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

Starting point is 00:00:00 The 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 resourceably 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 plan helps millions and millions of people. I think this is the next great American industry, period. cannabis is a scheduled drug. But hemp is not a scheduled drug.

Starting point is 00:00:32 It is a federally legal product. So when you jump into the federal hemp market and you can start shipping D to C, and you can hack your way around, you know, meta and Snapchat to start running, you know, normal CPG-type focused ads. It's a much more efficient business. It's true consumer packaged goods at that point. And so we decided to not go into that space because we thought it was a little too risky. We had a conservative investor base.

Starting point is 00:00:54 It felt a little gray area at the time. In hindsight, I wish we had done it because. there's been a lot of brands that have done really well and quickly grabbed a lot of market share nationally. There's an insane amount of these brands on the shelves now. This week in startups is brought to you by Circle. Circle gives you everything you need

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Starting point is 00:01:35 Gusto. Check out the online payroll and benefits experts with software built specifically for small businesses and startups. Try Gusto today and get three months free at gusto.com slash twist. All right, everybody, welcome back to Twist. Today is Wednesday, January 28th. We've got a great show for you today. We're going to be talking about the cannabis industry with three experts and specifically around startups, the opportunity there, and the changing legislation and regulation in the industry.

Starting point is 00:02:06 But before we get to that, very important note, wanted to give a little memorial here to a friend of mine, Herman Kotler. Herman, like me, was a kid from Brooklyn, him from Bedsonhurst, me from Bay Ridge. He was also the father of Matt Kotler, who has been my partner here at launch and this week in startups for many years. But Herman was a bit of a storyteller, also from Brooklyn, as I mentioned, may or may not have been in. in a foreign three-letter agency may have, you know, worked for the government. I'm not saying that those rumors haven't happened around me as well.

Starting point is 00:02:40 But Herman and I would get together once in a while and talk about his son, Matt, who we love dearly. And it'll be missed. There you have it. OK, so let's get back to the show. With me today, my good friend, Fort Smith, CEO and founder of Ultra Native VC. How are you, Ford?

Starting point is 00:02:56 I'm lovely, man. It's good to see you. I'm excited to be here. That was beautiful, dude. I've always appreciated your sense of humility. So thank you for that. Yeah. Thank you.

Starting point is 00:03:07 And Ford is the CEO and founder of Alternative Visa, and he has a cannabis company himself doing cannabis oil manufacture. We hear about that, Noble Pacific. He's an advisor to Cannes, which makes cannabis beverages, and he's been in the business for a while. Socrates Rosenfeld is the CEO and founder of Jane, which is a cannabis and product marketplace. Welcome to the program, Socrates.

Starting point is 00:03:29 Thank you, Jason. It's not easy having that name, is it? Wow. A lot to live up to. I fall short. Now, this was given to you by your parents? Yes, my mom proudly named me Socrates. So I'm still living up to it. We'll see. Wasn't a name you chose, just to be clear. Wasn't a name I chose? It's the one that was given to me. And I'm growing into it, as they said.

Starting point is 00:03:54 What a great name. Now, were you named after the philosopher? It's an inside secret with my mom. The world thinks I was named after the Greek philosopher. I know you're half Greek, Jason. I also have Greek blood. So she appeased the in-laws with that name. But deep down in 1982, the World Cup was going on while she was pregnant with me. And there was a Brazilian – the captain of the Brazilian soccer team who ended up winning the World Cup.

Starting point is 00:04:26 was named Socrates. And so she was in her... So double meaning. She peased the in-laws. And yeah, she got her passion for the sport. Also with us in our little quartet here is Andrew Duffy. He's the CEO and founder of Spark Club, which is enterprise software for retailers. But when I met Andrew, which was now probably five or six years ago, he went through the

Starting point is 00:04:48 launch accelerator cohort 20, which for those of you who are LPs is Launch Fund 3, so you can get excited. and he had a really great idea for incentivizing the clerks, the retail workers, by educating them on different products in order to increase sales, to increase their engagement. I said, hey, this is a great idea. He said, oh, there's only one problem. It's cannabis. I said, well, you're an enterprise software company. You have cannabis as one of your clients, but you have all these other clients.

