at how legalization impacted his local community and had always been curious about THC and specifically microdoses of THC as a means to a better health and wellness picture for an individual who might be relying on alcohol as a social intoxicant of choice.
Over the seven years of our friendship, we'd be across from each other at a dinner table or during a weekend getaway and we'd be debating on opposite sides of the same issue, actually. He would say cannabis beverages are coming and they'll take a great share of what we know today as alcohol consumption. And I would yell back, alcohol does the job just fine. This is gonna be enough for me and I don't think that I would ever, if I were in my right mind, replace it with some novelty item that, you know, reminds me of bad experiences I had when I was younger.
And ultimately, as I got a little bit older and my hangover started getting worse, and I started physiologically feeling a need to try and replace some unwanted alcohol consumption with something better for me, and taking things like a 30-day break from drinking or a 2-week break from drinking and feeling really good about what my body did in that time period, I began to be interested and re-approached Jake about the concept he had been dreaming up, and eventually joined forces, put our heads together and said, "Let's design something that would be uniquely appealing to people like you who are familiar with cannabis and understand it and people like me who had maybe never been to a dispensary before ever in their life."
Mathew: Okay. Now I didn't know you had a background with Bain. I know it's kind of an interesting group over there. People may remember the name Bain from Mitt Romney debates and stuff like that. That's how he got really wealthy working at Bain. But I read a book, I think it was called "The 80/20 Principle," and they talked a bit about Bain in that book and how they have like a unique philosophy and way of doing things and methodologies to create really high impact outcomes for themselves and, you know, profits and so forth. Can you talk a little bit about how...you know, what lens you gained from working at Bain and how you still have it today or if you don't?
Luke: Yeah. Working at Bain was a tremendous experience. Jake left after just a couple of years and went to Bain Capital, which is also a Mitt Romney institution, but I ended up staying in the consumer packaged goods practice for a total of six years with a two-year break for business school in between. And like you said, the 80/20 principle governs everything that we do at Bain. It's how can we find 80% of the value from only 20% of the effort and then doubling down on that type of activity so that we can create more value overall in a shorter amount of time. And my role, in particular, of late had been helping big consumer packaged goods companies, big global organizations with many different brands and business units try and jumpstart their innovation cycles by learning from how startups launched new products.
And so by applying principles like agile ways of working and assembling cross-functional teams and rooms to crack problems over a sustained eight-hour time period rather than breaking it up with one-hour meeting here, one-hour meeting there over the course of a longer period of time, I became quite passionate about the power of focusing on a smaller number of issues and solving them really fast. And when I had done a few projects like that and Jake and I had been talking about this cannabis beverage concept, I felt like this would be a really great opportunity to apply that same framework. And ultimately that's how we ended up launching by picking one retailer in Southern California, one geography, and one skew, a six-pack three flavors of product.
Mathew: Okay. That makes sense. That's really interesting. I thought it was, you know, there's been so many high success events out of Bain that it's worth studying what's going on there exactly and how that methodology came to be and all the mindset. So it is interesting. So you've made it as simple as possible to, you know, create a success for yourself and see if...just test it and see how it works, and that way you're not spending a lot of time on elaborate different products and product lines. You just want to see, will this work quickly?
Luke: That's exactly it.
Mathew: Okay. So your minimum viable product is a six-pack in Southern California at one dispenser. That's pretty clean and simple.
Luke: That was it.
Mathew: So your target market, as you mentioned, is not the guy doing, you know, gram dabs. It's someone that's not saying, "How much THC can I get for my dollar?" It's someone more saying, "I want a controlled experience that's not gonna have me, you know, hallucinating or like so deep in a couch that, like, I need a crane to lift me out." And so you're kind of going for that kinda casual user that's a little bit skeptical, but also curious.
Luke: Yeah, we say we stretch from the can of curious all the way up to the can of casual. A lot of people, I think 10% roughly of people in the United States have purchased cannabis in the last year and 60% of people are interested in purchasing cannabis but have not purchased in the last year. And if you talk to that fifth percent Delta, a lot of them are people who have selected out of the category from a bad experience, like a pot brownie from college or coughing too hard from a bong hit that they were unprepared to take. And those people, they're used to buying alcohol as a social intoxicant of choice and you don't scan the craft beer aisle and look for a percentage AVB, excuse me, or look in the liquor section and ask where is all the Everclear because that's how I'm going to get my most bang for my buck.
You're looking for an experience and a brand and a product that resonates with you. So we're trying to buck the trend of dollar per milligram of THC, which is more prevalent in other categories, but we hope actually won't apply in the beverage space.
Mathew: This is interesting because, you know, most startups and entrepreneurs don't want anybody to be excluded. They feel like, "Oh, we're not being inclusive," but it can be one of the best things you can do for your target market so they know exactly what to expect.
I mean, I think about 7 Up, like the uncola, it's for someone that doesn't want a cola specifically. And so this is kind of what you're doing here. And it's interesting, but, you know, if you don't describe the beverage as, you know, how high it makes you, how do you describe its effect? Do you have to create a new language? How do you describe it to people who are curious for the first time and want to try it?
Luke: Yeah, it's we're creating a new language around it, for sure. Microdosing culture is becoming more popular and people are starting to use language to describe that experience, but there isn't much consistency around it. And so we find that we have to have a longer conversation with everyone who's interested. Some words that we really like now, lightly lifted does a pretty good job of describing the buzz that you feel. We say a mild uplifting social buzz, if we're being asked a more academic question. And one of our branding partners described it as feel a little good lately, which I'm quite enamored with. I think it's exactly how you feel. It's just a little bit of something. It's palpable, it's noticeable, it's undeniable, and it's pleasant.
Mathew: Okay. Typically we describe the effect of cannabis as onset, but similar to what we were talking about before where it's not high, you prefer a different way of thinking about it. Can you share what the description is instead of onset, you know, instead of how you've lightly lifted, but what about the way it comes on? How do you describe that?
Luke: So we do say the word onset so that we can relate to people who are already walking dispensary floors and have that as a key purchasing criteria, and we're proud that it's around a 10-minute onset time, which is how long it will take for you to feel the effects of the beverages.
There's something about the nanoemulsion and the sublingual absorption before it goes into your stomach that kickstarts that process for you. But what we're trying to train people is that it's not about the onset of your individual cannabis item. It's about how many of these products can you have in one given experience. So the sessionability of alcohol and how it has become very socially common for people to get together with a 6-pack of beer and, you know, you have 1, you wait 10 minutes, then you decide whether or not you want to have another, and then you decide whether or not you want to have the third is exactly what we're trying to do by selling our product primarily in six packs and encouraging people at the point of sale to think of how many they want to drink over the course of an experience.
Mathew: Yeah. This is really interesting. So you're borrowing aspects of alcohol kind of the framework. We think about alcohol, beer or wine, specifically more beer or wine, like one makes it feel this way, two makes it feel this way. Adopting kind of the metronome of how you'll feel from, you know, wine or beer onto cannabis, which is tricky because it requires some explanation to even think this is possible. Because most people, you think about the brownie experience you talked about, where it's like, "Yeah, I took a brownie and I didn't feel anything and I didn't... So I took another one, I didn't feel anything, and then I blasted off to another planet."
Luke: Yeah. Which is actually an unpleasant experience for somebody who is in that more can of curious demographic. It's you don't like sitting in waiting for a ticking time bomb to come and hit you and create an unsettling feeling. You're used to and you've trained yourself over years of consuming alcohol to drink something and slowly step up into an experience that your controlling. And that's exactly what we want to create with Cann.
Mathew: Okay. So how do we build a bridge from where we are now for people who don't know how they'll feel with a 2-milligram drink, to where they will know how they'll fell and they'll have confidence in it? Like for someone that, they'll say 2 milligrams, what's that? I mean, I usually say a rookie cookie is 5 milligrams. So if you've never had any kind of edible before, that's what would be considering a starter place. And so this is kind of less than half of a rookie cookie. I mean, did you experiment like one and three and or is this just like this came out of the gates that this is the right amount?
Luke: We experimented lot. And I think when we had an equal part group that said this is not going to get me high and another equal part group that said that I can't have more than one, that's when we know we landed on the right amount. And it's amazing how passionately people will argue on both sides. And it represents just how different people who are routine cannabis users are from people who are just exploring the category. People who are routine cannabis users will come up to me and say, "I would need to drink 50 of these before I felt anything," or, "Like, that's a punk amount of THC." And I just got a text message yesterday from one of my friends who is a skeptic, and after learning about the product digitally for six months approached the dispensary for the first time, got it, and then, and I said, "How did you feel?" She was, "They are so tasty, but I had two and that was beyond my limits. One is perfect for me."
Mathew: Oh, good.
Luke: Now we really want the both of these experiences to be in between where people feel comfortable having two to three, but it takes some time for somebody to step up from a 2.5-milligram experience to a 5-milligram experience. So your question was how do we bridge the gap between where we are today and where people become accustomed to and familiar with this 2.5 milligram and below sessionable cannabis drinking experience? And I think there really are five main things that need to happen that will evolve the category, and I think it's, first, more products that are dosed similarly.
So a suite of sessionable cannabis beverages that exist in the fridge will help make the category look more legitimate and less fringe and make dispensaries pay a little bit more attention to it as a growing category. Within that set of products you also need to have drinks that are formulated with better ingredients and that take after trends from today. All-natural, no sugar added, low-calorie, without artificial sweeteners. And, you know, there aren't enough that fit that kind of whole foods quality drink benchmark and we hope that more will come in.
The third is branding. I think there are a lot of drinks that use overt cannabis imagery to invite people in and remind them that it's cannabis drink. But we need a lot more drinks that don't have any overt cannabis branding because those will be inviting to the people who actually will enjoy that sub 2.5-milligram drink the most.
And the fourth is price. People who are doing that dollar per milligram calculation, those aren't the right people to buy the products, right? People who are spending $15 to $20 on a 6-pack of premium craft beer or a bottle of wine to bring over to a friend social gathering, when they look at cannabis beverages at $10 and above per unit, it doesn't become something that they can do the same thing with. So the price has to come down significantly, which means the whole industry needs to evolve. And, you know, all the way from manufacturing down to the point of sale, there needs to be better ways and fewer points in which money are changing hands before that final retail price is set.
And the last thing, and I know this is a long list, is availability. Even people in the Cann ecosystem who love the product and are comfortable with our price point and want to buy it often, their number one pain point is they just don't know how, and they find the existing cannabis channels hard to reach or stigmatizing, evoking fear, not knowing what to say to a bud tender, not knowing how to scroll through a menu with tons of pictures of clumps of weed on it. And so I think we need the channel to evolve and more premium points of sale that do not make somebody think back to a negative cannabis experience before this thing really takes off.
Luke: So it's fair to say that you're making the trade-off for consistency and experience over potency. Is there one or two demographic profiles that seem to want this consistency in experience the most? Have you seen an age or gender area where this time Cann seems to be the sweet spot or is it just all over the board?
Mathew: It's shocking to me, but we still maintain a 50/50 male and female consumer split. I think it's weighted because there are more males than females currently in the cannabis channel. So if we were looking at just a pure group of mainstream consumers, I think we may slant more heavily female, but we also surprisingly have a very even split of age ranges, making us feel like this product does have cross-generational appeal.
I think 30% of our consumers are between 20 and 29, 40% are between 30 and 39, and then another 30% are 40-plus. The one thing that everybody has in common, though, that loves the product, it's more of a need state than a demographic is a desire to drink less alcohol. And that can be something that appeals to people of any gender and of any age. It's 21 out of 25 adult drinkers will say, "Yes, I am actively trying to moderate or reduce my consumption of alcohol." It could be for health reasons. As a 60-year-old, your doctor's telling you, "You have to drink less." It could be as a 25-year old, you know, "I want to blackout less and drink less irresponsibly at parties." Or it could be a 32-year-old like me who's just like, "The hangover is untenable and I want to take back my Sundays."
Mathew: Yeah, that's true. You wake up and it's like you're eating fatty, salty foods and trying to just normalize, if you were having a botanical oil, you don't need to do that, but I mean really it's ethanol. Let's be clear. It's poison that our liver is processing. Now let's talk about the CBD aspect a little bit. We said 2 milligrams of THC. Can you talk about the CBD concentration and profile?
Luke: Yeah. We believe that a CBD dominant ratio with a microdose of THC gives people a more calm and less anxious peak of their THCI. The thing that turns people like me off from cannabis is when you hit that point where, "Uh-oh, I am too high to be here." And something, which is definitely part psychological and definitely part physiological from the entourage effect about having CBD on the label, gets people more comfortable with trying it and then also, in their high, they report less of an anxiety factor. And so I think we're still at the beginnings of figuring out how the variance in a THC and CBD ratio creates a different experience, but like you said earlier, we're trying to optimize for consistency and by making it with...as pure of a distillate, as we're able to find, we've found that people report generally similar feelings of that lightly lifted thing from each can that they drink.
Mathew: Okay. And you said this is available in six. Is it six-packs only or can you purchase one can?
Luke: We're starting to broaden our skew assortment to make it so that it's easier for people to try. We initially sold with just six-packs because we knew that if somebody had just one can, then we weren't giving them the full experience of drinking it with friends and replacing it with that six-pack of craft beer they would've had in the same occasion, which is truly where the product shines. But it's a hard hurdle to spend $24 on something pretax at $30 out the door on something you've never tried before. And so we are starting to sell in singles at $6 retail and then keeping the 6 packs at $24, and then starting to offer a 24-pack, which is a $75 price point and allows you to have significant savings if you're on a per can basis, if you're really in love with the product already.
Mathew: Okay. Any feedback from the dispensary in Southern California and customers, what they say or so forth? Or is it still too early?
Luke: So it was MedMen, and we picked four of their retail doors and we launched only with them for the month of June. And the feedback was tremendous. The product, even though it was only available in six packs, MedMen built its brand around attracting that premium kind of curious consumer and they gravitated toward its packaging in the fridge and its positioning as a cluster of drinks that I could enjoy socially.
And there's a very large percentage that go into stores like MedMen as an experience and walk out empty-handed, a cannabis tourist, if you will. And I think what we found was that a high percentage of the people that bought our product from MedMen were people who had no intention of actually buying anything, and that this was the most approachable product that existed in there. Something about a microdose edible, it was too much of a behavior change for them to switch from drinking something like they would alcohol to taking something out from under the table. And then flowers and flower-related skews and vapes were an entire league away from what they were comfortable with and they just wanted to be a voyeur. And so then we quickly expanded distribution to now, I think, we're in nearly 100 stores throughout the state of California. And in some stores like MedMen, the product just flies without any support, no marketing and no promotion.
And in other stores where you have a much higher concentration of people that are looking for flower, the product does not fly on its own, and we have to put somebody in the store and sample and do consumer education and often tell somebody, "Yeah, this isn't for you if you're doing 100-milligram plus products, but this might be something that you could share with your friend who is trying to drink less alcohol." And that way we're trying to be as much of a Trojan horse as possible. Get this in the hands of people who maybe haven't had a cannabis product they could share with somebody in their social circle because they found the other cannabis products to be too stigmatizing.
