Blaine: Hello, everybody. Welcome to the Distru Podcast. Today, I have a personal friend and occasional mentor of Distru with Steve from Confident Cannabis. In addition to helping Distru, he is the CEO and Founder of Confident Cannabis. Welcome, Steve.
Steve: Hey, Blaine. Thanks so much.
Blaine: Absolutely excited to have you on. Do you want to actually start with an intro about you and a little bit of your background and what Confident Cannabis is?
Steve: Yes. Thanks for having us on. It's really exciting to be on your podcast and hopefully, we can have you on ours someday. It's always good to have good friends in the industry. Confident Cannabis is a software company. We're based in California but we operate in 30 different markets in North America, primarily in the United States. This is a really big important market for us and we have two things, two products. One of them is a lab testing platform that we've had out in the market for five years now that allows Cannabis manufacturers, distributors to [00:01:10 inaudible] us and see the results and their lab data with other software tools they use, so they can just manage their lab results better, print labels, things like that.
Then the second product is business to business wholesale marketplace, which is live in California and Oregon. That's a way for vendors to automatically create inventory listings based on their completed lab results, display that in a gallery and that buyers can browse and shop by product or by vendor and then send out sales orders, manage invoices, integrated books, all that good stuff, everything related to b2b.
Blaine: You guys have a particular unique stack across the different offerings, you just said, from lab to this marketplace. I'd love to get a lens on when you were first approaching the Cannabis industry, why did you choose the approach that you get?
Steve: Yes, it's a good question. It's funny because people in the industry tend to get it a lot more, a lot faster than pitching an investor, that's really super familiar with Cannabis or my family. The key insight we had early on in 2015, when we started the company, was that, every batch of Cannabis has to be tested before it's sold which is not really marketable inventory until you get that passing test result.
These labs, they naturally aggregate all of that supply side information by testing it. The lab results also inform the quality of the product and times and therefore, the price. Getting access to that lab data, we thought it was really important to marketplace that people can browse and rely on the lab data to some extent to make these informed purchase decisions but also to get a really large market share of the supply.
For instance, in California, we work with 60% of the labs and because of that, we have about 60-70% of all licensees in California in Confident Cannabis ready and all that supply unless people choose to opt out, is made available to buyers. Retailer can go in and see a portion of supply and this goes across the supply chain. It's not just manufactured finished goods to retail, we have that as well but it's also for both products which there's really nothing else like that on the market because if you're a farmer and you sell wholesale you don't sell finished goods retail. It's really hard for buyers to know you even exist. This is a great platform for that.
Starting with labs, was the point of entry, we were able to get to fairly high market share nationwide through the labs because there really aren't that many [00:04:13 inaudible] really building lab softwares. We're the only game in town on the lab software side but that was really just a means to an end to power the marketplace which is really where we're focused on these days.
Blaine: I was interested as an entrepreneur. I know that you came from an investment and finance background. I understand you’re approaching the b2b wholesale marketplace and it makes sense, the thesis you're saying. Everyone needs a lab, lab goes up to marketplace, all the data is there, people can now access if you're just providing access through a marketplace. I want to know what were the moments when you first approached the Cannabis industry that got you to this conclusion? Is there actually something in between investor and that? That I'm missing.
Steve: To go a little bit into the genesis story. I was working in New York as an investor and I decided to go to [00:05:16 inaudible] which brought me to California. I got a business degree and that's where I met my co-founders and I said to myself, “Well, I'm on this mini vacation. I don't need to think about my day job. I'm just going to see what I'm really interested in but I actually don't want to be an investor anymore.”
It was waking up every day, looking at 10 pitch decks and placing bets and watching people do the fun part, I wanted to get my hands dirty and I always said to myself, if I could focus on one thing, I could do that really well instead of being distracted in all these different companies and really get my hands dirty with. That was the first point. I don't want to be an investor, I want to be a founder, operator.
Then the second point is, what am I passionate about? What are some once in a lifetime things that are happening? Where's the place I could really have an impact? That's when I started really getting excited about Cannabis because not only am I recreational user, I'm also in favor of legalization for social economic reasons.
In 2014, that's when Mike and I started working. We just asked a bunch of operators all over the place, what problems they had. So, idea and go see if it works, what founders do. We force ourselves to not jump to a conclusion with an idea and instead ask, what problems people have and then choose a problem to solve and if we are able to solve it then a business will naturally come out of it.