Starting point is 00:05:15 So we were in the clear. We were invested in an enterprise software company that services, anything legal. But how has the business been going? I'll start with you, Andrew, just in terms of. of looking at how things have changed in the five or six years since we got into business together. Absolutely. Well, business is booming as any of the other folks on the panel can tell you, the growth of the industry since COVID really has been astronomical. In the past 10 years, it's gone from about a $3 billion industry to a $30 billion industry. So an order of magnitude

Starting point is 00:05:49 of growth primarily fueled by more and more new states opening. So in the early, early days, Washington, Colorado, but now as we've proceeded along and more and more states have liberalized their cannabis rules, we have huge population centers like New York and California online, as well as now some pending legalization in other states like Pennsylvania, Florida. All those places you see on the election map, those are the ones that are starting to legalize and are becoming the big population centers adding consumers to the business. Got it. And how's the business itself doing? Is the business still center around? the core premise you shared with me five or six years ago that I fell in love with?

Starting point is 00:06:29 Yes, absolutely. So. And did I describe it well? Yes, very well, very well. We've grown since then to expand from not just that core premise of accessing the point of sale employee, which still is one of our most important products, but actually to become a coordination co-pilot for wholesalers to influence every aspect of the physical retail space. So not just that point of sale employee getting commissions to recommend particular products like a real world influencer, but also managing promotion schedules, managing inventory, any way that a wholesale operator wants to influence that physical retail space where today 80 plus percent of commerce still happens in the U.S., that's what SparkPlug can do for them. And yeah, it's been going well and adding that surface area to the product has helped us expand

Starting point is 00:07:17 from cannabis into verticals like outdoor gear, beauty, specialty nutrition, anywhere where you have that influential point-of-sale employee, we have a pretty meaningful opportunity to. And the retailers like this as well. It's a win-win. They don't mind a commission or a little spiff going to their retail employees. It's like a nice, it's like, do they view it as like a tip or like a little bonus that doesn't interfere or maybe even takes a little pressure off of them in terms of salaries? Yes. The latter is precisely the outcome that we see. So essentially they're able to offer their employees a dollar or $2 an hour raise without having to pay for it, all fueled by the marketing budgets of these brands. So that is great for them for reducing turnover, for increasing output from employees, for making people happier working for them.

Starting point is 00:08:04 And overall is a win, win, win for all the folks. And a lot of these employees are really changing their lives through the platform. we have employees making 20K a year and additional payments from Sparkplug when they're earning 20K in wages. So it's a pretty significant source of income for a lot of these folks, which we're really happy to be able to provide.

Starting point is 00:08:24 This sounds like something that could work well with your cannabis beverages because you have to explain the sort of value prop. Tell me a little bit about when you got into this area and how it's going, because that's one of the things I haven't been able to get a handle on. Is it like a great investment opportunity?

Starting point is 00:08:42 Or is it flooded with competition because making the flowers seems to be not like a proprietary or very difficult thing to do. So I've heard these reports that the market's gotten flooded with stuff. And I'm sure Socrates will have some input on this as well. But has this been a great business or is it a good business? I'd say it depends on when you got in. And then if you kind of maybe had the foresight to pivot or jump into the hemp market, there's some regulatory framework that needs to be kind of set up to understand this.

Starting point is 00:09:11 So many states, and I couldn't give you the exact number, but they have these state regulations like California, Oregon, Colorado, things like that. Inside of those state regulations, you've got to go and apply at a state level, get a license, and then you get certain types of license types. Some of that's cultivation, manufacturing, distribution, productizing, more or less, and then retail or like direct to consumer. And what's happened over the past, you know, in 2018, Trump passed the Farm Bill, and the Farm Bill essentially legalized.

Starting point is 00:09:37 It didn't essentially. essentially it legalized hemp. Hemp is a, it's not a separate type of plant other than, it's not different from cannabis. Himp is a legal definition. So whether you're consuming some product from the hemp plant or from cannabis in a regulated retailer, it's still the same plant species at the end of the day. It's just a different form of genetics. Hemp, the legal definition of hemp is less than 0.3% of dry net weight of an actual

Starting point is 00:10:04 bud per se. And so what happened was because the farm bill legalized hemp and they defined hemp as less than 0.3% THC, they technically still nationally, federally legalized THC. So there is a weird loophole that would allow these farmers or extractors or brand builders to say, hey, by the way, I grew a whole bunch of hemp. You know, California, let's say, you know, like on average you're seeing 25 to like 33% THC content and cannabis flour in these regulated markets because patients kind of like, like to spend or get the biggest bang for their buck.