Mathew: Okay. And talk a little bit about your flavors. You have some interesting fun flavors. How did you arrive at those?
Luke: Yeah, this was one of the most fun parts of the entire process was formulating beverage. My dad has a long history in the food and beverage world, and when I worked at Bain and Company, I worked on a number of interesting brands that took an innovative approach to flavor profiles in the consumer packaged goods space. And through just relentless networking and trying to find, hey, for a certain type of ingredient, where's the best place to get it in the world? Like lemon juice, which turns out a small farm in Sicily or lavender, a European variety of the plant, or agave nectar for sweetness, get that from Mexico.
We did an exercise where we sourced the best quality ingredients that would make this product worthy of being on the shelf at whole foods and would be impressive to a national premium grocery retail category buyer. But then we also did some science. We looked at Google trends data, which is a completely underutilized analytical tool available to everybody where you can just see the search interest over a period of time by geography.
And we looked at how often people in the United States were searching for savory herbal ingredient profiles. And between 2004 and 2009, the search volume and growth was about half that as it is from 2009 to today. And so we look to capitalize on this growing demand for savory herbal products and just mix them with the guidance of a food scientist with a citrus fruit that pairs well and makes it so that the whole is greater than the sum of their parts.
We ended up launching...we've developed about 24 flavor profiles and loved them all, but we did some rigorous consumer testing and decided to launch with the three that were most approachable and least polarizing, so had the highest percentage of people that liked them. And those are lemon and lavender, grapefruit and Rosemary, and blood orange and cardamom.
Mathew: Okay. Very interesting. One problem many companies have making drinks is emulsion and creating a uniform dispersion of the active ingredients so we are getting an equal amount of, let's say, THC, CBD, or Rosemary in each sip. Can you talk about the kind of the challenges there and how you addressed them?
Luke: Yeah, the emulsion was the biggest issue in us getting to market. Lagunitas Hi-Fi Hops had been available in cans and switched to glass bottles, and our thinking was...and we had heard rumblings that a few other players in the industry were having trouble with maintaining a consistent potency in a non-glass container because the emulsion itself is highly reactive to the can liner.
Now it turns out, and I never thought I needed to know any of this, but there are 3 different can manufacturers and 12 different types of can liners across the 3 of them in the United States alone. And each one of those can liners has a different effect on pulling the agents that were used in the emulsion toward it or letting them remain equally dispersed in the liquid. And so what we did was we tested not only every can liner but also every type of emulsion on the market.
And it turns out that some emulsions had optimized for onset time. Like, let's get somebody to fill this within 5 minutes rather than 10. But in order to decrease the onset time, you need to use an agent that often has a very poor taste in it to accelerate that feeling you get from the THC. And we ended up using an emulsion that had a slightly slower onset time around 10 minutes, but that is probably indistinguishable to our target consumer who's just worried about getting too high. And because they use a different type of agent and made it optimized for tasteless and odorless and made it more reactive with the water than the can liners, we were able to prove out six-month minimum consistent potency in the cans.
And we loved the idea of being focused on the cans because it's just easier to carry a 6-pack of cans somewhere and you feel like each strength is something that you're consuming more casually, and we want to encourage people to drink 2 or 3 of them rather than savor each individual one. So it was a tough science challenge, but one that we felt was ultimately very important.
Mathew: Interesting. It's tough to kind of imagine how people react to it. Sometimes the market takes your product and likes it, but behaves differently with it than you'd like. So it's kind of like, for example, Red Bull and vodka. Like those two things aren't really supposed to go together, but the vodka or Red Bull manufacturers aren't complaining, but it's like, "Hey, this is not what we set out to do here." But then the market kind of takes its own way. So interesting. What question do you get asked by dispensary owners the most and how do you respond to those?
Luke: The number one question when I'm selling into a dispensary is, "Well, who's going to buy this?" And my answer, at this point, is the person who's gonna end up growing your business. It's the person who you may not even have access to today, but that who will become a cross-category cannabis purchaser. And it's, I think, especially at a time where the industry is in a lot of trouble and people aren't hitting their revenue targets and expectations for how many people were gonna be flower smokers were probably overblown. I think call for products like this that invite people into cannabis and then keep them there.
And my own experience as somebody who had never been to a dispensary before January of this year and now my own cannabis consumption patterns having evolved from designing this product that I would use as the first cannabis product I would ever pay money for, now I have four cannabis products that I pay money for. I have Mr. Moxey's microdose mints, I have some Kiva Camino gummies, and I have a Dosist sleep pen. And I wouldn't be surprised if over the next year I replace a greater share of my own alcohol consumption with something that's a little stronger or, you know, maybe a higher potency edible or maybe I get into pre-rolls at some point. I'm still a little nervous about the whole lungs thing, so maybe not, but by gradually stepping into the cannabis category and choosing experiences that don't make me feel overwhelmed. I have increased the amount of money I spend on cannabis significantly each month.
Mathew: You just gave a shot of terror to anybody from the alcohol industry listening. This is their worst-case scenario, listening to how you're replacing alcohol with cannabis products, but I love it now.
Luke: Or is it, though, because it's the same...the microdose THC drink is the same thing functionally as an alcoholic drink, which is like a microdose of alcohol. And I believe that the regulator...people who are making it so that cannabis is regulated as one entire bubble, I think, are doing it wrong. A microdose of THC, like you have to have 8,000 of my cans on your person in order to be over the personal use limit in California. And so I believe in a future where microdoses or THC actually get regulated more similarly to alcohol than the rest of cannabis and can get folded into the social spaces and purchasing channels that alcohol gets purchased from.
And ultimately the natural owners of cannabis beverage businesses, I think, are probably alcohol companies. They would want to acquire cannabis beverages and fold them into their distribution networks because that's the best way for them to offset the declines in beer sales as the world is falling a little bit out of love with irresponsible alcohol use.
Mathew: So we talked a little bit about microdosing and that seems to be the beginning of a new trend, especially in California because we can do other things while we microdose. Can you talk a little bit about where you think microdosing, in general, is going? Not just cannabis, but otherwise?
Luke: It's so interesting because microdosing is a trend within people that are accustomed to cannabis is something that you can do during the day and remain very functional. But for our target consumer, and for me personally, even though I have become used to my own product, I would never drink a can in the middle of the workday if I had something important to do within the next six hours. It does impact my ability to thin. And, you know, I think if I were in more of a routine type of job that I didn't have to go through some complex mental exercise every few hours to try and solve a problem, then maybe I could microdose throughout the day. Or if I were a purely creative person and I was drawing something or writing a script or conceptualizing of an idea, then a microdose would be additive to my creative process.
But for the majority of people that are going to explore cannabis, microdosing actually would be a lot like drinking. And I don't think people, even though it might make the creative process a little more fun or it may be possible to do for people during their work days, I don't think people in mass will drink alcohol during the day. And so I think that there's limits to this microdosing trend as we see it today as a way for people to functionally get through their daily experiences. And I hope that the more prevalent use case of microdosing becomes a social one as a mild intoxicant.
Mathew: Okay. And where are you in the capital-raising process?
Luke: So we have raised two rounds. We did a pre-seed led by Navy capital in December of 2019 and then we just announced our seed round which was a $5 million raise and was interestingly led by one New York City VC that focuses on really brilliant consumer packaged goods brands that we honestly pinch ourselves every day to be associated with, and that's called Imaginary Ventures. They were founded by Nick Brown and Natalie Massenet and have companies like Daily Harvest, and Glossier, and Dirty Lemon in their portfolio.
And then we have a cannabis co-lead in that round called jam 10 partners and that has helped us think about this from a one foot in and one foot out perspective. So how do we grow strategically within the cannabis channel given the way regulations are and how many points of sale exist today? And who should we partner with in the cannabis ecosystem to grow our presence throughout the country, but also how do we think about our business like a mainstream consumer brand and how do we market to people who have this real relatable pain point of, "I want to drink less alcohol but I don't want to be sober"? And so that has been a really dynamic duo for us and we think will help us catapult into the next phase of our growth.
Mathew: If for accredited investors that are listening, are you still looking for more accredited investors or not right now?
Luke: Not right now. Our philosophy is let's raise enough money that we can survive for at least 12 months because raising money is a full-time job and building a category and a tightening channel is like 10 full-time jobs. And so we really feel like we have to focus so much on the day to day and how to get this product into more paying consumers hands that we don't want to think about raising money until at least the end of 2020 but, you know, certainly will be added again then.
Mathew: Luke, I want to move on to some personal development questions to help listeners get a better sense of who you are as a person. With that, is there a book that's had a big impact on your life or way of thinking that you'd like to share?
Luke: Interesting. I have been obsessed with the book 1984 and have read it three times now and I am delighted by it each time. And it's a fiction book by George Orwell and it paints this dystopian future. And I think what it helps me do is continually think outside the box about a future world that does not exist yet and as a different set of problems than today's world. Now, obviously, creating a cannabis beverage and imagining that it can be on tap right next to a beer or a hard kombucha at a bar is not such a farfetched reality, but I often have to train myself to imagine things that don't exist in order to create them and wheel them into the world.
So, you know, "1984" is a pretty dark book and it's not that I'm trying to take a page out of it, but I find it to be just a beautiful piece of writing and really inspiring.
Mathew: Although it's a work of fiction, do you see elements of that in our modern society that give you pause at all?
Luke: Totally. But, you know, I assume often that privacy is something that we don't have and I live my life as publicly as I feel comfortable. And if I do something, I assume that everybody is watching and listening because who knows? They might be, but it makes it very easy to get through the day to day and the week to week knowing that I'm not hiding anything from anybody.
Mathew: Right. What is the most interesting thing going on in your field besides what you're doing?
Luke: I think that fifth frontier I called channel availability would be probably the hardest thing to crack in order for microdose THC drink to become mainstream. And so I think that the people who are creating innovative retail spaces and delivery platforms that do not smell or look like cannabis traditionally are the ones that are doing the work that will carry us into this next phase of growth for the industry.
And so I think I was really inspired by what MedMen did to create an Apple Store-esque user experience for somebody who frankly needs that consumer education to get welcomed into the category. And I think we'll need a whole new generation of businesses like that, that can figure out how to crack that can of curious target consumer without burning so much cash on marketing and being at risk of folding.
And I think that in delivery that's much more scalable. Eaze has done amazing things to give access to so many people to cannabis on-demand, but there's still something about easiest target consumer that is focused on high THC, low dollars, that prevents us from really saturating it as a channel. So, my money is on people who are building innovative and non-cannabis forward points of sale, whether digitally for delivery or a physical for retail.
Mathew: Okay. Here's a Peter Teal question for you. What very important truth to very few people agree with you on?
Luke: Wow. Well, you know, I guess that's a general question but I'm gonna give them a cannabis answer. The truth that people disagree with me on most vehemently is that the world is ready for a microdose ready to drink THC beverage and that it can be consumed similarly to alcohol. It's the fundamental, you know, thesis for our company's existence, but we experience so much pushback in the market in just casual conversations with friends.
And I used to be a naysayer, and when I was that person who vehemently disagreed with Jake about the need for a product like this and like why solve one substance issue like alcohol abuse with another substance? Like doesn't that feel silly? But, you know, after doing this whole exercise of quitting my job and starting the company and seeing our growing team of 12 people now also go through this exercise of sacrificing careers to build this. And in the hardest of days, we all look at each other and just hold the can in our hands and say it's a really good product. People just have to get used to it. And so as many naysayers as there are out there and as many people who vehemently disagree with what we're doing, we know it's just a matter of time before it inflex. And so in the meantime, just getting as many cans in hands as possible.
Mathew: Luke, as we close, how can listeners find your beverages and follow you online?
Luke: Our primary way of communicating to our consumer base is on Instagram, and it's @drinkcann. It's a highly irreverent and silly social media page. We say as a company that we want Cann to be your friend, not a brand that's pushing its product on you. So hopefully, those who follow it find it an entertaining and educational place to learn about what we're doing.
But we also have a great website that we're very proud of that tackles that consumer education more directly. That's at www.drinkcann.com. And we answer every direct message and every email to our company. And so if you are interested in learning more or just having a dialogue, reach out, somebody will reply.
Mathew: Luke, thanks so much for coming on the show. We really appreciate it. Please come back on and let us know how this all progresses, and good luck to you.
Luke: Thank you so much. Anytime.
Matthew: If you enjoyed the show today, please consider leaving us a review on iTunes, Stitcher, or whatever app you might be using to listen to the show. Every five-star review helps us to bring the best guests to you. Learn more at cannainsider.com/itunes. What are the five disruptive trends that will impact the cannabis industry in the next five years? Find out with your free report at cannainsider.com/trends. Have a suggestion for an awesome guest on CannaInsider? Simply send us an email at email@example.com. We'd love to hear from you.
Please do not take any information from CannaInsider or its guests as medical advice. Contact your licensed physician before taking cannabis or using it for medical treatments. Promotional consideration may be provided by select guests, advertisers, or companies featured in CannaInsider. Lastly, the host or guests on CannaInsider may or may not invest in the companies or entrepreneurs profiled on the show. Please consult your licensed financial advisor before making any investment decisions.
Final disclosure to see if you're still paying attention. This little whistle jingle you're listening to will get stuck in your head for the rest of the day. Thanks for listening and look for another CannaInsider episode soon. Take care. Bye-bye.
To know where the cannabis market is going, we need to examine where it’s been and where it is right now.
Here to help us is Cy Scott of Headset, a data-driven tech company that provides business intelligence for the cannabis industry.
Learn more at https://www.headset.io
- Cy’s background in cannabis and how he came to start Headset
- An inside look at Headset and its mission to help cannabis companies stay ahead of the curve
- Surprising trends Cy has observed in recent dispensary sales data
- How data can help inform an entrepreneur looking to bring a new cannabis product to market
- Valuable takeaways from purchasing behavior data that have proven to maximize visitor engagement and drive sales
- How different products sell better on different days of the week as well as morning versus evening
- How purchasing patterns differ between generations
- What to expect in cannabis over the next few years based on Headset’s real-time data and market intelligence
Matthew: Hi, I'm Matthew Kind. Every Monday, look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com. That's cannainsider.com. Now here's your program. In order to know where the cannabis market is going, we need to examine where it's been and where it is right now. Here to help us is Cy Scott, co-founder of Headset. Cy, welcome to "CannaInsider."
Cy: Hey, Matt. Great to be here.
Matthew: Give us a sense of geography, where are you in the world today?
Cy: I am in Seattle, the Great Pacific Northwest here.
Matthew: Okay. And you've been on the show a few times before in the past. I think it's been maybe a year or so. And in those interviews, we covered your past co-founding Leafly and now you and your co-founder sold that company and you're involved in Headset, for the last, I don't know how years. Just give us a quick snapshot of what Headset is for new listeners.
Cy: Sure, it's been about a decade in cannabis for myself, as you mentioned starting back with Leafly in 2010 when we launched that service, having sold it to Privateer Holdings and moving on to Headset, a data analytics provider for the cannabis industry. So really at Headset you know, our mission is to enable the success of what we consider the greatest drug policy shift in our lifetime, which is cannabis legalization, which is, you know, something that you cover quite a bit on your podcast. And we do that by providing the analytics that organizations and cannabis operators need to make those informed decisions. The way we look at it is that if the operators are able to make better decisions based on data, then in turn, they'll be more successful, and if they're more successful then the cannabis industry overall will be more successful. And we're really motivated to see this great experiment work.
