How decriminalization led to an explosion in cannabis startups (Feat. Ford Smith, Andrew Duffy, and Socrates Rosenfeld) | E2241

24:53Then they thought, oh, well, it's going to clearly happen during Trump or Biden's and it hasn't. And it went legal in federally, I think in 2018, as we discussed in Canada. So here we are seven, eight years later, it still hasn't happened. Here's a graphic, from Claude, thank you, producer Claude, of the amount of capital raised. And as you can see, it was a little bit of a boost here in 2021. I think that was probably post-COVID, people thinking that we would pull this off or Biden would pull it off, and he hasn't. Yeah, over$70 billion has been raised. That's a big number, but it's declined since, and we're in a holding pattern.

25:28This follows what you've seen, Andrew? Yeah, well, interestingly enough, I think actually a huge amount of that investment capital in 2021 was going into ancillary technology startups, in particular one called Dutchie, which is one of the startups that's taken in the most capital in the industry. But unfortunately, that was pretty much peak ZERP and it was also peak cannabis. And right after that, there were a lot of challenges for capital formation in the industry. It wasn't coming online as fast as people expected. And ultimately, a lot of companies struggled. And the Steve Jobs quote holds here, success in this industry is spelled survival.

26:06It's all about continuing to exist and being able to be poised to take advantage of the opportunity when the market becomes that real explosive once in a generation opportunity that it can be. Because like we saw in Canada, Canada was a very different market onset than the US. In the US, we've done this patchwork state by state thing, whereas in Canada, they just said, all right, federally, we're just going to do this. There wasn't that same lead up of state by state infrastructure. And what that means from my perspective is that now there is a great deal of pent up infrastructure that wants to be unleashed in the U.S.

26:47cannabis industry that has been built up in all of these states, like all of the cultivation built up in California, which is getting sent into the illicit market because what it really should be doing is getting sent to all the other states where you probably don't need to be growing cannabis. So the ability to have interstate commerce with federal level legalization would totally change the shape of the industry and allow it to progress and mature and grow all at once in the way that all these other industries that we've talked about, these classic CPG industries have been able to. Yeah. And a question from one of our Nody gang.

27:18Those are the people who watch the live stream and have notifications on. We call them the Nody gang. Sam Houston, SF says, haven't most of the cannabis company shut down or have had major layoffs? What's the state there, Socrates? Has it been a bloodbath in the cannabis startup space? It's followed the same trend line as the broader market since 21, right? Where it's shifted from growth at all costs to you better be profitable and growing. To Andrew's point, it's been a challenging road. And to your point too, Ford, because we've seen it across the board, whether that's operating businesses, producing manufactured products or ancillary tech companies, 21 was peak.

28:03And now it's a game of endurance rather than speed. And this is something that cannabis has faced as an industry and as a plant for decades now, Jason. It hasn't been easy for cannabis at any point in this American history. On one hand, it's really challenging and can be daunting and frustrating at times when we're not treated similarly to other industries. But on the other side, a way to look at this is it's going to force the best companies to emerge. We're going to have to think creatively and resourcefully like this industry has for decades. People will find a way to this plant. People will find a way to sell this plant, whether it's legal or not, whether the financial markets are backing it or not, because this plant helps millions and millions of people.

28:53I think this is the next great American industry, period. And it's a matter of when, not if, that our friends in DC are going to realize that. Obviously, there are some closed-door conversations with the alcohol and pharmaceutical and banking industries that are inevitably happening. If you go through those, banking, I think, would be pretty stoked to be able to have this as a customer base. Pharmaceutical will not be stoked because there's no patents here, so they're bummed out. And we'll fight it. And really, I think that the clearest way to get this federally legalized, regulated, is to just say, look, think about pain management.

29:32You want to be at end of life for cancer patients. We all know somebody in our lives who is dealing with massive pain, had never tried cannabis. And then during, you know, their hospice care or whatever it was, was giving cannabis and was like, oh my God, I should have been doing this for the last 10 years when I was in pain instead of taking OxyContin or other, you know, things. And so pharmaceuticals know CPG companies, hey, they need something because alcohol is absolutely in decline between Ozempic and young people just not drinking. I was reading a statistic the other day, Ford. My lord, the alcohol companies are sitting on massive, massive caches of premium and just regular liquor and spirits.

