‘Costco of Cannabis’ Makes Waves at Y Combinator’s Demo Day

The elite angel investors and mentors of Silicon Valley’s start-up accelerator Y Combinator have their eye on the “Costco of cannabis,” following its prestigious Winter 2019 Demo Day on March 18.

In less than a year since being founded, Flower Co. has become the talk of one of the most prestigious investments events on the planet, named one of tech publication TechCrunch’s “top 10 startups” from the day. The company was originally founded last May with the goal of fusing “Humboldt County values with Silicon Valley efficiencies.” Through the streamlining of distribution and delivery, it claims to be able to beat dispensary prices by roughly 30 to 50 percent. The “wholesale cannabis club” offers members discounts on bulk cannabis purchases, for a starting membership fee of $79 a year.

Y Combinator and its network of money and mentors have helped launch some of the most groundbreaking new companies on the planet since the turn of the millennium. Its biggest success was Airbnb, turning people’s spare rooms into a $30 billion company in the 10 years since its team took part in Y Combinator. Other names from the incubator’s past that people would be quick to notice include Reddit, DoorDash and Dropbox. If you take a look at its top 100 performing companies, you’ll see plenty of other names you recognize, along with a variety of web and businesses services now with big money.

Y Combinator’s winter showcase, one of two annually, is where companies take the stage to convince investors to give them a shot. Each year, a different batch of companies graces the stage, following 11 weeks where they’re constantly refining their pitch, product and company, while listening to their peers that have launched successful businesses out of the accelerator on a weekly basis. This year’s winter batch featured roughly 200 companies from around 30,000 applicants.

Cannabis Companies at Y Combinator

In addition to Flower Co., who featured on day one of Demo Day, California cannabis distribution company Nabis took the stage on day two. According to Nabis’s website, 40 different companies are now using their distribution services and they ship to 90 percent of California dispensaries.

Previous Y Combinator cannabis highlights have included Meadow, who builds various web solutions for the cannabis industry around retail, delivery and compliance, who was the first cannabis company to be supported by the incubator in 2015. Another past highlight is California Dreamin’, which makes low-dose pot sodas. Last summer, California Dreamin’ scored $2.3 million in funding after last summer via Y Combinator’s network.

As for Flower Co., they were one of the big
highlights so far for the winter batch at Y Combinator. CEO Ted Lichtenberger
told Cannabis Now in a phone interview that the company just opened its Series
A funding round, amidst all the Demo Day enthusiasm. Series A funding is the
first round of funding that companies receive from venture capital firms.

“I think it was pretty early on we knew we
were on to something,” Lichtenberger said.

When Lichtenberger picked up his early batches
of marketing materials from the print shop, the employees at the print shop
asked if they could join his company. “That moment was when I knew we had a
product that fit the market, but I think none of us saw coming how quickly.”
And the enthusiasm has carried over to the Y Combinator. So far, Lichtenberger
says they have already heard from over 100 investors. “We’re jam-packed with
meetings with everybody to walk them through the model,” Lichtenberger said.

We asked if Flower Co. was just trying to fill
the coffers with as much cash as possible or if they have a fixed number with
the right person more in mind. “We’re looking for smart investors that can add
more to the table,” Lichtenberger replied. Right now, he said it is mostly
talking to venture capital firms and folks that have specialized in the
cannabis industry.

Lichtenberger said that one of his favorite
parts of all this is helping get legacy farmers to market.

Investing in Cannabis Start-Ups

Troy Dayton founded The ArcView Group in 2010,
and it was the original destination for budding cannabis entrepreneurs hoping
to find venture capitalists and angel investors to back their causes. We asked
Dayton how different things have become with institutions like Y Combinator getting
involved.

“While there are these great stories about Fortune 500 companies and well-known VCs putting money into the sector, we are still in the early innings of mainstream investment acceptance of cannabis,” Dayton replied. “But incredible progress is being made. Ultimately, it will be constrained until banking and [the tax code] 280E are resolved, and ultimately federal prohibition is repealed and the states stop strangling the industry with onerous regulations”

The National Cannabis Industry Association
pointed out the perils investors still have to deal with regardless of the size
of the firm.

“Most investment spaces don’t have to worry
about the companies they invest in or their customers being prosecuted if they
are in the wrong state [unlike with cannabis], so I wouldn’t say it is
completely normalized,” NCIA Media Director Morgan Fox told Cannabis Now. “However,
I think that investor interest has gotten to the point where one could say
investors are viewing many of the issues caused by prohibition as calculated
business risks and are more willing to take those risks than ever before.”

Morgan believes a big part of investor
confidence comes from the fact that advocates are succeeding and that policy
change is moving at a good pace.

Kris Krane has built one of the largest
footprints of any business in the cannabis industry across the U.S. with his
company 4Front Ventures currently operating dispensaries in multiple states and
the District of Columbia, and expecting to add a couple more to the list in
coming months. Krane’s take on all things pot has been respected since his days
at NORML in the early 2000s, so we asked for his take on the news about Flower
Co. doing well at Y Combinator.

Krane said he couldn’t speak to the valuation
of the Costco-style model, “but there is going to be a future in bulk
purchasing,” he said. “Costco, Sam’s Club — those placers do well for a
reason.”

Krane noted that on a recent trip he took to Vancouver, Washington, he visited Main Street Marijuana, a dispensary that offers more affordable options and is one of the highest grossing in the state. “They carry no high-end products, the most expensive thing is probably a $40 eighth, but they got a $30 dollar ounce,” Krane said. “It’s all the low end of the market, but they’re absolutely crushing it. They’re busy all day long.”

Krane says there are a lot of people that are
going to buy in bulk on the lower end of the market. If their needs aren’t
being met by the current spread of options, it’s easy to see why this is an
idea elite investors would see potential in. “My guess is there is probably a
market for that,” Krane said. 

We asked Krane if removing banking
restrictions was the final thread that needed to break before investing your
money in pot was totally legit for old money financiers.

“I mean it’s coming, it’s all part of it,”
Krane replied. “With a lack of access to banking, you still have to go to high
net-worth folks. There are a lot more of those people in cannabis and getting
involved in cannabis just in the last year or two. There’s just more real money
in the states now than there was.”

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