Matthew: Yeah, that's valuable information, and what markets are you providing the data for right now?
Cy: We're actually...we have a footprint in about 25 markets. So a variety of adult-use and medical. We're providing what we consider a full market measurement through a service we call Headset Insights in five markets at the moment, and we're looking to be expanding throughout the year here. So those five markets where you can see a full read, which is basically market intelligence data all the way from the category down to a specific product in the market. We provide that in California and Colorado, Nevada, Washington, and Canada, actually, as well, particularly Alberta at the moment with a few more provinces coming online this quarter.
Matthew: Okay. And do you remember the last thing that really just kind of slapped you in the face and surprised you in the data that you weren't expecting?
Cy: Sure, there's always something, we're always looking at new and interesting ways of slicing the data, looking for interesting patterns. I think most recently, we did a report on weekly sales. We really looked at were there any patterns week-over-week, were there any weeks that perform better than others, you know, outside of things like holidays, just kind of in a calendar week? And what we noticed is that the last week of the month actually has a pretty significant spike in sales, particularly in the more mature markets of like Washington and Colorado, the markets that have been online for some time at this point. Markets like California and Canada with our kind of high growth rates don't really show this pattern quite yet, but we expect to see it soon. But what's interesting is the last week of the month that sometimes bleeds into the first of the next month, we see a good size increase in not only transactions per day, but overall sales or revenue per day and units per day sold. So anywhere from, you know, 5% to 6.5% of growth on that last week.
And then the previous weeks of the month, actually sometimes you see a little negative growth. So if you're a retailer or dispensary and you're looking at your week-over-week sales in the beginning of the month or middle of the month and they're down, I wouldn't be too concerned because usually, it looks like it kind of comes up at the tail end of the month, which is just pretty unique. It could have to do with, you know, payroll cycles, people coming out at the end of the month, a bit better on budget looking to spend a little bit more money now that, you know, they've got all their bills accounted for. And I think it's a pattern that you see in traditional industries as well. So it's quite fascinating to see some of those same patterns emerging in this new cannabis market.
Matthew: I know in the past, we had talked about how when a new market comes online, it's usually strong with flower and then over time it moves more into concentrates and edibles and so forth. Is that trend continuing? Or are we seeing markets truly become kind of independent of each other and not, you know, converging around common themes?
Cy: You know, there's definitely convergence. I think you see that as markets mature, to your point, you're starting to see patterns where as far as market share by category, so you know, flower sales versus pre-roll versus edibles and beverages and so on, kind of start to look pretty similar, where you have, you know, flower in the mid 40% of all sales, things like edibles anywhere from 11% to 14%. It's kind of how it shakes out across most markets. Now, with the newer markets like California, you kind of see a different trend. And I think we'll probably get there and you'll start to see it kind of blend together across the different states. But in California, actually, flower sales are a bit less about 40% of sales.
And really the difference is coming from more vapor pen sales. So vapor pens in California, actually about 26% of category share, and that's in the last 90 days. And you compare that to a market like Colorado, which is about 16% or Washington about 13%. So in California, vapor pens do seem to resonate a bit better than some of the more mature markets and that could have to do with it being a new market, more vapor pen operators, people coming to the legal markets for the first time jumping in and, you know, getting exposure to vapor pens where, in a market like Washington, when it launched, there really weren't that many vapor pens in the beginning.
So kind of interesting to see some divergence there. But in general, it's converging. Canada is kind of a unique entity, it's got a bit of a different structure. You know, up until this year, it was exclusively flower, you know, capsules, some tinctures or oils, and pre-rolls. And so you see some different patterns there where flower is actually about 66% of sales. But we expect that to start to look more like the U.S. as these new formats come online and you start seeing them in more stores, which is just now starting to happen.
Matthew: Cy, where are we in this vape pen story though, because we had some deaths last year and some scary stuff going on. And it seems like we've kind of reached, you know, peak vape pen scare. Do you think that's true or it's still some pain left to come?
Cy: Yeah, it's a great question. So yeah, the Vapegate, as it's been dubbed, was pretty tough for the industry last year, obviously, a lot of news headlines and some unfortunate deaths. It sounds like it was mostly black market or exclusively black market products, so unregulated products. But it certainly did have an impact on consumer purchase behavior in legal markets and regulated markets, so both medical and adult use. What we saw was quite a bit of decline. So when you aggregate, you know, the vapor pen market share across those key U.S. markets that I mentioned before, it was about you know, 24%, 25% of sales going to vapor pen. And then after, you know, I guess, it was mid-August to mid-September, that's kind of when the news cycle was at its peak, you saw a pretty significant drop in market share, basically down to about 18% through the end of the year.
Now, the good news is that it has flattened out and it's kind of climbing back, I would say. So we're starting to see people going back to the vapor pen market. I think a lot of organizations have gotten in front of, you know, the crisis and talked about how they're providing tested products, regulated products that don't have any of the additives that the CDC was kind of pointing to as some of the reasoning for the illnesses. So you are starting to see some market share clawback. But during this period, what was pretty interesting was other categories, particularly edibles and pre-rolls, gained quite a bit of market share, edibles going from about 10% to close to 13%. So you know, consumers were still purchasing cannabis. They were just looking at alternatives of vapor pens, but I think that people are going back to vapor pens. In 2020, you'll start to see it hit those same market share numbers as we had before the crisis happened.
Matthew: Cy, if you were to use your data, all your Headset knowledge and insights, and you were forced to create a product that would do well, that's your goal, how would you use your data to come up with a product that has fit for the market now? And is there anything you do to add some special sauce to try to go where the puck's heading?
Cy: Yeah, certainly. So with our market intelligence services, a lot of our customers use the data to really understand the competitive landscape to really understand their brand ranking in market and find opportunity, which is kind of to your question there. And so to find opportunity, a lot of our customers use a variety of different dashboards that we provide, different analytics, but it really comes down to, you know, identifying potentially white space in the market. So those gaps where there might not be a product that's produced. You know, one interesting thing to look at is cross-market. So if you are an operator, say in California, you can look to markets like Nevada or to Colorado and see, are there products that sell really well there that might not be available in markets like California, the market that you're in, for example?
And so really identifying that white space where, you know, a product that resonates in another market, if you bring it to your market, it may do well, you know, consumers are pretty similar across markets. I think it just has to do with availability and the types of brands and the products that would be available in a particular market. And that has a lot to do with the legislation and fragmentation that we see in a cannabis industry where an operator in Nevada might not necessarily be an operator in California, for example, or Canada.
So you can look to other markets, look for that white space to really find opportunity. I think looking at the competitive landscape is another option as well. So you can look at brands that are performing well. Look at their product mix, see, you know, what's driving the majority of their sales. Look to things like pricing and margins to use in forecasting, you know, as you decide to develop a certain product, you're probably gonna wanna forecast sales. So you can use what's selling in your market comparatively from our data set to really understand and make those unit projections, or raw sales projections. And then on the secret sauce of the planning, we do some really interesting things around basket analytics or behavioral data so we can help inform our customers, you know, what types of products are purchased together? What kind of brands are purchased together? What kind of loyalty do customers have? And who are those customers through some of the demographic data. So, you know, what generation are they from, you know, what age resonates with maybe a brand that you're modeling your products on.
And so using all that information to kind of forecast products is critical. And we see a lot of people doing it in their own markets, but also like new markets that are emerging markets like Massachusetts, for example, are looking to markets in the West Coast that may have been around to kind of see where the market may go for them, you know, it won't always be exactly the same, kind of like what we're seeing in California with some higher vape pen sales, but I think you can use it as a good proxy. You know, it's a way to kind of take a good guess at the way it might shake out as your market matures. So there's lots of interesting data in there to explore. And I really think it does come down to making an informed decision around the product that you will be producing because shelf space is getting harder to come by these days, retailers are getting pickier, the markets maturing. So really coming with analytics first, I think, can give you a great competitive advantage.
Matthew: So you already spoke before about, kind of, how the different weeks in a month make a difference in sales, the last week being, kind of, the peak. What about the individual days? Like is there certain days if you are a dispensary owner, you'd say, "Hey, I would really target this today or send a text message promotion about pre-rolls on this day?" Is there anything that you see as, kind of, surgically tactical that you would recommend?
Cy: Yeah, certainly. So there are very interesting patterns that come from day of the week. Really, Fridays are the biggest driver of sales when we look at, you know, how Friday indexes over other days of the week, it's pretty incredible. You know, about 2% of all sales in the week go to a particular hour on Friday. So kind of between the hours of noon and 8 p.m, you know, you'd see about 15%, 16% of all sales for the week happening right then. So Friday's a great day just for sales overall. Saturday as well, as you can imagine, not as strong as Friday, but still a high amount of sales. The other days, there are sales, but not at the same level that you'd see on a Friday.
You know, I think that just points to kind of the recreational nature and adult-use markets, you know, people going on Friday and maybe purchasing products for the weekend and so on. But I will say there are patterns for earlier in the week, or even earlier in the day frankly, and a lot of that comes from the wellness-based products, products like topicals, capsules, tinctures, and sublinguals. We see sales patterns earlier in the week. So you know, Monday, Tuesday, Wednesday, more sales happening there and actually earlier in the day too. So when stores open at 10 a.m., 11 a.m., you're starting to see more of those types of products sold. So I think that, kind of, the wellness products going in the morning and then recreational type products and more in the afternoons, weekends, and so on.
So kind of using that information, a lot of brands will do in-store demos, you know, they'll have people there talking about their products. So if you're producing a wellness product, you're probably better off earlier in the day, you know, having one of those vendor days at a cannabis retailer. But if you're producing something that might be more recreationally consumed, you know, probably Friday afternoon, Friday evenings are your best bet.
Matthew: Oh, great. Now, your Headset data gives a lot of insights on what different generations like to purchase. And I want to just go into what those generations are for people who don't...I mean, everybody knows that the millennials and baby boomers, but there's the silent generation that was born between 1925 and 1945. The baby boomers post-World War II, which is 1946 to 1964, that's when they were born. Generation X born between 1965 and 1979. Millennials born between 1980 and 1994. And then Gen Z. Some people call them the homelanders, but Gen Z, 1995 through 2012 is when they were born. What kind of insights is there about generations because I mean, we all like to think we're so unique and everything but, you know, there is a lot to be said for where you are in your lifecycle as a human and what you, as part of a cohort, believe. Like, for example, Harley Davidson knows that most of their motorcycles are purchased by men between ages 45 and 48. You know, that's when the midlife crisis sets in for Harley Davidson. So there are these things we can draw from it. What do you have to say about generations and how to think about it with your data?
Cy: Yeah, great question. So, you know, all of our data is sourced from our retail and dispensary partners. And so we are able to see some interesting analytics around demographic data. We don't take any personally identifiable information, but we can get a sense of age and a good proxy for gender based on first name. And so for age and kind of to speak to those generations, you know, what I think historically was a very millennial-driven market, we're seeing some pretty incredible gains in the Generation Z demographic. You know, one interesting thing about Generation Z is that, you know, it's a generation that's continuing to age into cannabis. And so every day, new consumers are turning 21 in the U.S, you know, 19 in Canada that can go and then now purchase cannabis. So it continues to expand. So that's quite fascinating.
Also, this generation has grown up with a legal market. You know, when you think about cannabis legalization, and when that happened many years ago at this point, this generation, these 21-year-olds, you know, were in their teens, early teens. And so they've just been around cannabis has been normalized and legal potentially without the stigma for much longer than maybe baby boomers and so on. So, good adoption there, and actually, it's quite fascinating, we saw in 2019 Generation Z took about 3.5% of all sales in the market. And then at the end of the year, it was about 5.5%
Cy: Yeah, so two percentage point increase there and we expect that to keep happening. But also at the same time, we're seeing more older generations coming into the market. So the baby boomers, you know, the silent generation, which are the elderly, kind of coming into the market more, being more represented than they were before. And so while the industry continues to grow, and you know, Millennials used to take a very significant percentage of the market, now it's about 50% of the market. So their market share is dwindling, but at the same time, more people are purchasing cannabis, so the pool is getting bigger. And so it's quite an interesting pattern, you know, younger audience coming to the market and an older audience coming to the market where before it was very millennial-driven. I think it just had to do with normalization. And now that it's been around for so long, you have, you know, older people coming looking for those wellness products or, you know, coming around to this idea that cannabis isn't this taboo product anymore. As far as purchase patterns and behaviors, there are some differences. You know, one interesting thing is baby boomers, as far as percentage of sales that go to flowers, is actually the highest, could be that that's what they're used, to just having access to back in the day it was just flowers...
Matthew: The flower generation, Woodstock.
Cy: Yeah, there you go, exactly. And then, you know, most of the vapor pen sales are pretty equal across Generation Z, millennials, and Generation X, about 20% of sales, vapor pens, across those generations, and it shrinks at the baby boomer and silent generation. So much less than the vapor pen market. Pre-roll flower for the Generation Z and millennials. Pre-roll is about 12%, so the highest for those generations so they're really gravitating towards pre-rolls. I think a lot of that has to do with the low cost of pre-rolls, you can get individual, you know, single-gram pre-rolls for pretty cheap in a lot of the markets that we track as you're seeing a lot of unit sales going there. I think it's just the amount of wallet or purse they have to spend is a bit less than, you know, a baby boomer potentially. And then concentrates, concentrates kind of over-index on Generation Z, about 16% of sales go to concentrates, that's the waxes and the shatters, and compare that to something like the baby boomers where it's like 7%. So I think the younger generation is gravitating towards higher potency products, which concentrates tend to be.
So there are some, you know, unique sales patterns. The silent generation is definitely over-index on the tinctures and the capsules where you don't really see that going to Generation Z. Basically no market share in those categories for the younger generation, but it's tinctures, 14% of all sales to the silent generations at 74 years of age and older. So you can definitely see how that's more of a wellness product for the elderly, potentially, and driving sales for those categories. So pretty interesting if you're producing products to kind of understand, you know, who you're targeting, where the majority of your sales are going, and how that breakdown looks.
Matthew: Yeah. I mean, certainly if I was targeting the silent generation, I would be thinking about arthritis tinctures and topicals, knee replacement subjects, things like that. Baby boomers, you know, what kind of music was playing when they were in their peak teen years? Was it something for the Beach Boys or something like that kind of target, you know, perfectly exact match to what the imagery is they like, so this is super important to me. I mean, I read the book "The Fourth Turning" about different generations. It was written in the '90s by these two demographers from Yale, and there really is just so much you can do just by focusing on generation. So I'm really glad that you include that information. As we look back at 2019, what are kind of the 1, 2, or 3 bullet points you kind of think will stick out in people's minds in terms of what the Headset data told you? Like, if you were to sum it up in a nutshell, what was 2019?
Cy: 2019 I think was, well, certainly, the vapor pen issue.