30:15So they can't move it. Wine, nobody, people stop drinking. Yeah. I read the other day Gallup. I think Gallup said that alcohol consumption is down to 54%. 50 % of Gen Z's drinking when previous generations were at like 70%. That's insane. That's a massive dip. A lot of the newest, we talked to Total Wine the other day. And Total Wine said that most of their new, 30 some odd percent of their new consumers are actually coming into the store looking for THC beverages. And they're not walking out with alcohol either. They're not even like, it's not like a lead generation. They're finding alcohol. They're coming specifically for that and they're leaving with that.

30:49So yeah, it's happening. And the taxes are significant. Yeah, Andrew from Sparkplug, it's 15, 10, 15, 20 % is what you could expect to pay in taxes as a cannabis company in a retail? Certainly. Well, taxes for cannabis companies are extremely onerous. On the one hand, there's the classic excise taxes that you're talking about. What do you pay at the counter over and above the purchase price? But as Ford mentioned, tax code 280E prevents these businesses from deducting most of their expenses from their tax bill. So they're paying 60, 70 % effective tax rates. So if you were to legalize and remove 280E, then these businesses would be profitable overnight instead of losing money or just barely getting by.

31:38So from our perspective, when we see our customers under that burden, operating successfully with the grit to actually power through that. Imagine if any of these big tech companies were paying 70 % effective tax rates, that would not be okay. We would not like to see that on the P &L. Well, these businesses, if they can get over that hump from a legislative perspective, it's a game changer. And then, yes, those state level excise taxes, which today are putting a really challenging burden on them, would be survivable. They would be workable. And the states would be able to take in that tax revenue without unduly pushing customers into the illicit market.

32:15Like the California market has really struggled with getting people to transition from illicit purchasing to legal purchasing because of that difference in taxes. The expense is just a lot higher. But if you were able to give those businesses a fighting chance by removing that overarching federal tax burden, I think that would change the game and allow states to take in more revenue. That's incredible that this exists, but it is a hangover from the war on drugs. It makes total sense if you were dealing heroin to say like, yeah, you don't get to take the farming of the poppies out of your profits and you just pay your taxes on the profits.

32:56Completely reasonable. But in something that's become legalized, completely unreasonable. When we get back, I want to talk about the downsides, specifically some of this cannabis psychosis and these incredibly potent strain shards resins and how we look at those you know compared to the classic cannabis industries if you're an independent content creator or you're building any kind of community oriented business like i am just making great videos or awesome websites it's not enough you need to spend real time with your community and you need to do that with tools that allow you to see what's going on and communicate smoothly and crisply with your community members.

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34:27Socrates, your Jane is in the business of retail, essentially, right? Delivering cannabis to people. There's this category. You can explain it to the audience. It's kind of like a trope now that, hey, weed today is not like the weed you smoked in high school in the 80s. It's like much more potent. Okay, we get it. Be careful. Pace yourself. You can always take more edibles. You can't take less. There's a lot of rules of the road. But then there's this new category. And I don't know too much about it. I have never tried it, but there are shards. There are resins. There are dapping. Explain to us what all this is and how it compares to taking a three or four milligram gummy or taking a hit off of a joint at a party or hitting a vape one or two times.

35:15Full disclosure, I've been in the cannabis world for a minute. I've never heard of shards. so unless Andrew or Ford if you've heard of it let me know I have heard of resin and rosin I think people refer to the resins as shards as well they're like a hard version of it that cracks from my research yeah shatter oh shatter okay I said shards it's not the best marketing because I don't think anybody wants to ingest anything called shatter or shards so there's two things I want to highlight in that question it's a great question Jason One is potency and the other is four factor. Talking about potency first, because it's a real one.