Starting point is 00:10:37 So farmers are incentivized to cultivate higher yielding THC crops. What's happened since 2018, somewhere along the way, people realize, oh, wow, we could actually go make the argument that this 0.3% THC, we can extract that out of hemp and we can concentrate it and then infuse that into gummies, edibles, pre-rolls, etc., and increase that THC content to the same level of what state-regulated operators are producing and selling through retail. So it took a couple years for that to really kind of like catch hold. But as soon as kind of the word had gotten out, a lot of the original operators like myself, I've been in the California industry for since probably 2014, I set out, I raised a whole bunch of money in 2020 to go and

Starting point is 00:11:24 enter the cannabis beverage market in California specifically. And within about nine months, all of a sudden we started hearing about people running into the hemp market to go and launch their cannabis beverage brands because now you're not dealing with the same taxation issues. There's no 280 issues, which at 280, just for simplicity is most of the cannabis operators, because cannabis is a schedule one narcotic, they can't write off their cost of goods, which this makes the business extremely cost prohibitive because cannabis is a scheduled drug. But hemp is not a scheduled drug. It is a federally legal product. So when you jump into the federal hemp market and you can start shipping D to C and you can hack your way around, you know, meta and Snapchat to

Starting point is 00:12:03 start running normal CPG-type focused ads. It's a much more efficient business. It's true consumer packaged goods at that point. And so we decided to not go into that space because we thought it was a little too risky. We had a conservative investor base. It felt a little gray area at the time. In hindsight, I wish we had done it because there's been a lot of brands that have done really well and quickly grabbed a lot of market share nationally. To answer your last question around just market saturation, yeah, there's an insane amount of these brands on the shelves now. There's a lot of fly-by-night operators. There's a lot of operators that really truly don't give a shit about the quality of product they're putting in it. Most of them, there's a very well-known lawsuit

Starting point is 00:12:41 right now. You can go look at it online. There's a company called Vertosa that people are claiming have actually been buying distillate THC oil from regulated, like call it California, Oregon kind of state operators, and then black marketing it into the hemp channel and infusing that and selling that into beverage companies claiming it was coming from hemp. And there's really no way, if you can't follow the paper trail, there's no way to actually know if it came from him. Oh, wow. So basically giving people more bang for their buck or backdooring it when they shouldn't. Yeah, yeah, yeah. They're saving themselves, yeah, an insane amount of money by doing this. I'm not claiming that I'm not making any statement around that case other than that's out in the public,

Starting point is 00:13:18 but these are the things. Five states have complete prohibitions, as I'm reading here from producer Claude, Idaho, Kansas, Nebraska, Wyoming, and Idaho. Launch is a fast-growing organization. We've got more than a dozen employees working with me here in Austin and another dozen spread out all over the world. But there's so many moving parts when it comes to hiring and managing employees. There's the onboarding. Of course, payroll. You got to pay them. And listen, I've got all these podcasts to do. I don't have time for payroll benefits, HR taxes, answering questions. Nor do I want to hire a full-time person and then have them do five hours of work a week. No, I have the perfect partner. Gusto. They're the all-in-one payroll and benefit product that's built.

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Starting point is 00:14:45 Great partner. Socrates, explain a little bit about your business and how long you've been in it. And then what is the business outlook here for cannabis going into 2026? I've been in business. I've been doing this full time since I left the military. I did a stint with McKinsey and then came over here in 2015, 2016. So I've been doing this for a minute. And it's been a lot of fun to watch this nascent industry go from an illicit market into more and more of a mainstream market. And the truth of this plant is coming out, that it helps a lot of people.

Starting point is 00:15:22 What we do at Jane is essentially similar to what, Andrew, you've been doing with your technology, is taking cannabis for what it is. It's a $30, $40 billion market. It's fragmented across thousands and thousands of supply-side retailers. There's no direct-to-consumer capabilities to Ford's point where now you can do that through hemp. You can ship a six-pack of can to a doorstep. You can't do that in cannabis.