We spent nine months just interviewing operators, going to retailers, touring accommodation facilities, just asking everybody what's hard for them and the main problem that we heard over and over, which is pretty much the same problem that you're solving a Distru as well is that trading business to business is just too hard. Obviously, people don't say it that way but a retailer would say, “It's really hard for me to know what products I should be carrying and how do I get in touch with these vendors. My vendors are flaky. They don't show up on time or they'll pull a bait and switch and give me a different quality product.” That's all really annoying and the paperwork and the cash payments, that's annoying.
Then on vendor side, they might say, “It's really crowded. How do I get my brand name out there? How do I get more distribution? How do I just differentiate and stand out? The logistics are hard. How do I transfer all of this stuff? There's all this metric stuff to deal with, compliance and paperwork. It's just really challenging.” That's all related to doing business to business being hard. What we realized was that the thing that made it hard was that it's a data problem and a software automation problem.
It's a data problem because nobody really knows what's out there. The industry is very opaque for the most part. Nobody really knows what's being made, who makes it or importantly, what it's made of and then it's a software automation problem because there's a bunch of manual steps. For instance, just putting COAs together with invoices is a challenge. You have to print them out and then attach them to this binder and put it on the box, so the shipping people can take it on truck and all these steps, it just takes so much time and if you can streamline that with the software then you solve a huge part of the problem.
That's how we backed into the lab as a point of entry because we said, if we get the lab data in real time because the labs use our software for everything they do and the clients see the test result through our platform first then that's basically the data about what's being made, who makes it and what it's made of in real time and then if we put a buy button on the test results then we streamlined the ordering process and the fulfillment process was not going to solve that problem. We backed into it that way but once people understand the way the industry works, they get it.
Blaine: The platform, I think makes sense now. I'm super interested just also as an entrepreneur to dig in on one thing. When you did that initial reach out when you were starting to discover what were the key problems, how did you do that? Did you just get a list from the [00:09:42 inaudible] and you start calling people? Did you look up dispensaries and read maps? I'm just curious, how you did that initial reach out [00:09:49 inaudible]?
Steve: Yes, just fearlessly reach out. We went Mjbiz and toured the floor and I didn't have business cards, asked a bunch of dumb questions. I also go to a random booth and say, “Hey, my name is Steve. I'm thinking of starting a company in this industry, do you mind if I ask you a couple of questions?” Sometimes they're like, yes but I only have a few minutes or I spent a lot of time. It just varies and if people are mean then brush it off and move on quickly but then I would say, tell me about your business? What's hard? What's working, what's not working?
I did that with my co-founders in person at trade shows. We went to as many trade shows as we could, all across the country. We went cold call and cold emails. It's actually funny. Dixie, I don't know if you remember or another brand, Dixie Beverages in Colorado. They were in the news a lot because their Founder, CEO was very vo- [00:10:49 inaudible] and I found his name from the news and I found him on LinkedIn and I think, I called their corporate headquarters and [00:11:00 inaudible] sure enough emailed and I said, “Hey, we're going to Colorado, do you mind giving us a tour of your facility?”
We weren't planning to go to Colorado but if he says yes then we would board a flight and so he said yes and we bought a flight [00:11:15 inaudible], a couple of additional meetings and he spent good two or three hours with us [00:11:21 inaudible] and what he does and things like that. That was really helpful, just doing that fearlessly is invaluable.
Blaine: That's me. Creating blocks. Any entrepreneurs out there, yes, just do it and it's okay and don't be afraid to get rejected and look like that idiot, asking dumb questions. But I'm curious with what was that Dixie movement? Was that a standout moment for you in learning these types of workflows and how it worked or was it really just more of an agglomeration of all the research that tied it together for you?
Steve: The Dixie moment was, it was great to see the facility. I really appreciate the time but it was almost more of a celebrity moment rather than a truly lightbulb moment because we were having very high-level conversations with the CEO. The most valuable conversations we’ve… is the warehouse people, the manufacturing people. They're the ones who are actually doing it who have the real pain points. Probably the best conversations are just going to farms, I am particularly talking to the smaller farmers because they have all the same problems that any business has only, without all the people.