35:54I don't know if anybody's ever tried moonshine, but I had a roommate from West Point, from North Carolina, who grew up, his family grew up distilling moonshine. I tried it for the first time and I'm still getting my eyesight back. And the reason I say that is because moonshine was a result of prohibition from alcohol. If you think about it, you know, if you're going to go and take the risk of distributing and manufacturing and selling alcohol, or if you're going to take the risk of actually going and buying an illicit product, you want to make sure that you get the most, I think, before you said this, bang for your so-called buck.

36:35And we've seen that now where this was coming about a decade, two decades ago, people were talking less so about the strain itself and more so about one specific cannabinoid. There's over 100 cannabinoids, but the one that everybody talks about is THC, which is the psychoactive, quote unquote, high feeling. And when you're paying$80 or taking the risk to go to the illicit market, you want to make sure that you get high. And so the conversation went away from all these different beautiful terpenes and cannabinoids that go into the whole plant and more so of this specific variable called THC. And that's why you saw this out of the ordinary spike in products being genetically modified to get the highest THC percentage.

37:29What we've come to realize is that's like drinking wine based on alcohol percentage. Jason, I imagine you have a nice wine collection. I'm not a big wine guy, but Chamath does and some other friends do. Vinny does. And so I'll partake in a one ounce. But I would certainly not want to drink moonshine, which I think is probably 10 times, I don't know, five times more potent. But no one's basing their wine purchasing decision based on how much alcohol they have. Maybe back in Prohibition, they were doing that. So that's what you're seeing. This is why legalization needs to happen. So tell me about the shards or shattering and resins.

38:08Like what is the... Now we're shifting into form factor. Form factor is actually a beautiful thing. If you think about what alcohol is, is you can just consume it as a social, like, hey, I want to have a good time at the Super Bowl. I can drink it. Cannabis comes in hundreds of different form factors. There's beverage, you can eat it, you can put in gummies, chocolates, you can have it as lotion, you can put bath salts and take a wonderful CBD bath. The products you're talking about, shatter, rosin, live resin, is different ways to take the plant, extract the medicinal benefits of that plant, and present it to the customer in a way that they consume it.

38:49So dabbing and shatter is a result of prohibition, meaning how concentrated can I take this and put it in? For it, Andrew, explain how people take this, because I think that's what the audience is missing. We understand it's more potent, but how do people consume this, Andrew? If you could explain it. You could probably think of it as quite similar to the mechanism that's happening inside of a Juul or a nicotine vape. You're basically taking a concentrated liquid or in the case of dabs and shatter, it's more like a gel, which is essentially 80 or 100 percent THC. You've compressed the plant and taken out all of the THC content and turned it into this sort of gel.

39:31And so you take a very small amount and then you superheat it and you would smoke it similar to a bong or, you know, the way that you would consume any other flower based. yeah i mean it sounds like smoking is it a way to say this for it might be this is the crack version of it is the crack it is the crack of cannabis yes you nailed it yes and people take this in the ram it actually doesn't i i do i in the spirit of not of not putting out misinformation it is highly potent but what is actually extracting is all the plant medicine from it Now, people are advertising it as like, hey, this is going to get you so high.

40:14But really what it's doing is it's extracting all the plant matter that when you consume it and smoke it, it smokes. It's not good for your lungs. And it's actually pulling all that out. So it's a distilled version of the cannabinoids. Here's a look at what it looks like. Here's one of these pipes. You heat it up. I guess that little stick is the hot thing. And then the resin is what's in the little bowl there. And I've seen this online. So this is five, 10 times more powerful per hit than smoking a J or hitting a vape pen. And this can cause a pretty serious psychosis. Kids are getting taken or adults are getting taken to the emergency room because they hit this too hard.

40:53That's, I guess, people's concern. So I'm not trying to demonize anything, but this is... This is a really important part of the conversation because I think what people in the cannabis industry who have a responsible approach to cannabis don't believe that there are no consequences to widespread high dose cannabis consumption. I see those consequences and I believe in them, but I think that we should compare them to the things that we accept in our everyday life amongst other substances. And how do these things actually work out when it pertains to personal liberty and personal decision-making?