Starting point is 00:15:54 And so I was very interested in what the future of e-commerce was going to look like with my founders. And this was agnostic to any industry. And we held this thesis 10 years ago, and we see it coming true, that the future of e-commerce would be in the complete digitization of all commerce. It wasn't going to be taking an Amazon model

Starting point is 00:16:15 and trying to beat Amazon at its own game. It's been tried multiple times. Amazon's not going to let that happen. Shopify, another monster in the direct-to-consumer business is doing extremely well. it's going to be very hard to displace them. And so what we saw was, could we take existing retail infrastructure, brick and mortar stores, the CVS is the Walgreens, the grocery stores of the world, and in some automated fashion,

Starting point is 00:16:41 take all that offline inventory and push that online so the consumer has an Amazon-like experience when shopping, except now the value is being pushed into local economies rather than being consolidated at one Amazon.com, if you will. And so we saw this as an opportunity that was once in a generation and we jumped on it. It also helped that personally myself, cannabis really helped me as a veteran coming out of the army. And what I struggled with was I couldn't get the consistent feeling from one product from an illicit dealer to another. If you think about how you shop on Amazon, you can have full purchasing power. You know exactly what you're getting.

Starting point is 00:17:24 You get recommendations. You get social proof through millions of verified reviews. And we want to bring that same level of consistency and transparency to the industry and launch this. And so we've developed technology that in real time can take live inventory off a brick and mortar store shelf, create a turnkey digital storefront, and connect those storefront so that we're building the Amazon for Main Street, applying this here in cannabis, and proving this at scale. And then one day we'll probably bring this into other retail goods that are very, difficult to ship direct-to-consumer groceries, alcohol, etc.

Starting point is 00:17:58 Here's the reality of the framework changing on a federal basis. We talked about states, you know, the United States of America. We get 50 different sets of regulation. But here's your polymarket weed, weed rescheduled by March 31st, 9% chance. So you can get this polymarket. But you see, I guess right around Christmas time, it spiked up to well over 60%. I think that was when Donald Trump was talking about it. So Andrew, what's the chances this gets reschedule?

Starting point is 00:18:25 during the Trump's second term. What does the buzz in the industry? I think the chances are extremely strong. Anyone who's been in the industry for as long as we have knows that the hype cycles of it's going to happen, it's not going to happen are constant. But this is the first time that we have seen truly bipartisan support at the executive level. So the Biden administration tried to reschedule cannabis. They were slow ruled by the DEA until the transatlantician. to the Trump administration. So the Trump administration coming out and saying, hey, our intention is to reschedule this is the first time that both sides of the aisle at a federal level have said that this is a priority for them. Previously, it has been a small group of Republicans in Congress

Starting point is 00:19:14 and the Senate who have said, this isn't a fit with our values. This isn't a fit with what our constituents think. But broadly, at a population level, cannabis is one of the only bipartisan issues right now. over 70% of individuals believe that cannabis should be legal in some capacity, whether that's medical or recreational. And it really is across party lines. It's about freedom of access. It's about medicine. It's about economics. It's about personal liberty. It's about all of these philosophical ideas that aren't owned by one party or the other. So I feel quite optimistic that this is something that we can actually generate momentum behind, particularly if in advance of the midterms, the Trump administration is looking to get a little bit of a populist boost.

Starting point is 00:20:00 Ah, very interesting, yeah. And I think pain reduction is a key there. Your thoughts for it on the potential federal approval of this and what impact that would have on the industry, because it did many years ago become legal federally in Canada, yeah? And I'm curious what the effect there was. I would agree with Andrew. I mean, I think there's strong tail wins. I think that the Maha movement has definitely brought to light. It's funny. We've been bouncing these topics back and forth from the right and the left for forever and somehow it's landed on the right and now the left is, I don't know, not too thrilled about it. But regardless, we're here. I think that, I think the reality is at some point in the next three years. I don't know if it's going to happen

Starting point is 00:20:39 for the midterms. I would hope it does. I think that's a great theory. I would, I keep kind of pushing that too. Whether that happens or not, he has the foresight to think to do that. We'll see. if it happens, I think it's a big boom. I mean, I think right now you're already starting to see, you know, whereas traditionally when I was raising funds from investors, I've historically had to go to family offices here in Texas to go back these companies. They're usually like high risk, high reward. They write a check.

Starting point is 00:21:04 That was their bet in cannabis. Don't ask them for another investment again. And let's see how it goes. And now you're starting to have the conversations with like traditional consumer packaged goods investors. You've got guys like Clayton Christopher and Brian Goldberg and, you know, There's a hand, I mean, the list goes on of these like really top notch, like, you know, skinny pop kind of C4 Coca-Cola kind of type executives that are coming in that really understand capital markets.