Usually the founder, manager operator, they do sales, they do accounting, they do fulfillment, they do [00:12:41 inaudible] and they have it all in their head and they can see the big picture but they're not too just connected to be able to really have specific input. Those are always usually the best. Same thing with just talking to the distributors and their workflow. We go over here and then we enter into this system and we print the label with there and then five other people do these other things. That's the stuff that I really love to hear.
Blaine: The operator stuff is the most important feedback. I couldn't agree more on our end too. The only question I have left on how you chose this direction? It's a big problem. It's a b2b marketplace. I think everyone in the industry understands that sourcing in the b2b marketplace and how testing transparency around it is one of the biggest problems in industry but there's a lot of problems. How did you decide on the marketplace or more the b2b transaction movement and maybe solving the payments problem? You're solving these other problems.
Steve: I think, the most common problem that we heard were payments, that everybody has problems with payments and we could have gone in that direction but we just made the decision that we think, it's a temporary problem. Now fast forward five years, the problem still hasn't really been solved but I think, it'll be solved within the next five years and the way it'll be solved is just a change in the regulations and the laws to allow them to do what they already do. It's not novel. It's just a regulatory hurdle. We didn't want to build a business that would go away at the stroke of a pen and we've decided not to tackle the payment side because Bank of America, Stripe Square, they're all going to eat our lunch if it's legalized. If [00:14:39 inaudible]. We didn't want to do that.
The other big problem was [00:14:43 inaudible] taxes, obviously, huge drain to capital resources in this industry, nothing really we can do to change that. We're not going to… the IRS laws. We didn't focus on that. There are other huge problems. For instance, things consumers are facing, so helping consumers and patients find products or read online. There are really successful companies like Jane and Dutchie, Eaze and Leafly. They're all doing really well, so we chose not to focus on those segments because they're already being addressed but nobody was [00:15:20 inaudible] beside really when we started.
Blaine: Yes, not as scalable way. I think, the b2b supply chain problem is going to consist of multiple software solutions and it's very unsolved. There's a lot of work to be done. To put a cap in this entrepreneurial journey thing, looking back, having entered the Cannabis industry, if there's any advice, you would give a new Cannabis entrepreneur that is entering in the market now. What would you tell them?
Steve: I would say, find a problem first that is either unsolved or solved poorly because there's still a ton of them and if you start with that. One thing that a lot of people do is, I come from the consumer products industry, so how to know beverages. I'm just going to launch a beverage line. That might be a good idea, you might be really successful but they don’t need another beverage line right now. What are other successful [00:16:23 inaudible] successful? I think that probably more than [00:16:29 inaudible] really attracts people passionate about the plants and the product, which is great but just because I can protect it doesn't mean everybody's going to like it. You have to think.
If you want to build a craft, that's totally fine. It's your passion to do your thing but if you're trying to build a really big company or scale an organization, you have to put, maybe you're passionate. Think of this much more as a business and say, what's the problem for my customer? Who's going to actually pay me? Does the world actually need this? That kind of problem for any startup but especially in Cannabis is insight [00:17:08 inaudible] your judgment.
I think, it's harder than you probably think. I would say, I don't want to discourage but it is. Startups are hard, for sure. COVID makes things hard, for sure. This is hard but starting a Cannabis putting in COVID is really hard. Just little things like, getting bank accounts and [00:17:31 inaudible] investors, we can't get money from 95 of the investors out there. That just limits our potential pool of capital. Hiring is hard, it's just everything. All these [00:17:45 inaudible] face that other companies just have [00:17:50 inaudible], just getting paid online, people just use Stripe for that and we can't use Stripe. Things like that.
Blaine: By the way, big yes, you could not use Stripe as a software company. I can attest to that. I swear to God, last thing on startup. I do want to get to the market, the state of testing in the marketplaces and talk more about that but if one of the things, you would want to see in the Cannabis tech space right now, just magically appear, what would that be?
Steve: One idea that I would want to see right now, I would probably want to see some open-source industry standard like, API/middleware is something that everybody is in [00:18:41 inaudible], metric but better basically. Something where Distru can seamlessly share information with Confident Cannabis like, a Zapier for Cannabis is, I guess what I'm thinking?
Blaine: A middleware, totally.