41:26So, you know, based on the ratios that we've just described, this is basically the difference in concentration between having a beer and having some vodka. You know, that's a choice that people make when they're consuming. And there are a lot of problems that happen in our society as a result of overconsumption of vodka, death by traffic effectiveness, death by overdosing on alcohol, alcoholism, all of these consequences that occur based on a substance that ostensibly doesn't have any medical benefit. And we accept because it's something that people want to consume and it enhances their life from their perspective.

42:01So I think that's where thinking about cannabis as something that is part of our tradeoffs as a society, but also has many benefits. There is a ton of great research that you alluded to, Jason, that indicates that when you legalize cannabis in a state, opioid consumption and opioid deaths plummet precipitously by in some cases up to 30 percent. That is huge. If we're trying to handle the fentanyl crisis, if we're trying to handle the opiate addiction and deaths of despair crisis, cannabis is one of our best solutions. And I think we can probably do the math to show that the risks of cannabis and the consequences when not consumed responsibly are outweighed by the benefits of responsible consumption on personal lives, as well as from an economic perspective, you know, for the entire country.

42:51I want to say, Socrates, I completely agree. I appreciate what you said just about not putting out misinformation. I think, again, not to touch on the too much THC side or it's like it's just too potent. This is a product of prohibition and it's now a product of overregulation. We're being overregulated. And so when you're going to the consumer and you're trying to, you're still buying on a price per milligram dosage basis. And when you're getting the shit taxed out of you, you're going to make sure you're getting the highest potency THC out there. So prohibition and Gavin Newsom, I think amongst many others are like the key.

43:20He does not have a really good track or anything. I would say that both of those are factors that are influencing this high potency market. And this is where you could have regulation, actually a federal regulation help sort this out. Because Everclear, which is like 190 proof, which I guess means it's like 85 % alcohol or 200 % proof, 100 % alcohol for industrial use. These things are banned. There are places where they say, hey, there's a certain potency where we're just not going to allow you to sell it. There might be a reasonable concept here as well. You know, maybe don't sell gummies that are.

43:54What's the highest potency gummy you can buy, Socrates? Before legalization, actually, in the state of California, you could buy like a 400 milligram candy bar that was unregulated. Did you say 400 milligrams? 400 milligram. And it would actually, in the vice, the flip side of that, you could buy something that says it's five milligrams. And it could actually really be 400 milligrams because there wasn't testing. Sure. But a 400 milligram, just so people know, like I think a reasonable dose is five or 10 milligrams. Correct. Yes. So this would be 40, maybe 100 times more, which you don't want laying around.

44:34That's the issue is like if this stuff is laying around or kids get access to it, you know, it's always about protect the kids. But the same thing could be said about moonshine, right? You just don't want the stuff laying around and then somebody taking a shot of it and winding up getting really sick or just underestimating the potency of it. There's also a question here of core CPG principles, which is that the businesses in cannabis are responding to the market that they have. And because of the stigma around cannabis and the continued prohibition, there's a huge slate of the market that is not comfortable entering into it.

45:08So the classic unicorn consumer that every cannabis business is always talking about wanting is the soccer mom. The soccer mom who's having her vape You know, she's watching the soccer game. She's having a great time and she's having a low dose, high quality branded experience. Those consumers are a diminish, a diminuous percentage of cannabis consumers by volume. Right now, it's heavy consumers that are purchasing based on THC content are driving most of the revenue for cannabis businesses. And so, yeah, they're going to respond to that and make those high dose products. But if you expand the network of consumers that feel comfortable entering into the space, which is slowly happening over time, then more diverse businesses with low dose or differently branded or different form factors can start to provide real, reliable products to those people that can actually sustain their businesses, rather than having to lean into some of these products that maybe don't feel as comfortable or familiar to the typical consumer.