Starting point is 00:21:28 They understand how to raise capital. They know they're not to take things public. They're not to get things sold. And those conversations, like I was hoping they were going to have five years ago. But ever since this announcement, that's when things have really started to heat up. So I think there's some SPACs out there that are going to happen. Everybody's getting their documents ready, sitting them on the shelf and then trying to like read the tea leaves to see when this thing happens.

Starting point is 00:21:47 And then I know conversations or I'm having conversations actively right now with a bunch of cannabis beverage, cannabis slash hemp beverage companies to try to put a little portfolio together because I think that right now there's this weird. It's almost as an investor, I think this is interesting. There's a weird moment of like almost arbitrage you could play right now because there's still uncertainty. I mean, everybody's like these eternal optimists that it's going to go through and I'm ultimately one of those too. But there's a couple of brands out there that have unfortunately had burned through a lot of marketing dollars. They may have, you know, Cannes a great example for it. They're like this, I'm not going to call them the cockroach, but these guys are, they're one of the top selling beverage companies in the United States and the THC sector.

Starting point is 00:22:23 They've been the darling of cannabis for five years now. They raised a whole bunch of money to go and focus exclusively on state regulated markets starting out in California to Stanford graduates. They founded the company, raised a whole bunch of venture capital. Then they saw this opening in the hemp market. They pretty much paused all of their developments in like the 10 or 14 different like state regulated markets they were entering. They said, we can build, you know, our margins are going to be significantly. better in hemp, kind of focused over there. But now you've kind of got, again, I don't, I'm an advisor to the company. I don't fully understand the cap stack. And I know that isn't just

Starting point is 00:22:53 them. There's other companies out there like it. But you've got companies that raise an insane amount of money to go and fight against strict regulation, taxation in these state markets. And then they pivoted into these, you know, this federal market. And so now, you know, there's a lot of dilution that's happened in the business. A lot of capital has been raised. And I think there's this weird arbitrage opportunity where, you know, the guys that have been sitting on the sidelines watching the cannabis and hemp market for a long time are now coming to play and they're having these conversations. And I think there's interesting pricing that can happen right now because there's uncertainty. And so, you know, when somebody swoops in with a check,

Starting point is 00:23:28 you know, in the next kind of nine months before rescheduling or whatever, I think, you know, you might get a nice discount on buying these businesses. So your startup needs custom software, but building your own secure production ready apps is hard, right? And not every founder has the expertise or time to get started. Well, now you don't have to. Just use Zite, Z-I-T-E. Make whatever you need from idea to a working app in just minutes. Easily, all on your own. Plus, you can fill it in with forms, apps, databases, and other automations that you need as part of your product. So many of the no-code and vibe coding tools are just flashy demos, where they work on legacy systems that takes so much time and effort to learn, let alone master. But Zite is both easy to use and powerful enough

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Starting point is 00:24:36 I'm going to give you 50% off your first project. Go to Zite.com slash twist to get started. That's Zite.com slash twist. for 50% off your first project. Andrew and Socrates, people thought this would happen during Obama's second term, didn't. And then they thought, oh, well, it's going to clearly happen during Trump or Bidens. And it hasn't. And it went legal in federally, I think in 2018, as we discussed in Canada.

Starting point is 00:25:01 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 raise. And as you can see, it was a little bit of a boost here in 2012. 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. This follows what you've seen, Andrew.

Starting point is 00:25:30 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, you know, 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.

Starting point is 00:26:06 It'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, you know, Canada was a very different market onset than the U.S. In the U.S., 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. cannabis industry that has been built up in all of these states, like all of the cultivation

Starting point is 00:26:51 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 Nodie gang, those are the people who watch the live stream and have notifications on.

Starting point is 00:27:21 We call them the Nodie Gang. Sam Houston S.F says, having most of the cannabis company shut down or having or have had major layoffs. What's the state there, Socrates? Is it been a bloodbath in the cannabis startup space? It's followed the same trendline as the broader market since 21. where it's shifted from growth at all cost to you better be profitable and growing. To Andrew's point, it's been a challenging road.