Steve: All these different apps in the Cannabis industry and I'm not sure that they don't serve a purpose, they do but there's no way to connect all this data and this valuable data to be had to make informed decisions. As a consumer side, for instance, we don't know, you can ask the best retailer in the country. Who are your best customers? What do they buy? They'll tell you but if you ask why they buy this stream over that stream, they’ll tell you. [00:19:32 inaudible] if you ask, what are your best strains? They'll tell you. They’ll say, what makes it better.
They'll have their opinion but they don't really have a real reason for saying this [00:19:44 inaudible] this one because of this reason, other than the aesthetics and their own personal opinion on things. I think, there's so much data around genetics, around cultivation practices around branding, distribution, fulfillment, retail sales, consumer preferences, all these data sets are totally disconnected.
Blaine: Yep, agreed. I think that one that you were hinting at is the unification around a single number and an identifier that connects it all and then [00:20:14 inaudible], it's actually the act of connecting it with some of [00:20:17 inaudible] way, so I'd love to [00:20:19 inaudible]. Great. It's super interesting entrepreneurial journey. I love all the input. I love hearing thoughts on [00:20:25 inaudible] ship but I do want to talk about a lab industry, the marketplace where you see the market going. I'd love to know from a lab perspective because there was a lot of labs at one point that they said that they were cutting the back. What had been the biggest trends on the lab side nationally?
Steve: We're fortunate in that. Early on, we made the bet that lab testing is going to be more of a thing rather than less of a thing. For instance, in the food or the pharma industry, they don't test every batch before it's sold like in Cannabis. So, in food and pharma, the manufactures have to adhere to certain good manufacturing practices, the FDA or whoever samples randomly on a case-by-case basis after the fact. If that were the case in this industry then we would have had to pursue a different model but lab testing is becoming more of a thing rather than less of the things.
For instance, Arizona, on November, required the lab testing for the first-time patients in Cannabis. Testing in California are pretty strict and it doesn't look like though, they'll be less strict. Michigan is adding additional tests that they didn't require before like, heavy metals testing in microtechs especially. These new regulations with stricter and stricter testing, huge implications all across the supply chain. It's not just we want clean medicine but if you're a really good operator, sensible ethical [00:22:11 inaudible] that might be down for a while until you change your process, vendors and you might not have known that picking something that potentially had heavy metals in it.
[00:22:26 inaudiable] medicine works for, doesn't mean you're a bad person. It would maybe had some copper in it or else, so that shuts down certain suppliers. It also creates bottlenecks in the supply chain which means that there's scarcity, which means prices go up, which means that the end consumer pays more and overall, it's a good thing. It's like ripping off a band aid but there are serious knock-on effects, the whole supply chain from that testing. There are a lot of states, we just legalize adult use and Michigan has got a deal and it's growing crazy, Oklahoma.
All of these markets across the country are going to have these supply shocks because of the testing in some way. Fortunately, in California, things are pretty stable at this point. Same thing with, Oregon, Nevada Washington, Colorado. Things haven't really changed too much there but most of the craziness is happening in markets for sure.
Blaine: As the Cannabis market comes online and then eventually enters in mature state, what is the evolution of this sourcing marketplace dynamics look like usually?
Steve: I would say, generally, it comes in three flavors. Number one is pretty much what we have in California and Oregon, Washington, Colorado which is fairly low barriers country, super expensive to get a license. There's either very high number of licensed caps or no goal. What you have is a very free market enterprise model, lots of entrepreneurship in companies, lots of failures, a lot of turnover within the industry and very little verticalization. Those markets are very typical American, if you want to think of it that way because that's how generally our economy, entrepreneurs, small business trend and that's really what we bet on.
Those are the markets where we thrive the most because those are the markets where people need to do business with each other. The other player, player 2 is more constrained and vertical. If you look at Montana right now or Nevada makes it higher barriers to entry, higher fees, fewer licenses issued and verticalized. People grow, manufacture and retail their own products. We don't do super well in those markets because they don't really need a marketplace. 50% or whatever that they sell at the store, they make themselves. They really need a marketplace as much and then you've got the really constrained markets like, New York, for instance, where several million dollars for a single license.
