Photographer: James MacDonald/Bloomberg
Venture Capital

Hoping to Avoid Burnout, Some Startups Turn to Pot

Entrepreneurs are revitalizing their businesses by focusing on the growing cannabis industry.

An embarrassing experience trying to get medical marijuana gave Mark Hadfield, chief technology officer of HelloMD Inc., the idea he needed to stimulate his business.

"My wife gave me the 'aha!' " said Hadfield. Two years ago, Pamela Hadfield visited a rent-by-the-hour doctor's office to obtain a medical marijuana card for her chronic migraines. Scheduling the appointment was cumbersome, and the office lacked privacy. The receptionist called out her name and date of birth to a packed waiting room, and then took her blood pressure at the check-in counter. The bad trip was an inspiration for her husband: Instead of targeting patients with general medical ailments, the foundering telemedicine company could connect people seeking medical marijuana cards with doctors.

HelloMD was able to use its existing technology to make an already-legal process more efficient and discreet. Within six weeks, the revamped HelloMD app was available to Californians. Consumers download it, answer two dozen health questions and spend roughly 20 minutes video chatting with a doctor, who can then recommend various marijuana strains. Customers receive a PDF of the doctor's approval a few minutes later and a laminated card in the mail. The whole process costs $49.

HelloMD is one of a growing cluster of startups pivoting their businesses into the cannabis industry. According to a 2015 estimate by the Marijuana Policy Project, nearly 1.5 million Americans have secured doctor recommendations to use marijuana as medicine.

Alaska, Colorado, Oregon, Washington, and the District of Columbia have approved marijuana for adult recreational use, and voters in California, Nevada and Massachusetts may pass similar measures in November. At least a dozen states are considering pot-related measures this fall, meaning that marijuana could soon be legal in some form in the majority of states nationwide. 

Although cannabis is still illegal under federal law, individual states have been given free reign to design their own policies, and enforcement of national laws has been lax. That market opportunity isn't lost on investors or entrepreneurs. Venture capitalists jumped in last year, investing a record high of $215 million in 2015, up from $97.1 million in 2014, according to research firm CB Insights.

Mainstream venture capital firms, such as Founders Fund, DCM, Slow Ventures, and Y Combinator, made their first bets last year, joining longtime cannabis investors and advocates, including ArcView Group and Snoop Dogg's firm Casa Verde Capital. Those investments have emboldened a new class of entrepreneurs to launch marijuana-related startups focusing on cultivation, tracking, distribution and delivery. Other more established companies are shifting their business plans.  

Transcend Lighting Inc. Chief Executive Officer Brian Bennett began getting cold calls from growers last year. His startup, which makes energy-efficient LED lights, had been working with aquarium operators who grow coral reefs and Canadian farmers who farm lettuce indoors. Transcend said its products' energy consumption is half the industry standard. That's appealing to cannabis growers, as electricity costs are one of the most expensive parts of the operation.

Bennett said he was surprised when he got his first cannabis call. He was also a little uncomfortable because he didn't know much about the industry. After confirming that supplying components to growers was legal, he began tailoring products for clients, like offering flexible LED ropes.

Cannabis has become the company's fastest growing category, now accounting for a third of its revenue. Transcend's LED lights, which are a proprietary blend of several colors but appear white, are designed to encourage growth of marijuana plants during the leafy vegetative stage.  Transcend plans to soon offer lights targeting the flowering stage, the time when plants produce buds and are harvested.

Bennett said he's seen the industry mature in recent months. "We are selling to CFOs now as opposed to the chief grower," said Bennett. "In the cannabis world, they are reaching out, trying to find the best, newest components."

Because marijuana use is illegal under federal law, major banks and credit card processors—subject to strict regulations—have, so far, been unwilling to take on the legal risk of doing business with marijuana purveyors. That has created an opening for startups.

Spare CS Inc. founder D'ontra Hughes said he has more than 100 neighborhood corner stores using his app, which is kind of like a mobile ATM. Stores and their customers download the app and connect it to their bank accounts. Customers can request a withdrawal through the app, which then displays a bar code. Once the store owner scans it, the amount is transferred from the customer's bank account to the merchant. Then the shop employee can give the customer cash from the till. The shop and Spare each get a share of the convenience fee paid by the customer.

A customer pays for his marijuana purchase at a shop in Denver, on April 19, 2015.
A customer pays for his marijuana purchase at a shop in Denver, on April 19, 2015.
Photographer: Benjamin Rasmussen/The New York Times via Redux

The company had been gaining traction with shop owners when Hughes got a call from his dad, suggesting he pursue cannabis dispensaries instead. "He said, 'Hey, they are showing up to the IRS with duffel bags of cash because they can't deposit it," Hughes said. He explored the laws and decided to give it a shot.

Hughes moved from California to Colorado and joined cannabis accelerator group Canopy Boulder earlier this year. Spare is now developing a product using the same technology but with extra data collection features required by regulators and geared to dispensaries. A handful of dispensaries in Colorado, Washington and Oregon are now testing it, the company said.

"We want to make sure we offer a solution but are treading cautiously," said Hughes, adding that he is watching policy changes closely and has kept the original Spare product separate.

Since its inception two years ago, 29 startups have completed the three-month program in Boulder, exchanging equity in their companies for Canopy Boulder's expertise on regulation and compliance, connections to investors and business mentorship. "We're seeing more and more companies, saying, 'Hey, this can be applied to cannabis,' " said Canopy Boulder partner Micah Tapman.

Still, it is early days for cannabis startups. And for those that are publicly traded—some 55 companies in all that trade at 10¢ or more, according to a report last year by Bloomberg Intelligence—it's far from steady growth.

Since HelloMD pivoted into pot last year, it has issued more than 14,000 medical cards to California residents. Hadfield said he expects that number to increase to several hundred thousand as his startup expands to serve residents in other states and as additional states legalize marijuana. HelloMD recently launched a marijuana community forum on its website, allowing the public to post questions for doctors.  Hadfield said the forum addresses the need for accurate information from credible sources and fulfills his company's expanded mission to be a trusted guide for consumers.

The growing client base, which also pays annual fees to renew their cards, is easier to reach than general medical patients, Hadfield said. "People are much more passionate about cannabis than they are about sore throats."

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