Starting point is 00:27:51 And to your point, too, for it, because we've seen it across the board, whether that's operating businesses, producing manufactured products or ancillary tech companies. 21 was peak. And 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

Starting point is 00:28:31 is it's going to force the best companies to emerge. We're going to have to think creatively and resourceably 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. I think this is the next great American industry, period. And it's a matter of when, not if, that our friends in D.C. 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

Starting point is 00:29:20 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. You want to be at end of life or cancer patients. We all know somebody in our lives who was 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

Starting point is 00:30:06 sitting on massive, massive cashes of premium and just regular liquor and spirits. So 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. I mean, that's a, that's a massive thing. 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

Starting point is 00:30:48 with that. So, 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 280, then these businesses would be profitable overnight instead of losing money or just barely getting by. So from our perspective, when we see our customers under that burden operating successfully with the grit to actually power through that, you know, 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

Starting point is 00:31:54 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. Like 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

Starting point is 00:32:29 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 know you just pay your taxes on the profits completely 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

Starting point is 00:33:13 cannabis industries if you're an independent content creator or you're building any kind of community 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. That's why I'm so happy to partner with Circle, the complete community platform for creators and brands. With Circle, you're going to get an easy way to build branded websites that help you with email marketing strategies. That's super clutch and AI agents that can help you design, manage data, and even do the branding. We use Circle here at launch to keep up with our Founder University community.

Starting point is 00:33:59 We've done 14 Founder Universities around the world. And they've helped us grow that from this tiny little program out of our office in Austin to this bona fide international movement. And they can do the same for your startup. Twist listeners can get $1,000 off Circle's professional plan by going to circle. dot s o slash twist. That's C-I-R-C-L-E dot S-O-S-O-T-T-T-S-T-T-S. Socrates, 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,

Starting point is 00:34:41 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. yourself. You can always take more edibles. You can't take less. 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, you know, a three or four milligram gummy or taking a hit off of a, you know, join at a party or hitting a vape, you know, one or two times. Full disclosure. I've been in the cannabis world for a a minute. I've never heard of shards. So unless Andrew or four, if you've heard of it, let me know.

Starting point is 00:35:23 I have heard of resin and rosy. I think people refer to the resins as shards as well. Like they're like a hard version of it that cracks for my research. Yeah, shatter. Shatter. Oh, shatter. Okay. Then I said shards. I didn't pick up. It's not the best marketing, because I don't think anybody wants to ingest anything called shatter or shards. So there's, 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. I don't know if anybody's ever tried moonshine, but I had a roommate from West Point, from North Carolina who, too, like, grew up, his family grew up, distilling moonshine.

Starting point is 00:36:05 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. And 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 cannibonite.

Starting point is 00:36:49 There's over 100 cannabinoids, but the one that everybody talks about is T-HC, 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 turpines 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.

Starting point is 00:37:30 What 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 Chimov 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.

Starting point is 00:37:59 So that's what you're seeing. This is why legalization needs to happen. So tell me about the shards are shattering and resins. Like 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, you know, have a good time at the Super Bowl. I can drink it. Cannabis comes in hundreds of different form factors.

Starting point is 00:38:27 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, rosen, live resin is different ways to take the plant, extract the middiscount. benefits of that plant and presented to the customer in a way that they consume it. Dabbing and shatter is a result of prohibition, meaning how concentrated can I take this and put it in? Forward, 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 mechanisms that's happening inside of a jewel or a nicotine babe. You're basically taking a concentrated liquid or in the case of dabs

Starting point is 00:39:20 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. And 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 flour based. but that sounds like smoking. Is it a way to say this for it might be this is the crack version of cannabis? It is the crack of cannabis. Yes, you nailed it. Yes. And people take this in the ram. It actually doesn't. I do in the spirit 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, this is going to get you so high. But really what it's doing is it's extracting all the plant matter

Starting point is 00:40:18 that when you consume it and smoke it, it smokes not good for your lungs. And it's actually pulling all that out. So it's a distilled version of the can 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.

Starting point is 00:40:34 And then the resin is what's in the little bowl there. And I've seen this online. So this is five, ten 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. That's, I guess, people's concern.

Starting point is 00:40:55 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? So, 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.

Starting point is 00:41:37 And there are a lot of problems that happen in our society as a result of over-consumption. of vodka, death by track of the African, it's 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. So 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%.

Starting point is 00:42:24 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. I want to say, Socrates, I completely agree. I appreciate what you said just about, like, 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.