There are five licenses, Ohio similar and those are really just driven in lobbying and connections. There's really no opportunity for us in those markets right now but I believe that flavor one is going to dominate in the future because free market forces always prevail. For instance, in Massachusetts, at some point, consumers are going to be able to buy Cannabis from all over the country and they would much rather buy quality outdoor from California at a lower price then lower quality indoor from Massachusetts, just because it makes no sense to grow weed indoors in Massachusetts and that just means that people are going to have to focus on what they're good at.
You're really good at retail, you're really good at manufacturing, you're really good at cultivation and that's what you see in economies and industries all over. At some point, those barriers, they have to come down and it's the free-market enterprise model that's going to cause winners to really win. We think that we'll be relevant in those markets at some point but not today.
Blaine: I didn't know that Massachusetts is opening up. Are they allowing as much sales as they want of cultivators from any state to their Massachusetts?
Steve: No, only thing that's an interstate commerce future state, they’ve been allowing right now. That wasn't there, no. Interstate commerce is very much illegal. No, I just used Massachusetts and California as an example because growing weed indoors in Massachusetts, prepared in the future for all time, it's just not going to be true. At some point, you're going to have places that are going to grow and grow, the places you're good at selling it and there's going to be commerce.
Blaine: I could feel the capitalism in you when you were describing states without market. [00:27:20 crosstalk] capitalism frustration [00:27:24 inaudible]. What is the timeline for that change? Let's pick New York or Florida or Michigan, the states that have more high barrier entry and smaller, verticalized operations or bigger worth buys operation, projections. What does that look like? Are they going to transform with a law? Is it going to transform naturally? What do you think?
Steve: I think… Hang on a second, let me [00:27:56 inaudible] my crystal ball because nobody knows this stuff but [00:27:59 inaudible] which is very unintuitive is that they have to fix or they have to change with laws but the problem with the laws are going to be consumer demand. If you think about the number one reason why Cannabis even started down the legalization path, it's because the policy is wanted to eliminate the illicit market and all the perceived negatives of that.
The perceived violence, the perceived social injustice and that's the frame. If they haven't state like Florida, there's something like, five licenses or something like that. The majority of the Cannabis consumed in Florida is purchased from the illicit market. That's because very few people have a medical card because the barriers to getting a medical card are very high. You legitimately have to be dying in order to get access, which is great that they have access but all the other people who just want to either do it recreationally or have ailments that aren't qualifying, they can't get access. They have to turn to the illicit market.
That pressure is just going to continue and as governors and legislators in places like, Florida, New York, sea places like, New Jersey and South Dakota, these places that you wouldn't necessarily think of is super West Coast minded around Cannabis, legalizing is working great. They're making tax money and they're solving all these problems. There's very little argument to keep a constraint.
It's going to be a slow thing because the people who have licenses now have a lot of money and then they have a lot of influence over the [00:29:52 inaudible] fight this pressure but I think ultimately they're going to lose because at the end of day, people want good, cheap products and the only way to get good cheap products is to have competition.
Blaine: The connection between the desire for good, cheap products, politics and the actual operators is a whirlwind of misaligned goals. I want to have faith in the system… I have faith in consumers. I think your group is really in the same thing I have faith in. I have faith that when consumers can't get some really cool products and get it cheaper or better, they find out other states are getting better stuff, I think that that's where all my faith is in. I feel like they'll complain eventually.
Steve: I have got friends in Massachusetts and they just prefer to buy the list of branded, manufactured products that came from California than their locally produced products often because they're just better. They'll buy jarred flour from California from a particular brand that is sold legally here. I'm not saying those brands are necessarily facilitating that. People probably just go to stores and buy a bunch [00:30:10 inaudible] and mail it to their friends. That happens because it's just tough. It's better than… not just catching up. For instance, a hitch become Massachusetts but it's a newer market. It doesn't have a legacy of Cannabis like California does.
They have a long way [00:31:27 inaudible] so the question is, will they be able to cut quality fast enough or will the barriers come down, and they'll just have to focus on the small delivery and the retailing.
Blaine: Yes, I couldn't agree more. To bring it back to the b2b marketplace in the states that you are operational in like, California, Oregon, things like that. Are you seeing traction with the more of a specific type of skew? Is it both flour? I'm just curious, how that is going?