Cy: Yeah, Vapegate was a big top-of-mind event that it did take quite a bit of, I'd say, Q3 attention this year. But I think there's some good stories on growth. You know, you look at a market like California, which is still growing, still maturing, and it's doing pretty well. You know, a lot of people would argue maybe it could do a lot better, and that's certainly true. But when you look at growth rates of a market like California, it is significantly higher than what we're seeing in some of the mature markets. So when we look at things like average daily sales comparing January of 2019 to December of 2019, California saw an increase of about 66% from January to December. And you can contrast that with a market like Nevada, which saw about 15% or Washington at 14%. So good growth coming out of markets like California, and the same story can be said for a market like Canada. You know, it seems to be kind of a pattern where, you know, markets will open up a bit of a rocky start, licenses getting issued, potential shortages of products. And so it takes some time for it to kind of get that momentum. And we're definitely seeing that happening in a market like Canada.
So Alberta is a good example. You know, kind of started with a handful of licenses, and now has hundreds of licenses, and it's a relatively small province by population but they've got great coverage. We kind of look at it like an S curve where, you know, it starts out kind of slow and then it ramps and your starting to see a lot of stores coming online and then it kind of tapers off as we kind of hit market saturation. And so California is very much in that ramp of the S curve at this point. So still a lot of growth. I know a lot of people wish it would grow a bit faster. You know, we all do, but it's definitely, getting there. So I think that's a good story for the year as well. I think we'll continue to see that in 2020. You know, with some new markets like Michigan and Illinois, you're gonna see that same pattern emerging and still some great growth coming out of Canada and California at the same time.
Matthew: Okay. Anything that you think is like a black swan in 2020 that you have your eye on or nothing right now?
Cy: You know, what would be interesting to see is in Canada the new format adoption, the beverages, the edibles coming to market. We're just now starting to see them pop up in our retail data. It's still pretty early days and we're at the tail end of January here. Everyone, again, would like that to move a bit faster as well, but we expect it to. I think that Canada is unique, you know, in the sense that there's been a lot of investment from the beverage industry, so more traditional, whether it's beverage alcohol or just traditional beverage coming in and making investments in the space. And so that could prove to be a unique a dynamic where, you know, a beverage category in any given kind of U.S. market that we track is 1% to 2% of sales, and so it's a pretty small category.
Now, in Canada, that could be different. It could be different because of the investment that's being made. The types of products coming to market, you know, there's relatively small amount of products that are available in the U.S. in any given market for beverage if you compare that to like flower production, or pre-roll, or any other category really. So that could be a black swan, it could be a new model, or it could end up being very similar to the U.S. where we see 2% of market share going to beverages. The jury's still out. But I think there are some unique dynamics in Canada that could potentially afford higher market share than we see in the U.S. So it'll be interesting to watch and see how that looks by the time we get to the end of this year.
Matthew: Cy, what is the ideal client that Headset can help?
Cy: Yeah, first and foremost, I'd say cannabis operators, and again, goes back to our mission, really help the operators make these informed decisions. It's quite a costly investment to produce a new product, to produce a new brand, and to get that on the retail shelf. So you wanna be armed with most up to date, most accurate information out there. And so if you're a cannabis operator, I think that we can be very helpful for you from an analytics perspective on those that are looking at the market as well. So maybe organizations that are thinking about jumping in, you know, can use our services to really better forecast what it might look like, what the landscape looks like. So that kind of audience, so maybe not an operator yet, but looking at maybe becoming an operator, or maybe investing, ancillary organizations, groups like investors that are making bets on the market, on brands in the market can leverage our data to really better understand, you know, how organizations are performing.
Like in Canada, for example, with our Canadian data, a lot of these Canadian companies that we track are publicly traded. You know, investors are making bets on these organizations and really see how these large LPs in Canada are selling products and what products are resonating with consumers and how they're trending. I think investors find a lot of value in that. So a variety of clients that can use Headset from the operators all the way to ancillary people outside the industry that just want data and analytics on the space.
Matthew: Yeah, and can you give me a sense of kind of the budget that's needed to access the Headset market data and intelligence?
Cy: Sure, you know, we have solutions for pretty much all budgets. You know, we price it in a variety of ways. For our market intelligence service, you can get a single category in a single market for a relatively reasonable rate, I would say. We have services that are priced less than $1,000 a month all the way to much higher pricing for organizations that might be multi-state or multinational that need full market reads across all the markets that we track. Contract value can get pretty high for those organizations, but they need the data across all that space. So really, you know, all shapes and sizes, we try and find solutions. The cannabis industry, we target it like a specific vertical and within that vertical, operators of all shapes and sizes from the small manufacturer, small grower all the way to the multi-state operators. So we need to make sure that we can provide services that, you know, fit budgets for all sizes.
Matthew: Okay, so if I'm a business owner listening right now, they're thinking, okay, I invest in Headset and I'm getting this market data, am I gonna need like some sort of data scientist or someone to help me interpret this or is it digestible? How does that work?
Cy: Yeah, we try and make it as digestible, as prescriptive as possible. You know, we understand that people's time is limited and to really dig in and understand what the data is trying to tell you could be challenging. So we try and make it pretty straightforward for organizations. So you don't necessarily have to be a data scientist, you know, you can get most of the information that you need with our dashboards, the way they're just kind of out of the box developed. Now, if you want something more specific, or like a deeper dive and you're not capable, potentially, of doing that and you don't have a data scientist on your team, we do provide services to be able to help with that. So some of the larger organizations, you know, like to have that extra support kind of just be told what trends are out there, where the opportunities are. So we do enable support for that. But not all organizations use that. And we try and make it as self-service as possible. And we're always trying to improve that prescriptive analytics so that you can just kind of plug in some metrics and get exactly what you need out on the other side.
Matthew: And the data is pretty fresh. How close to real-time is it, would you say?
Cy: Yeah, we publish data, new data, every day for the U.S. markets that we track, you know, timeliness of the data really does matter. New products come to market every day and new brands being launched constantly. Obviously, new legislation happening, you know, not to keep picking on the vapor pen crisis, but in the State of Washington here, where we're at in Seattle, we saw flavored vapor pens being explicitly banned. So you couldn't have, you know, non-terpene-based flavors or original terpenes, so anything that was candy-flavored and so on, and that impacted sales quite a bit. And so if you are looking at data that might be four to six weeks old, you could be at a significant disadvantage making investments in something that changes quickly. So looking at how sales are going in a timely manner matters. It doesn't mean you have to look at it every day, that probably would be too much to log in every day to see. But if you wanna look at the beginning of the month, we're almost in February and you wanna see how January closed out, you can do that, you know, February 1st. So real-time is important to us.
Now in markets like Canada and Alberta, we have a bit of a time delay on our read at the moment. And a lot of that has to do with that S curve I was talking about before where it's a bit harder to project when they're issuing new licenses. It's hard to know exactly how many stores are opening, how well those are doing to kind of project out, but as it starts to stabilize, we're able to provide a tighter and tighter read. So you'll see Canada kind of going real-time in just a few short weeks here now that we kind of have a better sense of how it's all shaking out. So we focus on real-time. We do start depending on how fast-growing the market is with the time delay but eventually, we get all markets to our real-time read.
Matthew: And how's the partnership with Nielsen going? Can you talk about that a little bit?
Cy: Yeah, certainly. So our Nielsen partnership is going great. You know, when we started Headset and we wanted to do market intelligence, we really looked at organizations like Nielsen as models and Nielsen's been doing it for close to 100 years at this point, you know, really one of the leaders in market intelligence. You know, they're very interested in the cannabis space, a lot of the consumer packaged goods industry was looking at the cannabis space kind of trying to understand not only the opportunity but risk to their business. Nielsen needed a way to be able to answer those questions. So they looked for market providers, market data providers in the cannabis industry and really liked what we're doing at Headset. Now we have a strategic alliance with them. We do a number of things, both in Canada and the U.S. Most recently, we launched a pet CBD report.
So one interesting thing with working with Nielsen is we're able to get a sense of the unregulated market, so CBD products that are sold outside of dispensaries and retailers, licensed retailers, the stuff that might be sold at Walgreens or other big-box retailers. So Nielsen does a great job of that measurement, that retail measurement. And we're able to bring that together with our retail measurement coming from regulated markets. So you can get a holistic view of the space, which is pretty important. So if you're making, you know, a topical or some sort of pet food product and you wanna know what's going on in the market, it's not ideal to just look at one side or the other, even if you're planning on just entering the unregulated market or maybe you're planning on entering the regulated market.
You really need to understand both sides because it could impact sales, could impact forecast, there could be cannibalization. In a market like California, say, if I wanted to purchase a topical, I could go to an adult-use location regulated store or I could go to Walgreens. The products are slightly different. But I can make that choice given that I'm older than 21. And so looking at the market holistically is critical, and Nielsen really enables us to do that, you know, tracking product sales and the unregulated market and those channels, the Walgreens of the world, is just something that we're not particularly interested in pursuing. We feel like Nielsen does a great job of that already. And so coming together is pretty powerful for our customers.
The pet CBD report is our latest, again, looking at both sides, kind of understanding brands on both the regulated and unregulated channel. So that's pretty cool. You'll see more services like that more integrated CBD product sets. We're also looking at, you know, outside of CBD, more just CPG trends. So for example, understanding beverage categories, so carbonated or even flavors and using that data that's from the CPG world, so the consumer packaged goods world, you know, what kind of drinks do consumers buy just non-cannabis, non-CBD, and taking that information and producing cannabis-based products that might model on that. So pretty cool stuff that we're able to do with them and kind of able to provide a nice holistic view of the market.
Matthew: So let's move on to some personal development questions. What do you like to do when you're not working?
Cy: Yeah, not much time for that these days, but I do try and get some downtime on the weekend. I am of the belief that you kind of need some downtime just to prevent burnout. You know, I'm a perpetual learner, and so I'm always trying to learn something new. Something I enjoy doing often are the massive open online courses. Things like Coursera, I enjoy taking classes there, they're pretty, you know, straightforward. Don't take too much of a time investment, but you get a bit more out of a minefield than just maybe reading a book on a particular subject. So I try and do one of those at any given time. You know, I'm kind of in between them at the moment.
One that I'd recommend for any listeners that might be interested in this type of thing is one I just finished, which was Model Thinking from the University of Michigan, Professor Scott Page, he also wrote a book called "The Model Thinker." It's pretty fascinating stuff, just kind of how we can better think in models. You know, there's a lot of material out there if you do some research on how model thinking can really empower decision making. So I found that pretty fascinating.
So always learning. You know, I come...originally computer science major, I started my career as a programmer, moved into product and moved into startups. And so I still enjoy programming from time to time. So I kind of try and do that as an enjoyable exercise. And I'm not programming in the day job anymore for some years at this point. So that's something that I like to keep doing, it just kind of keeps my mind sharp. And those are all kind of, you know, boring learning programming things.
So on the recreation side, just in general, I'm trying to play more guitar these days. I used to play quite a bit in my teens and 20s and kind of fell off as I got busy with the career stuff and family stuff, but kind of going back to that. I find it pretty rewarding to just kind of get better at that and going back to that. So that's been a new thing for me just trying to find an outlet, but it's kind of nice to go back to it. Haven't bought a Harley Davidson yet, but I'm not 45.
Matthew: It's coming then.
Cy: I'm on my way.
Matthew: Well, it's interesting that as a business, you know, startup founder, you can always do one more thing. It's like I can squeeze one more thing if you finish everything on your to-do list. So there's that temptation of just allowing the scope to creep, to creep, to creep because you want your business to do well. You want everybody, the investors, your employees, your other co-founders, you want everybody to do well, and so you can always do one more thing but then that's like throwing one more log in the fire that's gonna burn you out. So it's a delicate balance and I feel for you there.
Cy: Yeah, it always is. Time is the one resource that we never have enough of.
Matthew: What's the last product you purchased, cannabis or otherwise, that you can't see yourself living without?
Cy: Yeah, let's see, most recently, I guess one of the more recent product purchases is I just picked up an iPad Pro just a few weeks back now and it's my first iPad since not the original but the first retina iPad where it was like the higher resolution screens. But my first iPad, I guess probably in like, seven, eight years. Kind of fell off, wasn't using it much, the old one obviously, getting pretty old. So I got this new one and I find it pretty great. And actually, I think it's like the 10th anniversary of the iPad, which is crazy to think it's been 10 years. But the Pro, I do enjoy, you know, it's almost a laptop. I've tried to use it for work items like I can do email pretty easily on it, document editing and things like that. So it's got some productivity aspects but it's also just kind of a great device for other services like the Coursera stuff or reading on my Kindle or even guitar like I have some apps that help me just stay in practice there. So I kind of find it as this very flexible device.
So I can't live without it, you know, I'm getting there. I probably could live without it but it's trying to become more and more of my day-to-day. You know, the phone itself, my iPhone is certainly the product I can't live without. But I think the iPad is a bit more flexible, bigger screen, has more productivity, easier to do things on. So that's kind of my latest and greatest. I am enjoying it. iPad OS is a bit difficult. I haven't had a chance to use it, but the multitasking and stuff's bit cryptic. I'm still trying to get there. But so far, so good, and I'm a fan.
Matthew: Interesting. I know Apple's working on glasses is their next big thing. I think they're released in 2021 or 2022. And so we can even move from that iPad experience to something even more intimate right there with our eye movements and it's gonna be interesting to see how that happens because it's hard to be more addicted than all of us are to our smartphones. But I feel like the glasses is really gonna be like a merging of man and technology in some way.
Cy: Yeah, you know, it's interesting if you're an Apple person, but they have the screen time where it'll highlight on a weekly basis, you know, the screen time used. You know, you're in front of your screen an average two hours a day, or whatever it may be. And so with things like glasses, that's going to be perpetual screen-time potentially, and I know there's a trend, you know, people are trying to pull back. And I think it's great that it kind of highlights the screen time so you can kind of see it right in front of you. And kind of know, "Okay, well maybe I need to pull myself away from the screen," which is hard to do sometimes given that there's so much great material on a thing like an iPad. But it will be interesting to see the glasses and if that's gonna happen. I know that AR stuff, Apple's done quite a bit. I haven't used as much of it on the phone. But they've made a lot of investments and the augmented reality, I think, is where the glasses will go. And I think there's gonna be a lot of productivity that you're gonna get out of it, particularly for manufacturing, but as a general consumer, should be pretty cool to see, you know, how that all shakes out. Although, I'm still not wearing an Apple watch because I kind of wanna not have to look at something all the time.
Matthew: Yeah, I feel the same way.
Cy: Right, right. And it'd be too tempting. I'd like to think that I have more willpower, you know, I wouldn't look at my wrist buzz because I got a text. But right now, if my phone's on my desk and I'm in the middle of something, you know, I try to limit distractions to kind of get more of that flow state really some of the deep work and perpetual, like, dinging or texts coming in or emails flying in can be quite distracting for me. So, I don't know about glasses yet, but I'm sure if everyone's wearing them, I'll be right there with everybody else.
Matthew: So with your computer science degree, being in the tech field now for a long time, is there anything that you feel like is going to massively change or upgrade humanity? Apart from, you know, the Apple glasses we just talked about, that's kind of on your radar where you're thinking, "Wow, if this takes off, it's gonna accelerate a whole new technology cycle that most people aren't looking at?"