46:06And to touch on your point around the consumer safety piece and the psychosis piece, because I know that's what you asked earlier. In California, a year and a half ago, the LA Times wrote an expose. They pulled pretty much all the top cannabis brands off the shelves in California. There's a set of pesticides. There were 66 pesticides that the regulators are supposed to be regulating for. They tested those products off the shelf against the California regulations and the FDA regulations for nicotine or for tobacco. There were seven pesticides that the FDA regulates for tobacco production that are not regulated by California for cannabis.

46:38That doesn't make any sense. Both are heated up with the flame. Both have the same type of risk profile. So we went in. We looked at the data. Once the report came out, about like 70 % of all of the brands that were about 95 % of the brands that were tested failed. And every single one of those brands got hit 50%, 70 % sales. I mean, their sales declined after that LA Times piece came out. There was a group, there was a coalition that came together. We set together, we put together something called ECHO Certified, the Environmental and Consumer Compliance Organization. We said, because of this fragmentation regulation, the feds aren't talking to the state, the state's not talking to the feds.

47:13So now we've got pesticides that are, first off, the regulators are not regulating. So now you've got all of these pesticide-laden products on all these shelves that are being tech, that are, you go to the consumer, you know, you feel like you should trust them at the end of the day. They're clearly not doing their job. The regulators aren't showing up like that. We built a set of standards and now there's an auditing process out there. We've got 30 of the top 30 brands in California are all on the platform. It's a nonprofit. There's an independent technical advisory committee that's doing the job of the California regulators and the FDA when they should have oversight on this and they don't.

47:41They're coming up with the standards and then the brands that actually care, the good actors are coming in. And they're saying, look, we're going to we're going to pay monthly dues. We're going to send out secret shoppers to do random audits, test the products. And then they essentially run this pretty cohesive auditing process. What we found is, and I'm speculating here and I've talked to a handful of doctors and they think that we're like somewhere on the right track. Yes, there's a chance that you're seeing psychosis coming from this high dose THC intoxicating products. Most of them coming from hemp markets or 33 % kind of like shatter, wax, etc.

48:14What we found was a really interesting correlation. The lab partners that were running these audits were looking through thousands and thousands of certificates of analysis, understanding the makeup of these genetics and the pesticides that are using these products, heavy metals, etc. And what they found was the prevalence amongst like 90 % of the lab samples came back with neem oil. Now, neem oil specifically is used in a lot of different pesticides. And there's something called neem oil toxicity. Neem oil toxicity has the same exact symptoms as what we're seeing in, I can't remember, it's not causing psychosis, it flirts with psychosis, but specifically there's this cannabis induced nausea that will happen where people will continuously vomit.

48:59So we might have a correlation, not a causation. We might be pointing at the wrong substance here, which means even more regulation. In fact, there was a bunch of hand-wringing not long ago because people were selling caffeine, like actual caffeine drops or powders. To understand how powerful these were, I was just asking Producer Claude, people were selling powdered caffeine that was the equivalent. One teaspoon, not even a tablespoon, was 28 cups of coffee. A half a cup of the concentrated liquid was 20 cups of coffee. And there were deaths from this. It was also for Loco, if you remember that, where you're just putting too much caffeine, too much alcohol in a serving can.

49:40So people will associate a serving or a chocolate bar, you know, whatever it happens to be, or a teaspoon of sugar, teaspoon of honey, you know, with an acceptable dose. It's almost like you can make any of these things into a fentanyl equivalent concentration if you are determined to. And that's what regulation, whether it's industry regulation or the government or some compromise of the two could really have a dramatic effect on protecting people because there is a, you know, harm can happen. I think, Andrew, you said it, you know, people get some personal freedom, but, you know, young people, they see a can of soda.

50:17They're like, I drink cans of soda. I drink Arizona iced tea. So it's four local. It's got some alcohol and caffeine in it. It's just like having an Arizona iced tea and they just don't know that it's four. Arizona is, it's four or eight. So they have two and they really having 16 and they just, we had jolt cola i think when i was in college and jolt cola was marketed as two times the caffeine so it's like hey if you want to drink one coca-cola instead of two you know but there's some reasonable uh yeah there's some reasonable compromise here i think socrates yeah yeah i as you were talking it's a great example i don't know how many documented accounts there are but i imagine people uneducated to the effects of what Four Loko was, was drinking it.