Steve: In California, it’s fairly mixed. It's pretty balanced. There are very few solutions for the bulk of non-finished products, like ingredients, products as well like, biomass destined for extraction or bulk distillates or things like that. They are solutions that are solving that. We have [00:32:24 inaudible] that market but we're not only [00:32:27 inaudible], we see a lot of retailers ordering manufactured products as well and on the product side, it's both edibles, cards, flour. It's fairly represent of the market as a whole in California [00:32:42 inaudible].
In Oregon, on the other hand, the pace is very different. A creator can sell directly to a retailer where you can't do it in California and there's very little bulk purchasing going on the b2b marketplace side but there's a lot of flour. Oregon, in general, is more flour focused. For whatever reason, we just got a lot of traction on the flour side. Oregon, we're definitely the place to go to buy flour, let's say on the manufacturer product side in Oregon but I think that's also representative of the state too. I don't think anything in particular.
Blaine: Yes, interstate dynamics are really important to understand. I think that every state and how they open up licensing affects so much. It's ridiculous. I hope opening the states can pick winners of how to do it and California did really well. As long as people can keep emulating that, I think, we're good to go. This is a great stopping point. You've given us a lot of information, I guess. I do want to leave us with what's next for Confident Cannabis and what the audience should know about for why they should interact to Confident Cannabis?
Steve: Yes. What's next? We're very excited to launch our payments product within our app. I mentioned before, we didn't want to focus on that ourselves but we heard from our customers overwhelmingly that they would love to just get paid when they sell their inventory. We found a third-party partner who's enabling this, which is great. They're very legit [00:34:30 inaudible] we haven't announced who they are yet. That will be coming up soon but it'll basically be a button Pay Now and then the sellers will know that the buyer is good for the money.
We'll also have an escrow functionality, so that the seller drive two or three miles across to deliver the inventory, only to find out the buyer changes their mind over it and they receive it then they're going to get funded. Really excited about solving that credit risk and payments problem in the industry and that'll be coming out probably just after thanksgiving. I'm really excited about that.
Blaine: That's awesome. I'll plug for you as well. Any labs looking for Cannabis software or Cannabis lab software definitely check them out and anyone in the markets that they spark for marketplace, definitely look for your wholesale transactions there and seeing some of our customers get on there and [00:35:30 crosstalk].
Steve: Yes, I appreciate that. Plug for Distru, if you're a distributor, actually you need the best in class often to see what symmetric integration Distru is your company. They've done it better than anybody else and we're really excited about furthering that relationship and it [00:35:48 inaudible], more in the future.
Blaine: Do you want to leave us with one last thing? Can you give us a crazy Cannabis story during your time building Confident Cannabis?
Steve: Yes. This is fun. That was just after we started the company, I visited a lab customer in Southern Oregon. I just went online and found a couple of retailers to just walk into and there's this place that was attached to a gold buying pawnshop place with bars on the windows. Anyway, I went in and these two cop cars pull up next to in the parking lot and I was like, Oh, crap! Something's going to go down. I stood by the door rather than going and get caught in the middle of whatever might have happened and the two cops go in, they hold the door for me, I go in and they buy a couple of things and I'm like, oh! They’re actually buying stuff. They're in full uniform.
I opened the door and then they go out and I'm like, okay, that was cool. That was an experience. This is very early in my whole Cannabis experience. I was still nervous about things. It's cops still freaked me out at that time. That was cool.
Then I asked the bartender, hey, is the owner here? I'd love to talk to them and they said, sure! Go around back and he's in our sister store. They got the pawn shop next door. We're back there and this guy has a tea party flag and a shotgun and a bulletproof vest in his office. He sits me down and there's guns everywhere in his office and just shirtless. I'm literally in a cage with this guy with guns and I just went for it like, hey, so tell me about your business and started asking questions and sounding really interested and he was surprisingly helpful because he didn't get mad at me for trying to bring software to the industry because he's like, that's bullshit! I'll never use technology, whatever but I kept at it and I left it there probably, sweat, lost five pounds of sweat but that was a really interesting visit, both my paradigm of cops and Cannabis change and my paradigm of who our ultimate customers might be face to face with his guns is pretty scary.
Blaine: I loved that. That was a very [00:38:29 inaudible] entrepreneur story, [00:38:30 inaudible], got the information.
Blaine: Cool. Thank you so much, Steve. It was awesome having you, always appreciate your insights on the industry from a strategic perspective.
Steve: Thanks so much Blaine.
Blaine: Thank you so much for coming on.