Cy: Yeah, I definitely think, you know, AI will still play a big impact or will certainly play a big impact on being quite disruptive for a lot of industries. It's not a new idea, certainly, and it kind of comes and goes in waves. You know, there was a big push, you know, decades ago and then it kind of cooled down and kind of came back around. And I feel like some cooling is starting to happen, you know, like self-driving cars, everyone thought would happen by now. And then it's getting closer and closer but there's certainly challenges with it. But I do think that for the near future, it's gonna be quite impactful.
We use it quite a bit at Headset, we use AI or deep learning for classification problems. So you can imagine we have connections to about 1000 retailers and dispensaries and in all those locations, products are coming in and we have to map those products back to products in our product catalog. So we've got a database, what we consider a canonical product, so all the products that are sold in any market that we track, and retailers are entering those same products with their own nomenclature. So maybe they're using acronyms for the names or maybe misspelling product names. You know, UPC hasn't been particularly adopted in the market quite yet. So there's no single key. So what we have to do is we have to normalize that data, we have to map that back. And machine learning, deep learning is really good at that, you know, to be able to do those classification problems.
And I feel like, we're doing it for this vertical. I can only imagine, you know, things that have a wider reach than the cannabis industry adopting a lot of this type of technology, and it just becomes easier for organizations to invest. And I think that there's just more people that have been, you know, putting time and mindshare towards this stuff. So I think we'll see more impact things like data processing, a lot of what we do, I think it's gonna end up automating out a lot of jobs and really not just like low paying jobs, not just like data entry jobs, but I mean, you're seeing trends like traders in New York, the banks, like big banks looking at, you know, coders instead of, you know, gut instinct-driven traders are more coveted by these groups. And so it's really to build these kind of algorithms.
So I think that it's gonna be a pretty big...have a big impact. You know, again, like mobility, self-driving cars, self-flying vehicles, it sounds crazy, but I think if we're talking in 20 years, I think we'll see that stuff. You know, we find a lot of value in it for the normalization. It's pretty magical when it works. So I think, you know, applying that to all sorts of industries, you're just gonna see that as a narrative for the decades to come.
Matthew: Great conversation, Cy. Thanks so much for coming on the show. We really appreciate it. So how can listeners find Headset and reach out to you if they're interested in getting access to data?
Cy: Yeah, yeah, certainly, just head over to headset.io. That's our website, you can learn more about our services. We published some great industry reports. There are no costs. They're just kind of interesting deep dives into the data. One of our more recent one I mentioned was looking at weekly sales, particularly the last week of the month sales. So if you wanna see those numbers, you can go, headset.io, and download that report. I also, like, publish blog posts. You know, one of the things given our mission is to enable the success of these operators is giving, you know, people access to data and no cost. You know, we hope that organizations find it helpful to kind of get a good sense. And if they wanna dive in more, we're happy for them to become subscribers, obviously. So encourage your listeners to go check us out, headset.io, grab some white papers and reach out and let us know if we can help you.
Matthew: Well, it's been so fun to watch the growth of Headset. Good luck to you and your team in 2020, Cy.
Cy, Thanks, Matt, we'll talk to you soon.
Matthew: If you enjoyed the show today, please consider leaving us a review on iTunes, Stitcher, or whatever app you might be using to listen to the show. Every five-star review helps us to bring the best guests to you. Learn more at cannainsider.com/iTunes. What are the five disruptive trends that will impact the cannabis industry in the next five years? Find out with your free report at cannansider.com/trends. Have a suggestion for an awesome guest on "CannaInsider," simply send us an email at firstname.lastname@example.org. We'd love to hear from you. Please do not take any information from "CannaInsider" or its guests as medical advice. Contact your licensed physician before taking cannabis or using it for medical treatments. Promotional consideration may be provided by select guests, advertisers or companies featured at CannaInsider. Lastly, the host or guests on "CannaInsider" may or may not invest in the companies or entrepreneurs profiled on the show. Please consult your licensed financial advisor before making any investment decisions. Final disclosure to see if you're still paying attention. This little whistle jingle you're listening to will get stuck in your head for the rest today. Thanks for listening and look for another "CannaInsider" episode soon. Take care, bye-bye.
Is California the Hunger Games of cannabis?
In the face of regulatory failure in California, black market cannabis thrives as licensed sellers and growers – much like the pledges in the Hunger Games – compete to survive in a dangerous world controlled by The Capitol (Sacramento).
So what happens next? Will state leaders see the error in their ways or will dispensaries and cultivators unite to force a change? Here to help us answer this is Seibo Shen, CEO of Hanu Labs.
Learn more at https://hanulabs.com
Seibo Shen’s new product The Hanu Stone from hanulabs.com
- Seibo’s background and how he came to enter the cannabis space
- How California’s cannabis market has evolved over the last few years
- Disadvantages that licensed growers and dispensaries deal with compared to those in the black market
- How the black market has impacted the vaping crisis
- Why so many cannabis businesses are undergoing financial difficulties
- Slotting fees and why brands must pay to get their products on dispensary shelves
- An inside look at Hanu Labs and its new, award-winning personal vaporizer
- How Hanu Labs is unique to other big players in the pod manufacturing space
- Where Seibo sees California’s cannabis market heading in the next few years
Matthew: Hi. I'm Matthew Kind. Every Monday, look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly evolving cannabis industry. Learn more at cannainsider.com. That's C-A-N-N-A insider.com. Now, here's your program.
Is California the "Hunger Games" of Cannabis? Dispensaries and licensed growers are like the pledges of the "Hunger Games," running around in a dangerous and competitive world that the capital, Sacramento, controls. In the face of regulatory failure, the capital turns a blind eye to the market being flooded with black market products. What's to come from California?
Will the capital see the error of their ways or will the dispensaries and cultivators unite to force a change? Here to tell us more about the California market is Seibo Shen. Seibo, welcome back to "CannaInsider."
Seibo: Hey, thank you so much, Matt. I'm super excited to be here and what a cool intro, I mean, to somehow figure in how to put in the "Hunger Games." That was awesome. I was listening with excitement and happy to be here.
Matthew: Great. Great. Give us a sense of geography. Where are you in the world today?
Seibo: I'm in San Mateo, California. That's about 15 minutes south of San Francisco.
Matthew: Okay. And you've been on the show before, but it's been at least two years. For new listeners, can you just give us a snapshot of your business and your background?
Seibo: Yeah, absolutely. So, the last time I was on, I was running a company called VapeXhale. They make desktop vaporizers. And for those that aren't familiar with a nomenclature of desktop vaporizer, these are the first generation of vaporizers that weren't like the vape pens that you would carry around in your pocket. But these actually plugged into your wall like a desktop computer. So, when I was first on, we had created the highest rated desktop vaporizer, and since then, we utilize the technology that we learn from creating the desktop to create our first portable, the Hanu Stone.
Matthew: Okay. And what were you doing before you got into the cannabis industry?
Seibo: So, prior to the cannabis industry, I had a career in the high-tech space. So, I graduated in college. I had actually been looking to become immigration attorney, but law school just didn't work out for me for I could go into the tons of reasons. It wasn't right for me, but I had previously been selling software for various software companies like Salesforce and LinkedIn. And after a few years...not a few years, 12 years of selling software, I decided it was time for a change. And then I decided to get into the cannabis industry.
Matthew: Let's talk a little bit about California. Let's orient listeners so they can understand. It's really just a unique animal. If you were talking to a friend that was from a different part of the country, how would you explain the California cannabis market where we started a few years ago and where we are now?
Seibo: Yeah. So, the cannabis industry like many other new industries, it changes quite rapidly. So, even from let's say 9 to 12 months ago, I feel like California is a different climate right now. But I think when people think about the good old days, they're talking about pre-Prop 64 when we were still in SB 420 in Prop 215. And this is when we were very much more patient-focused.
The environment was I would say...I don't wanna say much more compassionate than it is today, but as the industry began to formalize and organize, we quickly started becoming less about compassion and more about profits. And there's nothing wrong with that. That's all what we were expecting, but I think that the quickness in which it changed caught a lot of people off-guard. There were a lot of legacy companies, pre-Prop 64 that were doing quite well that have had trouble making the transition either waiting too long for licenses or trying to lease buildings, but the price of the buildings would be too expensive and just struggling to evolve their business where it could survive in today's climate.
And on the inverse side, we have giant MSOs, Canadian LPs who have raised 8 figures, 9 figures, sometimes 10 figures in capital, and they came in with a strategy of just offering the lowest price possible. And in many cases, while that did help them buy a market share, they also found out that some of the price points that they were offering were not sustainable and not the way you would build a healthy business with. So, they kind of shot themselves in the foot.
So, I think if I were to give someone that was brand new a snapshot of today's landscape, I would say that it is very much a dog-eat-dog world where everyone is really looking at figuring out how they could save more margins for themselves while at the same time struggling with all the taxes that have to be paid on the state level, which are... depending on which municipality you're in could be between 30 and 35%.
Matthew: Okay. So you talked about disadvantages, yeah, taxes. What are some of the disadvantages that license growers and dispensaries are dealing with compared to the black market while illicit has much more freedom? What are the disadvantages for people that had to actually have a license and competing in the regulated market?
Seibo: Yeah. So, I think there are many, many differences, and I'll try to go over what I think the major ones are. But obviously, the cost of doing business is much higher when you are in the legal market. You have to have compliant packaging. You have to get your products tested. You have to utilize a distributor. And each of those checkpoints requires additional capital and shaves off your margins. Now, when you're on the black and illicit market, you don't have to go through any of that. And on top of that, there are the taxes. So, it's kind of like a double, triple, quadruple whammy, depending on how you're looking at it.
And in the earlier days, Prop 64 and SB 420. I would say those days. I don't wanna call it the "Wild Wild West," but there was much less oversight. There was still testing being done to make sure that there wasn't any pesticides or things like that in your edibles or concentrates, but at the same time, the packaging requirements were quite a bit less. And this allowed a lot of mom-and-pop and artisanal shops to be extremely competitive because they would have products that were very unique and were differentiated.
But in today's day and age when you have to factor in all the different compliance, testing, distribution cost that you have, it really made it tough for these artisanal shops to compete. And this is why companies had to really scale up in order to still have margins left over after paying all the different people within the value chain.
Matthew: And just for listeners outside of California, could you just summarize what Prop-64, SB 420 are?
Seibo: Yep. So, SB 420 and Prop-215, that is what we had prior to Prop-64, which is when we had adult use in California. So, prior to that, we were a medical state. I don't know the details enough to delineate where Prop-64 or SB 420 and Prop-215 kind of bled over on each other, but this is when we had a medical market. This is when instead of giving product for cash, we would be giving product for what they would call donations. And it was just a different environment where there was just less oversight on what we were doing, but at the same time, we were kind of like a self-regulated industry. Like the people within the industry, if you were putting out bad products or products that were testing poorly, it was almost like we self-regulated and got rid of those bad actors.
Now that we're in the Prop-64 days and we have adult use, now we're counting on the legislators to kind of be the big brothers and give us oversight. But when you are giving this power to people that don't have a close understanding of how people utilize the plant, then, of course, they're gonna make some mistakes. And we knew that this was gonna happen. We just hope that the mistakes would be fixed more quickly than they actually are right now.
Matthew: Yeah. I think that's what...you said something interesting there. The industry self-regulates in a way, and bad actors don't thrive. People don't buy again when they like the product. And I think that's something we don't really think about too often like solutions do emerge in the absence of regulation. There could be consumer reports for cannabis that's $1.99 a month that would be an app on your phone that reviews. They only take money from their members, and they review the products and test them and so forth. So, a lot of things do emerge without state regulation.
And right now, the California regulation is...I would say as you described it earlier is tone-deaf. But I wanna go back to what the black market looks like right now. Do you have friends or family members that feel more comfortable buying on the black market? Can you talk a little bit about that?
Seibo: I would say the vast majority of people that I know under the age of 25 buy from the black market. And this is just my own experiences. So, I wouldn't use this as a blanket statement. But I would even go as far as to say pretty much everyone under the age of 30 that I know utilizes the black market.
And obviously, as you get older, you have more disposable cash, and you have more to lose from buying things on the black market. So I think that my older friends tend to have that mentality. But if they were given the choice and there was no risk from buying from the black market, I think the vast majority of them would opt for it.
I've only been to a handful of these, what they call secret sessions. But when you go to these things, it doesn't feel like you're going to a black market event. It very much feels like you're going to a pre-Prop-64 event where there's a lot of vendors that have a lot of great products, and you don't have to pay for samples. You could just give it a try.
So, I would even argue that the buying experience at these sessions is more enjoyable than going to a dispensary where the bartender is really pushing a product that the dispensary owner wants them to push versus giving the customer the type of product that they actually need. And obviously, there are huge massive savings when you're going to the black market. So, I would say the buying experience, the money that you save, these are all big reasons why people have opted to, even with the legalization of cannabis in California, to continue buying products off the illicit market.
Matthew: Interesting. Where do you think we are in the vaping crisis and how is the black market impacted that in your opinion?
Seibo: Yeah. So, while I was just singing some of the praises of the black market being cheaper and a better buying experience because there is less oversight and there's less testing, I would say that by and large, the black market is very much responsible for the vape crisis. Me being in the middle of the vape crisis, it's a little bit more difficult to have an objective view like, "Are we in the beginning of it, the middle of it, or are we coming out of it?" I tend to be a more optimistic person. So, I think that the worst part we've gotten through, and now we are beginning to rebound.
But in the case of vape pens, cartridges, and pods, it's much harder to delineate the quality of the oil inside a cartridge versus when you're looking at flour that you could smell and just kind of rotate 360 degrees in your hand. And I think with flour, just the visual cues could give you a good idea of the quality of the medicine that you are about to buy. But when it comes to oil, people look at clarity, people look at viscosities, and by and large, those are pretty good indicators, but they're not the best indicators.
So, what people have figured out in the black market is if you change the viscosity of your oil to look like thick honey, then that is the viscosity that... the regulated cartridges tend to have the highest quality oil. So if you start off with a thinner oil, you might add some vitamin E acetate or some MCT to it to thicken it up and give it that look. And because they aren't tested, the end-user, they buy a product that looks like a duck, walks like a duck, talks like a duck, but unfortunately, when they consume it, isn't the same thing.
And it's really exacerbated the situation in the cannabis space because...for those that are listening right now, there's probably enough interest in cannabis for you guys to read a little bit further and understand the difference between a quality cartridge and a bad quality cartridge. But for the vast majority of America that just reads the headlines, I think they just stop at the fact that people have been dying from these pulmonary diseases, and vaping is as bad or if not worse than smoking.
Matthew: Yeah. I'm surprised. Is there anything out there that you know of where you can kind of put in a vape cartridge or a pod and just kind of test it quickly for anything that might be objectionable that you wouldn't want in there?
Seibo: Currently, there is not. But if there's anyone listening, this could be a great business proposal and business opportunity. Like I've seen these types of testing kits for party and recreational drugs for people that go to raves, but as far as I know, there's nothing like that for the cannabis space.
Matthew: So people in the industry right now don't like to talk about it because it's not sexy, but there's a cash crunch for many businesses right now. Can you talk a little bit about that, what's causing it and what the environment's like?