51:03And you could call it, they went crazy that night. I've certainly had some run-ins on Four Loko where I'm like, I think I might be going nuts. So I think that's what you're seeing, Jason, is largely kids or uneducated consumers going probably to the illicit market. So you're not buying a 400 milligram candy bar to a dispensary. You're going, you're saying, okay, I have$50. The person's going to give you the highest potency product. And you're going to think that you're going crazy because you have no expectation of what you're supposed to feel like. And you assume like, obviously, it's not going to send me to the moon.

51:43And this is why just echoing what you're saying, and what this group is saying, the way to solve that is let's legalize it. Let's study it. Let's research it. Let's put smart regulations around the plant so that people aren't put in a position where they could be putting themselves in danger like we do with alcohol and sugar, etc. 100%. If you're an operator right now, and this is more of a public service announcement, I consume cannabis. I have a cannabis beverage. We have two milligrams and a five milligrams and a 10 milligram. If you're selling anything above 10 milligram, you have no regard for like this market existing further than a few more years because you're actually the issue that's that's happening right now to get the regulators up in arms and not really knowing what to do with this there's brands in market right now i can go to the gas station the corner of south congress i can walk in and i can grab a hundred milligram dose beverage what a hundred percent yes absolutely that is the issue is that there's these fly-by-night operators that don't give a shit they're selling and again this is prohibition this is regulation these are all the issues already talked about but there's you got to have like some backbone out there and just do you know you know this isn't right you know and so i think that look i i i hear the regulations on the hemp side are going to settle between three milligrams and five milligrams per dose per unit of dosing that's a reasonable that's that's totally reasonable yeah i mean if you wanted to have more you can have a second skittles or breathman or whatever the format is there's some reasonable here for loco just for background on this banned beverage it was the equivalent of like almost three cups of coffee and a bottle of wine.

53:17So now you think, hey, I drink three of these at a party. I've now had nine cups of coffee, eight, nine cups of coffee and three bottles of wine. That's not going to go well for you. There's no instance where a human being on planet Earth has had eight or nine cups of coffee. Like I love coffee. On my worst day, I had six cups, five or six cups. I have friends who love wine. I think they might have had two bottles like in, you know, a long night individually, maybe, but never three, an individual three bottles. What would that be? 15 glasses of wine. It's insane. Now put them both together. I mean, you have to really love what you're having here.

54:00All right. Listen, gentlemen, this has been amazing. Uh, where, where can people find you online? And just a little bit of plugs here at the end for what you're working on. Go ahead. Uh, Socrates. Yeah. Visit our site. I heart Jane.com and reach out to us anytime. We love hearing from the market. Info at iHeartJane.com and find me on LinkedIn if you want to connect. Andrew? Likewise, I'm out there on LinkedIn, Andrew Duffy and sparkplug.app. That's sparkplug.app is where you can find us and take a look at my podcast where we talk about some of these. Yes, the influence of cannabis and it's really rare combination of retail traits on the future of retail.

54:37It's called High Touch with Jake. Love it. High Touch. great and ford smith go ahead uh yeah ford smith uh you can find me on linkedin you can find me on x at ford h smith and then the venture firm is ultra native that's u-l-t-r-a-n-a-t-a-v-e.com and then if y 'all are interested in the the consumer certification we need a lot of support out there so start looking for it it's showing up on a lot of packages it's uh echo e-c-c-o certified.org all right and all of those links will be in the show notes or in the youtube description. And we're going to start doing QR codes. Today, our first QR code is for Spotify.

55:12Go ahead and take a picture of that. And it'll be on the screen for about 60 seconds. And to the Kotler family, just bookending this, we're thinking about you. And yeah, I'm going to miss you, Herman. What a classic he was. Kid from Brooklyn. He did great. And Matt, what a son. All right, we'll see you all next time. Bye-bye.