Starting point is 00:43:03 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, he does not have a really good track or anything busy. 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%

Starting point is 00:43:37 alcohol or 200% proof, 100% alcohol for industrial use. These things are banned. There are places where 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. Maybe don't sell gummies that are, what'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 milligram? 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 5 milligrams, and it could actually really be 400 milligrams because there wasn't testing.

Starting point is 00:44:18 Sure. But a 400 milligram, just so people know, like, I think a reasonable dose is 5 or 10 milligrams. Correct. Yes. So this would be 40, maybe 100 times more. Which you don't want laying around. That'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

Starting point is 00:44:41 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. So 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 diminimous

Starting point is 00:45:26 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.

Starting point is 00:46:06 And to touch on your point around the consumer safety beats and the psychosis piece, because they know that's what Jake out you asked that 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. That doesn't make any sense. Both are heated up with the flame. Both have the same type of risk profile.

Starting point is 00:46:42 So we went in, we looked at the analysis, we looked at the data. Once the report came out about like 70% of all of the brands that, there 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. So now we've got pesticides that are, first off, the regulators are not regulating.

Starting point is 00:47:16 So now you've got all of these pesticide-laden products on all these shelves that are being that 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 the top 30 brands in California are all on the platform it's a non-profit 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 they're coming up with the standards and then the brands that actually

Starting point is 00:47:43 care of 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 you know this this this pretty cohesive auditing process what we found is and i'm not i'm speculating here and I've talked to a handful of doctors and they think that we're like somewhere in the right track. Yes, you are, 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, you know, 33% kind of like shatter wax, et cetera. What we found was a really interesting correlation. The lab partners that were running these audits, we're looking through thousands and

Starting point is 00:48:21 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 the, it's not causing psychosis. It flirts with psychosis, but specifically there's a, this cannabis-induced nausea that will happen where people continuously vomit. So we might have a correlation, not a causation. A hundred percent. We might be, we might be pointing at the wrong substance here, which means even more regulation. In fact,

Starting point is 00:49:09 there was a bunch of hand-wringing not long ago because people were selling caffeine, like actual caffeine drops or powders. Do you 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 a loco, if you remember that, where you're just putting too much caffeine, too much alcohol in a serving can. So people will associate a serving or a chocolate bar, you know, whatever it happens to be,

Starting point is 00:49:45 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 were 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, Andrea, you said it, you know, people get some personal freedom. But, you know, young people, they see a can of soda. They're like, I drink cans of soda. I drink Arizona iced tea. So it's four local.

Starting point is 00:50:20 It's got some alcohol and caffeine. It's just like having an Arizona iced tea. And they just don't know that it's for Arizona. 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, yeah, there's some reasonable compromise here, I think, Socrates, yeah?

Starting point is 00:50:47 Yeah. 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 Loco was, was drinking it, and you could call it, they went crazy that night. I've certainly had some run-ins on Four Locke 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

Starting point is 00:51:17 consumers going probably to the illicit market. You're not buying a 400 milligram candy bar to a dispensary. You're going. You're saying, okay, I have $50. The person is 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, I'm not going to, it's not going to send me to the moon. And 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, et cetera.

Starting point is 00:52:03 100%. 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 real. 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

Starting point is 00:52:27 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 flyby not operators that don't give a shit. 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, you know this isn't right, you know. And so I think that, look, I, I hear the regulations on the hem 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. So 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. That's not going to go well for you. There's no instance where a human being on planet Earth has

Starting point is 00:53:31 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. All right, listen, gentlemen, this has been amazing. Where can people find you online? You're just a little bit of plugs here at the end for what you're working on. Go ahead, Socrates. Yeah, visit our site, iHeartjane.com and reach out to us anytime we love hearing from the market at info at iHeartjane.com and find me on LinkedIn.

Starting point is 00:54:15 If you want to connect. Andrew. Likewise, I'm out there on LinkedIn, Andrew Duffy, and Sparkplug. That's Sparkplug.app. 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. It's called High Touch with Jake.

Starting point is 00:54:38 Love it. High Touch. Great. And Ford, Smith. Go ahead. Yeah, Ford Smith. You come me on LinkedIn. You're coming on X at Ford H Smith. And then the venture firm is ultram is ultrataVE.com. And then if you're interested in 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 echo eCCO 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. 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

Starting point is 00:55:25 he was. Kid from Brooklyn, he did great. And Matt, what a son. All right, we'll see you all next time. Bye-bye.

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

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