Seibo: Yeah. So, again, this is one of those topics that I think you may find varying answers depending on who you speak to, but I tend to... being in the industry in California, I like to talk to a whole bunch of different entrepreneurs here and kind of combine everyone's experiences to get some sort of average experience. But when we first started talking today, we talked about how taxes have really impacted the growth of the industry, and more people are buying on the illicit market. So, I think all of it starts there.
And when there are less people buying, the retail stores are obviously wanting to carry less inventory. They wanna carry products that have higher margins. And this just starts a downward trend for everyone, and so I guess this cash crunch is also exacerbated by the fact that the BCC has been issuing licenses rather slowly. So, in addition to people waiting on the licenses...the vast majority of licenses were granted in San Francisco and Los Angeles. So, people that lived outside of those metropolitan areas still had trouble accessing the cannabis that they wanted.
So, because of this lack of availability, because of these higher taxes, people are going elsewhere to purchase their cannabis. When everyone was expecting the California cannabis market to be a certain size and it wasn't that size, we all had to figure out, "Okay. You know, we projected this much revenue for this quarter. We're gonna miss that number. Where can we make it up?"
And if we kind of rewind to what I was saying in the early stage where people are just buying less, this has led to retailers wanting to charge different things like slotting fees. For people like ourselves that depend on our partners to get paid in order for us to get paid, many times our partners were having trouble collecting on what they were owed from dispensaries. And when they can't collect, we can't collect from them. And it just becomes this cycle of accounts receivable being the main job of a lot of people.
And while this has very much impacted us, I still have a lot of empathy for our partners because I know that they're going through the exact same thing. It's a trend that...I mean, virtually every company that I've spoken to when I've expressed my own lack of effectiveness of collecting money that was owed to us. That's when I realized everyone is dealing with this.
And when you're looking at treating the symptom, I don't think you'll ever get to a solution. You really need to look at the cause, and at least in my opinion, the cause all starts with these higher tax rates that consumers have to pay in order to buy whichever cannabis product that they were used to buying in the past and having to pay 30 to 35% more for it.
Matthew: So you mentioned slotting fees there, and for some listeners, this might be the first time they've heard that or understand what that means. But in a dispensary, there's shelf space and there's...obviously, some shelf space is better than others, and it gets more exposure to people coming into the dispensaries. Can you talk a little bit about slotting fees, how much they are and how that works?
Seibo: Yeah. So what's interesting is slotting fees was a new concept to me, but as I spoke to more people in retail, slotting fees is quite common in most retail channels. And for example, so if you walk into a grocery store like Whole Foods, the packages and the products that you see that are eye-level, they tend to pay a premium for that because they know that when you are eye-level, there's a higher probability that someone chooses your product.
Also, if your product is at the end of the aisles, those are premium real estate areas where more people tend to see your product. So, when it comes to the cannabis space, retail stores especially the higher-end stores are beginning to charge slotting fees so that your product is placed in a certain area or on a certain shelf so that customers that come in that may not have familiarity with your product will see it first.
And the slotting fees that I've seen, they have been as low as $1,500 a month and as high as $20,000 a month. And when I asked the dispensary store owners why they started doing the slotting fees, many of them gave me the answer that it was because that business was down. They needed to figure out a way to make up for the loss in revenue. And a lot of the larger companies that we mentioned earlier, the MSOs or the Canadian LPs. These companies were happy to pay the slotting fees.
And as you can imagine if a company's paying you anywhere from $1,500 to 20,000 a month for slotting fees. You just need a handful of those in order to justify or cover the rent or to cover your lease of the location. And while it does seem like a smart and savvy business move, on the retail side, it does limit smaller players, the mom-and-pop, the more artisanal brands out there because...in the case of ourselves, and I'm not gonna mention any names, but we were going to open an account. The first order was $10,000. The slotting fee was $8,000. So, for us, we just couldn't justify getting paid $2,000 and giving away $10,000 worth of merchandise, and so we passed on that account.
And unfortunately, for us, I had thought that by passing, they would probably come back and give me a lower offer or give me a different offer with a lower slotting fee, but they made the business decision that they needed $8,000 slotting fee for whatever new product that they were bringing in. And unfortunately, we weren't able to come to an agreement.
Matthew: Do you feel like there's transparency then after a slotting fee is paid? I mean, a product gets moved up to a better exposure, and they get more sales as a result or they don't continue to pay that slotting fee. Is that typically how it works?
Seibo: I think that is typically how it works, and I've talked to a handful of these retailers about proposed alternatives to slotting fees where if a certain amount of inventory is moved, then a certain slotting fee or fee could be paid to the retailer but to ask for a significant amount upfront without any sales data to back it up.
Like I said, the companies that routinely pay these slotting fees, when you go to these high-end dispensaries, you'll start noticing it's all the same big boys. And these are also the same big boys when you start looking at their financials are the same ones missing their numbers by 20, 30, 40%. So, I wouldn't say that this is a strategy that seems to be working for people across the board.
Matthew: Yeah. Race to the bottom. Okay. So, tell us more about Hanu Labs, your products, and how it works and how you came up with the idea.
Seibo: Yeah. So, as we started off this interview, we talked about my previous company the VapeXhale EVO or the VapeXhale. And I've been on record saying that I would never create a vape pen, and I created the Hanu Stone, which is essentially a vape pen. But the reasons why I decided to do that was I noticed that whenever my parents or my in-laws would come over, they would use the VapeXhale EVO at my house. But one time as they were leaving, I saw that my mother-in-law was taking out her vape pen, and I just out of curiosity I asked her which one it was.
She had one of the dosist pens. She paid $99 for a disposable, and it really got me thinking about people's lifestyles and how they interact with cannabis. And seeing my in-laws as well as my parents who are obviously seniors utilize this device, it really kind of motivated me to come up with a better mousetrap.
And the first thing I wanted to do was...my in-laws and the vast majority of people that are new to cannabis are consuming cannabis, not for recreational reasons, but they think that it's gonna improve their health and wellness in some way. So we wanted to change the visuals of our vape pen. Most vape pens, regardless of their tubular or square or octagonal, are long and skinny, and to me, that reminds you of the form factor of a cigarette. And we're here talking about health and wellness. So why are we mimicking the form factor of something that's bad for your health?
And that's why we went with this stone shape, and the stone shape for anyone that doesn't know what it looks like, it's actually asymmetrical shape. And the reason why we made it asymmetrical was that...I live in the heart of Silicon Valley, I love technology, but I think even here, people are fed up with technology. We're always looking at our Apple watches. We're always checking our notifications are on our smartphone. I'm constantly deleting slack messages so that I won't be bothered and I can concentrate on work.
Well, because we were bringing out yet another piece of technology, we wanted it to have the imperfection of nature. So we made it asymmetrical. And the side benefit of that is this asymmetrical shape when you hold it in your hand, it just gives you this really great tactile feeling where you instantly start feeling relaxed. And we had also seen that many people around here were carrying what they call a worry stone, and worry stones are just smooth little rocks that you could buy on Amazon. And when you're feeling kind of anxious, you could just start rubbing it with your thumb, and it's kind of like the equivalent of like an adult fidget spinner. So, we wanted the shape to not just be visually appealing but to have that tactile sensation so that you would feel some calmness and relaxation even if you weren't inhaling from it.
And then the last thing that we did, and which I think is the most important part, is we created not just the best functioning pod but also one of the safest pods. And we talked about how vaping has come under attack over the last year due to bad actors utilizing low-quality hardware or low-quality oil. So we wanted to make sure that our pod was not only heavy metals and lead-free, we had it certified by a global standard called RoHS, which is for hazardous materials. So, we feel very confident from a hardware perspective that we are top in class.
And then on the functionality side, we created a pod that utilizes a lot of the technology that we learned from creating the desktop vaporizer. And essentially, we learned that if you have more surface area to interact with the heat, you have a much more efficient vaporization process. So, with vape cartridges and vape pods obviously creating a larger atomizer is difficult because it'll add size to the device.
So instead we did the inverse, which was we poked a bunch of holes into our atomizer. We made it more like a ceramic sponge in a solid piece of ceramic. So, when the oil interacts with the atomizer, it soaks into all the nooks and crannies. And we have roughly three times the surface area in our device, which allows us to use lower temperatures to give larger clouds and to also preserve the terpene profile. So, our value proposition is it tastes better, it hits better, and it hits smoother. And depending on what type of cannabis user you are, I think that one of those three value propositions will really resonate with you.
Matthew: So, portable vaporizer, customers just want it to work. They really don't care how it works. But on your side of things, it can be tricky to create these pods and cartridges that work just right because, for example, if it's hot outside, pods might leak, and there's all other kinds of considerations there. Can you share a little bit about your experience there with creating a pod and kind of the difficulties?
Seibo: Yeah. So, creating the pod and cartridge technologies, you know, on the surface level is it's very complex. There's an atomizer that heats up the oil then that heated oil turns into a vapor. But to your point, a lot of pods and cartridges, they end up leaking. And I had just talked about the porosity of our ceramic that gives it that great performance. So, if you can imagine that the atomizer acts like a dam for the oil. The more porous the atomizer, the more likely the oil will seep through and begin to leak.
So for us, the biggest challenge was how do we create an atomizer that is porous that will give us more surface area but at the same time have enough density so that the oil won't seep out and leak when the weather starts getting hot and the oil becomes less viscous. And this is the challenge that I think the vast majority of manufacturers have a problem-solving.
And not to pat ourselves on the back, but I think one of our advantages is that the engineering team and the team testing the hardware are all the same team. Whereas most manufacturers will leverage a team in China, and that team in China needs to take direction from the American team and then utilize their own translation of that to make a product that will fit the needs and requirements of their U.S. counterparts. Whereas for us, because we design, we engineer, and we manufacture it ourselves, there's much less lost in translation, you know, first and then also because the people building it are also the users, I think there's just a much more intimate understanding of what is a good hit, what is a tasty hit, what is unsmooth hit that is too smoky.
These are all things that we can resolve like in just a few days, whereas if you're a team in America working with a team in China, many times they have to create the product. They send it over to you. It takes a few days. You have to test it out. You have to write down the notes, translate it back to them. And this back and forth just takes a really, really long time. So I think having design, manufacturing, and engineering under one roof for us. That was our secret sauce into designing a vape product, our first vape product that is top of class, and then being able to resolve difficult issues like the porosity of the ceramic atomizer creating better flavor but also making it more leakable.
And I think like I said, it wasn't any secret techniques that we used. It was just a lot of trial and error and going back and forth with our various teams, and I think because we're all centrally located together, we're able to do that much quicker than teams that are in America that have their manufacturing and engineering in China.
Matthew: Yeah. You could iterate so much faster and also you don't have an extended team with kind of different motivations. If you're shipping your product overseas for engineering, they have a lot of customers, and you might be bottom-of-the-barrel some days, and you're sitting there waiting, waiting, get frustrated, where you could be tinkering on all of it. I guess this is kind of a trend here with tariffs and everything going on to you to come back to wherever you sell your goods to try to design and manufacture them there in that theater.
Seibo: Yeah. And just to be clear, we actually still manufacture the product in China. We have a team in Washington as well that they were previous, they back sale distributors. And they had been working with factories back in China, and they ended up having that same experience that you just talked about where sometimes their secret sauce would be exposed to other customers, or depending on their ordering volume, they would be their most favorite customer, or they would be put on the back burner. So, this group actually went out to China, started their own factory.
We aligned with them very quickly because we knew that they had kind of...I don't wanna say American business style. But the way that they did the business was very much in line with the way VapeXhale did business, and because they moved their family out there to start the factory, we actually came up with a very great working relationship where I get to utilize my creative mind, come up with new products, and then I get to leverage their larger engineering team to see if my ideas have legs or if it's just some crazy idea I had the last time I took a dab that was way too big.
And by having this type of relationship, even though we aren't physically under one roof, the cultural differences are very little, and there's a very, very high level of trust too because we've worked with each other for the last seven years. So, this was a very ideal scenario for us, and in the coming months, you'll probably see some announcements of tighter and tighter integration between us and our manufacturer.
Matthew: And who are the big players in the pod and cartridge manufacturing space, and how do you compare those for people that aren't familiar with them?
Seibo: Yeah. So I would say the 800-pound gorilla in the space is a company called CCELL. CCELL, based on what I was told, is currently pumping out 30 million cartridges a month. CCELL has other cartridge competitors like Greentank, Convectium, 14th Round.
And based on my research, the second-largest company is pumping out about 3 million cartridges a month. And there are a handful of companies that are in the 1 to 3 million cartridge volume-wise. So as you could see, CCELL is the biggest, biggest player in the space. Now, on the pod side, it's a little bit different.
We have players like Pax. We have players like G Pen and Stiiizy. And on the cartridge side, they had standardized on what they call the 510 cartridge, and that is linked to like the type of threading that is on the cartridge itself. On the pod side, there is still no standard. So, what works in the Pax device doesn't work in the G Pen device, and that doesn't work in the Stiiizy device or in our device.
And the company that we have aligned with, it's a company called AVD. They are quickly becoming the Samsung to CCELL's Apple. And the vast majority of their current customers are X-CCELL customers. So they feel very strongly that they can be a reasonable competitor to CCELL on the 510 side.
And then we are working very, very closely with them to ensure that the Hanu pod system becomes the pod standard on the pod side of things. So, there's still a lot of heavy lifting to be done, but I do believe that our combination of creativity and engineering capabilities will allow us to make a lot of headway.
AVD is a fairly new company. There are only 18 months old, but in the last 18 months, they have won accounts like Blue River, True Leaf, Friendly Farms. And if you guys aren't familiar with any of those companies, these companies are...they're basically like the blue-chip extract companies in their specific geographies. So, I think if you look at their customer base, that gives you a good idea of the type of traction that they're getting.
And we're super excited because we know that with our ability to generate ideas for new products, their ability to engineer, we have a very, very potent design and manufacturing entity under our belt. And this is just the beginning. We have a whole bunch of other products that we're super excited to bring out in their near future.
Matthew: So, a lot of business owners are running around like crazy thinking they have to do everything like be a Swiss Army knife, and they have to have every extension on that knife and do everything themselves. And that might be true in the beginning, but long term, it has some hazards. Can you talk about how you've kind of settled into your workflow and decide what to do and not to do and let someone else do?
Seibo: Oh, man, that analogy really resonated with me. I would be the first to admit that I thought that you had to be...not only be a Swiss Army knife but to be the best tool in each of those categories of the Swiss Army knife. And I think the best analogy that most people could understand is when you look at a basketball team, you know, the shortest player tends to be the point guard, the tallest player tends to be the center, and the players in between fill in the shooting guard, small forward, and power forward roles. But there are certain attributes that people have that make them more optimized for certain roles.
And for myself, what I realized about myself is I love being creative. I love making things. And many times, I would beat myself up for perhaps not being the most process-oriented person or perhaps not having the best operational efficiency. And I would stay up at night just beating myself up over these things, and as I matured in my role as a CEO, I began to realize that it's okay to not have all these skill sets under your belt. And as a matter of fact, it's probably counter to being super productive and hiring people that are experts in those core competencies where you might be weak. Ultimately, that's what is needed to grow and scale your organization.
And I can only give anecdotes from myself, but I kind of fancied myself as a decent marketer. So, I would sit in on all the marketing meetings, and I would give a lot of my input and say I would have an open mind. And ultimately, while I did say I had an open mind, the marketing team, the vast majority of programs we did were the ones that I recommended.
So, in retrospect, I started realizing I had an open mind as long as they chose my idea, and in those cases, I often...when I look back, I was like, "Well, I hired this girl because she had so much creativity. She had great execution." And here I was kind of getting in the way of her being the best marker that she could be.
So, that's not to say that you shouldn't have some sort of fundamental understanding of all the different categories of business, but understanding what your strengths are and understanding what your weaknesses are and operating more in the areas that you're optimized in. I think that's ultimately what will help your company grow and also help you get out of the way of others that are looking to grow and enhance their skill set by doing whatever programs that they wanna do within your own company.
Matthew: Well said. Seibo, I'd like to move on to some personal development questions that give listeners a sense of who you are personally. With that, is there a book that's had a big impact on your life or your way of thinking that you'd like to share?
Seibo: Yeah. So, I think the last time I was on, I shared that I liked the book on, "The War of Art," which is the inverse to the art of war, and it's to conquer the enemy within. Since then, I've read two really good books that I've probably read two or three times since my initial read. The first one is "The Four Agreements," and the second one is a book called "Sapiens" by Yuval Noah Harari.
And the book "Sapiens," it is the history of humankind condensed into I think 500 pages. It's not a short read. In my opinion, it's the one book that I've recommended that when people read it always call me and wanna discuss everything about the book. I was curious. Have you heard about the book "Sapiens" by any chance?
Matthew: Oh, yes, I've definitely heard of it, and I've actually listened to some podcasts with the author. But I have not read it, which I am disappointed that I haven't. It sounds great.
Seibo: Well, I would say that there's one specific premise that stood out to me in the book, and the author talks about how there's three different types of reality. There's objective reality. Like, it's 72 degrees outside. And then there's subjective reality, which is, you know, Matt thinks 72 degrees is cold, Seibo thinks it's hot. So, you're in a t-shirt. I'm in a jacket. And then there's a third type of reality, which is intersubjective reality, and he gives a few different examples like the stock market is intersubjective reality in that if everyone believes a stock is going up, well, the stock goes up.
And fashion is also another example of intersubjective reality where, you know, if mom jeans and bell-bottoms are out of style, and everyone agrees, well, then it's out of style. And then 10 years later, when we all agree bell-bottoms looks cool again, it's cool again. And the author posits that the vast majority of life is intersubjective reality, and it is all the stories that we agree to believe together.
And I think when you have that framework of thinking, at least for me, it's helped me more easily navigate life, more easily navigate the political situation that the United States is currently in, and helps me better understand why sapiens do the things that sapiens do. And it's always to build and add to the intersubjective reality and narrative that we live in.
Matthew: Yeah. That's a great suggestion. I wanna check that out. What is the most interesting thing going on in your field besides what you do?
Seibo: Oh, man, that's such an interesting question. As much as I love my own product, you know, I wouldn't say that it is the most interesting thing going on. Where I do have a lot of interest is in all the new cannabinoids that are being studied now. We already through experience know that when you just isolate THC by itself...while it does a good job in relieving certain symptoms, you know, we all know that the entourage effect is so much more important to someone's overall feeling of well-being.
And more recently, I think that they've found different compounds. You know, THCV and CBG were ones that they were starting to about 18 months to 24 months ago. Now I think there's like THCP and some other cannabinoid derivatives where the psychoactivity maybe even stronger than THC. So, you would utilize even smaller amounts to get the therapeutic benefit that you are looking for.
And to me, you know, the study of the cannabinoids how they interact with the terpenes. This is the area that is most fascinating to me because I understand that everyone's biochemistry is different. And I've always been on this quest to find consistent methodologies for people to utilize cannabis where they would feel confident that if they tried it this way, you know, it would be like an early morning cup of coffee. If they did it this other methodology, it would be like taking a sleeping pill.
And right now I feel like we're still at that stage of it's just trial and error, and you gotta try, you know, 5 different strains, 10 different strains until you find one that works for you. But I think that with this research into these other cannabinoids that aren't as famous as THC or CBD, you know, we'll start making baby steps towards having something that is much more predictable and consistent for the end-user.
Matthew: Seibo, what is one thought you have that most people would disagree with you on?
Seibo: You know, this one was a question that I put a lot of thought into, and I thought of a few different answers. But the one that I'm gonna give maybe is controversial, but I think is the one that will give the biggest impact. And that is that those with different political views than you are not bad people. Like in my travels, you know, I live in California. So, the vast majority of people here are bleeding liberals, and they have a certain view of people that support Trump or our conservatives. And then I've flown to conservative states, and I've heard all the different stereotypes of progressives and liberals from California.
But in all of my conversations with all these various people, one thing that I've come to in conclusion of is none of these people are bad people. They have their own opinions. They have their own perspective of what types of policies will impact them negatively or positively. But when I speak to them, like, I rarely see just like a dark and evil heart.
It's just that the way they grew up, the experiences that they have have led them to believe and interact with society in a certain manner. And as I've traveled more and I've met more people, you know, I've come to the conclusion that, you know...and maybe it's because I'm here in the heart of Silicon Valley and we're working on a lot of robotics and AI, is that humans are just like machine learning algorithms.
The types of conclusions that machine learning comes to, it's very much based on the type of data that you put into it, and humans are no different. So, if you grew up seeing immigrants coming in and taking jobs, or you've had bad experiences, like, I could totally see why you would have a certain stance on immigration policy. Conversely, if you've had great experiences with immigration, you love the cultural diversity, you love like all the different foods that you could eat, you know, and those things, and you have a totally different view.
And ultimately, what I've come to reconcile with myself is that...you know, I just mentioned that I am a liberal, but if I had grown up in areas that were much more conservative, and I was told the things that I was told, you know, I don't have any type of...I don't think that I would think any different is basically what I'm saying, and that I am a product of my environment and all the various experiences that I've had.
And by switching to this type of attitude, and I wouldn't say it was a conscious switch. It was just based on what I've seen, you know, I've been able to I think kind of go between both groups, get a better understanding of what's troubling both groups, and reconcile and come to a conclusion of like, you know, not which group is right, but what do we have to do to resolve the differences between both groups and come to a solution.
And sorry for rambling on, but the main thing that I wanted to get to you was that, you know, I realized that...growing up in California, we always wanted to be liberal and progressive, but as I grow older, I realized there are some ideas that are worth conserving. And this is why conservatives and progressives need to be able to speak to each other because there are some ideas that absolutely need to progress and get better. And then there are some ideas like being kind to your neighbor, you know, loving your family. These ideas need to be preserved. So, my hope is that with this attitude, we could start building bridges between both polarized communities and get to a place where, you know, we're living in a state where or a country where, you know, there's more hugs and there's more love and there's less divisiveness.
Matthew: Maybe after this podcast, it'd be good if you hold up a sign and go downtown San Francisco and to say free hugs. What do you think about it, Seibo, challenge accepted?
Seibo: Not only challenge accepted, I may bring a few of my kids with me who are much cuter, so my probability of giving and getting hugs is much higher.
Matthew: Great. To add to your point, it's like not only is the other side are they good people, but I actually think that both sides need the other, because if you think what would happen with any ideology that's unchecked, it's not a happy ending. They need each other to some extent, which is not something, you know, right now people wanna think about. And to your point, like, "Hey, I'm the product of my environment."
I kind of had that epiphany some time back, and I was like, "Well, what wait a second. I got my values pretty much from the environment I was raised in, the people I hang out with, the zip codes. I'm in the most...and somewhat maybe on my interests." So are they really my values or are they kind of soaked in through osmosis and then galvanized so I believe that they're mine? So I went through an exercise where I defined what I consider my values and created a personal mission statement. And I realized that they borrow from both, but they're really neither. And it's an interesting thing to consider. And I encourage anybody, there's a lot of stuff on Google, you know, this personal mission statement and how you come up with one. But it's helped me achieve kind of a true north and once I know what my individual value system is. So, I really appreciate what you said there.
Seibo: Yeah. And I think that exercise that you did, I'm gonna look that up as well and do something like that because it's really important. And one of the things that I found is as I've gotten older, you know, I'm in my early 40s now, is that, you know, these values change in the different stages of your life. So, it's good to do these exercises every few years because you're consistently evolving as a person.
I'd like to say my wife and I, we have a very, very happy marriage. And one of the things that we actively do is as we evolve, we try to make sure that we're evolving with each other so that we're not just evolving apart, and we're taking interest in the new things that we're all interested in because, you know, as I said, if I was the same person that I was in high school or the same person as I was in my 20s and 30s, you know, I just don't know if I would be as happy as I am now with this constant evolution to become a better person.
Matthew: Yeah. Well said, Seibo. As we close, let listeners know how they can find your new product, the Stone and Hanu Labs. It sounds really compelling. It reminds me of a river stone, by the way, when I look at it. That's what I think of is like a hand-sized river stone. If anybody knows, that mean that asymmetrical kind of smooth rounded shape.
Seibo: Yep. So, thank you. It was very much inspired by river rocks, and I didn't even get into the story of like how we came up with that shape. But you could find it at www.hanulabs.com. We're currently only available in California, but we are about to release a farm bill compliant CBD line. So if you are outside of a cannabis medical or recreational state, you'll still be able to purchase the product. And in California, we are in a few locations in both northern and southern California. But we are about to sign up with a direct-to-consumer delivery service so that you could just go to our website and order the product direct. So, hopefully, by the time this podcast airs, that functionality will be built in, and if not, you know, shortly thereafter.
Matthew: Great. Thanks so much, Seibo, for coming on the show. We appreciate it, and good luck in the rest of 2020.
Seibo: Oh, thank you, Matt. I really appreciate the conversation, and hopefully in two or three more years if I come on again, I'll have some awesome stories to share about how California cleaned everything up, and now everything is kumbaya, and we're all holding hands and singing songs.
Matthew: It sounds good. If you enjoyed the show today, please consider leaving us a review on iTunes, Stitcher, or whatever app you might be using to listen to the show. Every five-star review helps us to bring the best guests to you. Learn more at cannainsider.com/itunes. What are the five disruptive trends that will impact the cannabis industry in the next five years? Find out with your free report at cannainsider.com/trends. Have a suggestion for an awesome guest on "CannaInsider"? Simply send us an email at feedback@ cannainsider.com. We'd love to hear from you.
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With online shopping at an all-time high, dispensaries are looking for more and more ways to create retail experiences that inspire customers to shop in-store.
Today’s guest is Shryne Group Executive Chairman Jon Avidor, who will explain why customers line up for his cannabis dispensaries AND what experiential retail means for cannabis.
Learn more at https://shrynegroup.com
- Jon’s background as a business attorney and what inspired him to enter the cannabis space
- An inside look at Los Angeles-based cannabis holding company Shryne Group Inc.
- Ways in which California’s cannabis market affects the rest of the country
- Why Jon believes it’s important for Shryne Group to be a vertically-integrated company in the cannabis industry
- How Jon has created experiential retail experiences so successful that customers line up at his dispensaries
- Jon’s advice on how to spark excitement in customers with fun attractions like Instagram pods, art murals for photo-taking, etc.
- The types of people dispensaries need on their team to achieve an exciting in-store environment
- Exciting things to expect from Shryne Group in the next 12 months
Matthew: Hi, I'm Matthew Kind. Every Monday, look for a fresh new episode where I'll take you behind the scenes and interview the insiders that are shaping the rapidly-evolving cannabis industry. Learn more at cannainsider.com. That's cannainsider.com. Now, here's your program.
In-store retail is getting harder and harder for merchants unless you're one of the few that creates an incredible experiential retail environment that excites, inspires, and creates an X factor consumers can't get shopping online. Our guest today is going to share why customers line up for his cannabis dispensaries and what experiential retail means for cannabis. I am pleased to welcome Jon Avidor of Shryne Group to the show. Jon, welcome to CannaInsider.
Jon: Hey, Matt. Thank you for having me.
Matthew: Give us a sense of geography. Where are we in the world today?
Jon: I'm joining you today from downtown Los Angeles, sunny California, and our operations are primarily located in the state of California.
Matthew: Okay. Well, give us a little overview, and what is Shryne Group on a high level for people that aren't familiar?
Jon: Sure. So Shryne Group is a vertically-integrated cannabis company with assets ranging from cultivation as far North as Humboldt County in California and as far south as Palm desert with retail locations there. We've got manufacturing, distribution, and cultivation just about everywhere in between up and down the state as well. Our operations are the result of a consolidation of some of the highest performing assets in the industry that has taken place over the past two years since I've been involved. Our main hubs are in Los Angeles and Oakland. We've got vertically-stacked licenses in downtown Los Angeles and in Oakland where we do our manufacturing and distribution, and we have retail locations as well.
Matthew: Okay. Can you share a little bit about your background and journey and how you got into the cannabis space?
Jon: Sure. So I'm a mergers and acquisitions attorney. I worked at big law firms for my entire career. Started at Sullivan and Cromwell in New York and then practiced at Goodwin Proctor in Silicon Valley. And it was a bit of a deal junkie doing a lot of mergers that were hundreds of millions of dollars big or all the way up to billion-dollar transactions of selling companies to large tech buyers or to consolidated companies in various industries, pharma, big tech, etc.
And, at some point along the road in 2016, I decided I liked working with entrepreneurs so much that I wanted to become one myself. And I launched my own legal practice and a venture capital fund early that year that I used as a springboard to work on projects that excited me. So I would work with founders and entrepreneurs who had exciting businesses, technologies, projects ideas that they were really passionate about, and that made me really passionate about them. And the venture fund was a project that I created so that I could invest alongside of these businesses that I was helping on the legal side.
So what grew out of that was the ability and the freedom to really do add value to companies and to projects that really excited me. One of those projects was a business out of Northern California that was run by a good friend of mine of 15 years who had been amassing a set of cannabis assets in Northern California that were ranging from farms to retail locations and everything in between. In 2018, I started working with this particular client and friend to develop the assets and to assist with potentially raising money, and creating partnerships, and consolidating assets into a top company that we could use to leverage and raise additional capital.
So that project kind of snowballed in late 2018. And we had created a couple of brands, used to be known as FX, and we'd started consolidating all these assets together, and that process grew into consolidating one of the largest companies in the state. And that's how Shryne Group was born, and that's how I ended up getting involved. I joined the company after having put together this legal transaction that created the Shryne Group. I joined as executive chairman in July of 2019 and have been basically merged my law practice in New York into another firm and moved to LA and jumped headfirst into the cannabis industry in 2019.
Matthew: So you've chosen California as kind of your primary focus, at least initially. That probably means you're really bullish on that geography. Can you talk a little bit why California at least is your initial focus?
Jon: Yeah. California is the largest legal market for cannabis in the world. It's not rocket science. It accounts for 25% of all the U.S. sales in the cannabis industry. It's also the epicenter of culture. We have Hollywood where influencers were born. The Kardashians came from Southern California. Style music, fashion all come from California and influence the way that people think and act across the globe. And so, California, both from a market-size standpoint and from a cultural relevance standpoint, seems like the best market to be setting trends in the cannabis industry.
Matthew: Okay. So the vertical integration there, was that part of the consolidation, or was there more of a strategy around that? Or do you feel like it was necessary if you were gonna thrive? What's the thought process there?
Jon: Yeah. So vertical integration is a product of, I think, necessity in the cannabis industry. If you look at the way that cannabis evolved as an industry over the past decade, and if you'll recall, California is probably the oldest legal market for cannabis in the world in that it's been legal since 1996, at least in the medicinal context. But in the shadow of federal regulation where it's still illegal at the United States level, the necessity grew to do business with a select few group of people who you could trust and who you could use cash with.
I mean, remember that you can't do credit card payment processing. Or, at least up until recently, you couldn't have access to banking. So this was a cash industry. And I think what ended up growing out of that is you have a very small subset of people with whom you can do business. So fast forward to recent years where the way that we do business is in this bubble of people with whom we trust.
And so the consolidation of assets across the different verticals in the industry grew out of this necessity to work with only people you trust so you can hand a bag of $1 million cash, you know, in exchange for a bag of flour sort of the old school way really had an impact on the way this industry developed. Now, from an economic perspective, it also makes sense, right? Our focus is on the bottom line.
I think Shryne Group wants to be a profitable company. It has been a profitable company since its inception, and the underlying businesses have always had a focus on generating bottom-line EBITDA so that it could sustain distributions to the partnership. And that focus on the bottom line really led us to say that vertical integration is the best way to go. And now add on top of that, from a business perspective, vertical integration just makes good sense.
You have a consistent supply of product with consistent quality, and you can trust the folks you're working with because they're your partners and you're all aligned in generating profits for the consolidated business. So that's how it came about. I think if you fast forward to the future and think about what the industry is gonna look like in 5 years, in 10 years, I don't think vertical integration is where cannabis will be. I think cannabis will look a lot like every other industry. The beverage industry is a good example where you will have distributors and brands who will be capturing a lot of the value of the profit. And you'll have commoditization at the productions and agricultural levels.
So you'll still have that sort of craft beers of cannabis where there will be, you know, growers who are maybe smaller and less large in terms of the amount of product that they can pump out on an annual basis. But for the most part, you'll have large farms that are run by conglomerated agricultural companies that are producing at the highest level and at the lowest cost. For now, though, it makes sense for us to have our own cultivation and to have our own manufacturing because those are processes that we like to control, and it just adds to our bottom line.
Matthew: To your point in the near future, interim future, there's gonna be some sort of commoditization with cannabis flour. You're combating that with strong brands and what I would call immersive experiential retail. Can you tell people a little about your recent retail opening and why customers were waiting in line?
Jon: Yeah. So retail's a major focus of ours for a number of reasons. And the first of that is there haven't really been a ton of established brands that have broken out of the camp out of California or out of any other state in which they currently operate. There's a handful of them, but the competitive landscape has not been fully set. So retail for us is really the opportunity to have a direct connection with our consumers and be putting products into their hands, hopefully, our products into their hands and really getting direct and immediate feedback as to what products are selling, what people are saying about the products, what they will come into the store to buy, and how they're interacting with those products. So retail for us is just a necessity of building brands and being at the cutting edge of the consumer's interaction with those brands.
Now, how have we executed our retail strategy? So, we were fortunate, as part of the consolidation of Shryne Group, to roll in one of the most popular and most emotionally-connected brands to its consumers in STIIIZY. And STIIIZY was born from the cannabis culture and made for the cannabis culture and so really hit...struck a chord, let's say, with consumers since it was developed really with consumers in mind. So our retail is simply a physical manifestation of the brand, STIIIZY, so far. So when we opened our downtown Los Angeles retail location, which was the first STIIIZY-branded retail location that opened, we had 4,000 people show up on the first day.
Matthew: Wow. That's great.
Jon: Of those people, about 500 waited in line overnight. So, by the time we came in in the morning, there were over 1,000 people when I arrived at 9 in the morning standing in line, you know, and we had to sort of audible at that point. We didn't realize so many people would show up, but what we did is, you know, we had to turn it into an event. So we had to bring tents, and bathrooms, and water and all the things that go along with having that many people waiting around in your parking lot.
Matthew: Yeah, that's kind of a high-class problem, but a problem nonetheless. I mean, if you and I were walking to this latest opening, could you just describe, you know, visually what people would be seeing, what the interaction would be like, and so forth so they get a flavor for that?
Jon: Yeah. And we took...there's some great video from this that we can share.
Matthew: Yeah. I can include your Instagram feed in the show notes so people can get a sense, and I'll try to get it exactly down to the open so people can see the open. Because I really want people to get a picture of this because as you were talking about how, you know, California's culture moves westward but also internationally, like, if you just have a plain old dispensary, that's not gonna fly after a while unless you live someplace where there's just such limited licenses that you get business. But that's really something I wanna get across to people, and I'll be sure to include that in the show notes. But go ahead, tell us what it'd be like to be a fly on the wall on opening day.
Jon: Yeah. So, for the first one, we kind of went a little over the top and had some fun with it. So, we had smoke machines at the front. And when we finally went to open the glass doors to the front of the dispensary, which also happens to be co-located with our corporate headquarters. So you have our sort of corporate people coming in at 9:30 in the morning to start their day walking through this line of people waiting outside and, you know, heavy security presence with, you know, armed guards around because it still is the cannabis industry and still a lot of cash that's floating around the environment here. But you would've seen basically all these employees walking upstairs going, "What is going on here?" You know, they all had an idea, but the excitement was really cool.
There was definitely a momentum in the air of the company, you know, executing on its goals and really succeeding and bringing people into our retail location. Now, what you would have seen if you were on the wall inside the dispensary was we actually had patient appreciation days, they call them PADs, where we brought representatives from many of the top brands that we sell in our dispensery to give out various promotional items and talk about their products and try to sell their products into the hands of the consumers.
So we were basically running, you know, thousands of people through the store on that first day, and people had an opportunity to speak directly with the representatives from some of the major brands so that they can get more information about the products that were being sold. So it was a riot. It was a lot of fun. But add on top of that, you know, we've done a lot to make our retail locations experiential as well. So there were certain things that were draws for people in addition to the free bongs we gave away and the discounted product that we offered, which is, I think, let's say the loss leader of bringing people in that door the first time.
Matthew: Yes. You do a lot of things. You have Instagram pods for customers in the store to take photos with kind of interesting backdrops. You mentioned the bong giveaways, huge art murals. There's kind of an element of showmanship and creating that event that you were talking about, an event-like atmosphere. What kind of people do you need on your team that kind of create this event environment that have a background in that that are capable of doing that? Because a lot of people don't even know how that's done.
Jon: Yeah. So this team has been really remarkable in that it's very gorilla in nature. So we do have top marketing professionals from some of the major brands across big beverage, big pharma, big tobacco that have added a really solid and diverse set of backgrounds to help shape what is cannabis marketing. But the core of let's say, building the STIIIZY brand, for example, came from the consumers. I mean, this came from our co-founders who were so tapped into the cannabis culture in LA because they lived it, right. I'll give you an example.
Our co-founder, James Kim, is a military veteran. He got back from his tour of duty in Iraq. And the PTSD was so heavy for him, and the VA and conventional medicine wasn't really giving him a whole lot to work with. So he turned to cannabis and created...he was also in the vape industry and had sort of built a business around nicotine-based vape back before Jewel took over the entire market and had an understanding that there was a desire to create a product similar to a vape product in the cannabis industry.
And only a few folks were doing it at the time, this is a few years ago, and so he created a vape pen that had cannabis oil in it that hit well, that also made you cough just a little bit because that was what cannabis smokers were used to. And also, it sort of made you know that you were actually still smoking cannabis. And he created a product for cannabis culture and really targeted, let's say, the 80% of sales that come from 20% of the consumers in the market. This wasn't your soccer mom's product. This was something for really the heavy cannabis users who used it to either manage anxiety or just get through life or used it recreationally to, you know, further their own personal goals, whatever those may be.
And because the focus was so heavy on the consumer, on creating a product for consumers, we were left with...really just needed to get the product into people's hands. So our marketing was simple. It was going out to the beaches, storming the beaches on weekends in Southern California and giving out merch and encouraging people to go to the local dispensaries where they could buy the product, which was rolled out to about 60 or 70 dispensaries at one time through a concerted marketing effort to get on the shelves.
And then these guys would fly, eventually when the money started being there from sales, would start flying airplanes across the beaches at the same time that they had these teams of models and cannabis users go to the beaches and give out towels, and give out beach balls, and give out tee shirts and hats and the like. So it was really this high-touch guerrilla marketing tactics that got the product into people's hands. And this team knew that once the product was on people's hands, because it was developed for the cannabis consumer by the cannabis consumer, that it would catch on. And sure enough, it did.
So Instagram followed and people started engaging with the brand. And really, it's that authentic connection more than any professional who came from Altrea on our team, or came from Red Bowl, or Shooting[SP] Preme, or wherever who, you know, are bringing us an air of sophistication to our marketing. It was really just the fact that the product was focused on what consumers wanted. And that's what I think gave us the leg up in creating at least the STIIIZY brand, and that we're trying to recreate for some of the other brands that we're building as well.
Matthew: As you look ahead the next 12 months, what excites you the most for Shryne Group?
Jon: We've got a lot of really interesting initiatives. One is, I earlier talked about retail and how big a part of our strategy that is. So, we are intending to open dozens of stores in the coming 12, 18, 24 months. We have four currently open in California. We should have another four by the end of Q1. I'd hope by the end of 2020, we'd be somewhere in the range of 20 stores or 30 stores if we really hit our numbers.
So that's an initiative that we're spending a lot of time and effort on. And, as I explained, having that direct connection to consumers where we can put our products in their hands knowing that our products are good and really are a reflection of what they want, built with consumers in mind, I think is a very high priority for us.
Secondly, I think the way that retail is going eventually for cannabis is the same way that retail went with the rest of the world, and that is people buy online. So delivery services are very exciting for us, and I think you'll see Shryne Group make a move in the delivery space sometime in 2020 and really take, I think, a piece of that market and help develop that piece of the market as well. And I think those are the two major initiatives for us as we look ahead to the next 12 months.
Matthew: I wanna ask a couple of personal development questions, Jon, to help listeners get a better sense of who you are personally. With that, is there a book that's had a big impact on your life or way of thinking that you'd like to share?
Jon: So I've read a lot of great books over the years. The one that really stands out for me when you ask this question is ''The Alchemist.'' It's not a book about business, it's not a book about management, but it's a book about your personal journey. And, for me, what I consistently remind myself throughout my career is that there's no real endpoint, right? This isn't about making a certain amount of money or achieving a certain status.
This is really about the journey and staying grounded with the reminder that life and your career are the daily decisions and the daily interactions you have with your team, and with your family, and with your friends rather than some pie in the sky goal of creating, let's say, $1 billion company, or selling a company, or any of the other goals that I think drives people.
It's really about the journey along the way. And what ''The Alchemist'' teaches you is that finding your personal legend as the author, Paulo Coelho, says in there, is really not the goal. It's really the adventure that you embrace as you are searching for that legend. So that book really stands out as one that I read when I was much younger, and I try to read at least once a year to keep me grounded and as a reminder that it's the journey, not the end.
Matthew: What is the most interesting thing going on in the cannabis field besides what you're doing at Shryne?
Jon: So I think if you fast forward 10 years, cannabis is going to be at least 50% run by the big pharma companies. And the cannabinoids that come from the hemp, from the cannabis plant, can be created in a lab. So I think one of the most exciting innovations and developments in cannabis is going to come from the companies that are viewing this from a big pharma lens and creating and taking forward the initiative to figure out how those compounds, how the various cannabinoids actually interact with the human body and what the effects are.
So there's a company that my good friend, Mike Gorenstein, who runs Cronos Group, I used to practice law with, that Cronos Group is working with, called Ginkgo Bioworks. And Ginkgo is making strides in really isolating the compounds that are in the cannabis plant and how those affect human behavior, and human moods, and all the cool things that come out of either smoking or ingesting cannabis.
And if you can boil down, if Ginkgo is able to boil down to a very molecular and cellular level, the compounds and how they interact, I think what you'll see is a drastic reduction in the cost of producing cannabis or producing the oil that goes into all the products that are not smokable flour. So that's the most exciting thing from my perspective, at least through a business lens, in terms of really innovation and changing what the market's gonna look like in the next 10 years.
Matthew: I have a Peter Teal question for you. What is the one thought you have that most people would disagree with you on?
Jon: So I happen to think that states that are limiting the amount of licenses in their locations are not necessarily the best breeding ground for profits for cannabis operators. I think there are a lot of cannabis investors and operators out there who would say that Massachusetts, and Illinois, and Florida where there's really a limited amount of licenses are great places to invest and build companies. I would say that the states that are focused on building an industry that looks and feels more like the other industries that it mirrors, for example, tobacco or beverage, I think those states are where you wanna put your investment dollars.
And the reason for that is the states with the more developed infrastructures and the more support, both at the state level and at the local levels, are going to be the ones that create the most value and innovation. And, at the end of the day, we're just at the very beginning of a decade's long industry growth, and you wanna be aligned in markets that are supporting new entrepreneurs that are taking innovation to the next level.
Matthew: Oh, that's an interesting take on it. Well, final question here, unplanned. Since you've spent time in the New York City area, I think you went to law school outside Chicago, and now you're in California, what's your favorite food at those three places? So when you go back to New York or Chicago, what's one thing that you have to have, and then what's your favorite food in Los Angeles?
Jon: Yeah. So, Chicago, I didn't love the food that much. I think that might be a controversial statement in itself.
Matthew: I'm gonna have to edit that out being a Chicago native, Jon. I'm kidding. Go ahead.
Jon: The deep-dish pizza really doesn't do it for me. I like a slice of Joe's from New York above all and a nice New York bagel from Marie's. But LA is really interesting in that it's got an amazing array of diverse foods like...you know, the Mexican food and the Thai food here is really something special. I actually think... I remember in Chicago when I was in law school, we couldn't find a place to get a great burrito. And, I think the same thing goes for New York. So, LA's just got hands far and above the selection of amazing Mexican food, and that's what I love about LA.
Matthew: Jon, as we close, can you tell listeners how to find out more about your cannabis brands and interact with you?
Jon: Yeah, I think anyone who is a connoisseur of brands and wants to learn more about our main brand, STIIZY, should follow us on Instagram. Just @stiiizy, which is, S-T-I-I-I-Z-Y. And if you're interested in Shryne Group and what we're doing on the corporate level, our website is shrynegroup.com.
Matthew: Great. Well, Jon, thanks so much for coming on the show and talking with us, and good luck to you in 2020. You got a lot of moving parts here. We're interested in what's gonna happen and, hopefully, you'll come back on and tell us how all this has evolved.
Jon: Thanks, Matt. Look forward to continuing to grow and keep our heads down and build something special. And thanks to you for being a good conduit of connecting with the industry, and look forward to working with you in the future.
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