The Bowery Capital team is embarking on a blog series covering B2B Marketplaces. We are doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. This week, Adam Sandow, Founder & CEO of Material Bank, answers some of our questions. You can read all of the posts in our series by going here.
The Bowery Capital team is embarking on a ten week journey to cover B2B Marketplaces. We are doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. Below is a part of our content series focused on insights from founders in the space. This week, Ryan Smith, Co-Founder & CEO of LeafLink, answers some of our questions.
LeafLink is a technology providing B2B marketplace services for wholesalers in the cannabis industry. The marketplace is currently live in 25 territories across the US and Canada and used by 1,500+ brands and 4,900+ retailers. As of April 2020, LeafLink manages $2.2 billion in annualized wholesale orders of cannabis – 23% of the US wholesale cannabis market.A lot of B2B marketplaces involve solving for a really discrete problem set and going narrow with the product to create the flywheel – order visibility, process optimization, labor shortages, etc. How did you think about the initial product in this context and what you needed to get right?
Something unique about our work at LeafLink is that the [cannabis] space itself is a start-up, and that means that a lot of the processes and structures that exist in other legacy supply chains just aren’t there. There’s no way your parents ran the business, because the first legalized sale didn’t go out until a single-digit number of years ago. In 2015, Zach and I flew out to Denver, Colorado and just sat with companies, listened to them basically list out their problems. What we found was that the industry was operating an ordering process using phone calls, emails, texts, and even some fax machines. Order visibility was essentially, ‘did you get the text message from the dispensary with the things the shop wanted to buy.’
Once the order was received – we saw this with one of our first clients – they’d take the order from the text message, put it on a whiteboard, and then the whiteboard basically acted like quasi CRM/inventory controls. And that was used by the manufacturing production team to figure out how many things they were going to make, and then once those things were made, they would go back to the whiteboard and record it. There was a whole other team for fulfillment, they would get a text message from the production team, on what product would be packaged into which boxes.
We’d ask these companies, how much did you make yesterday and how much do you want to make tomorrow? The answers weren’t concrete – we heard a lot of, “oh, this category is very popular,” instead of “we need to make 200 more units tomorrow because we sold 175 yesterday.” For the initial product, we started by taking that manual order submission and life cycle management process and bringing it online. We started, for the supply side, by creating those basic back-office tools to help them run their day-to-day. We focused on process optimization and order visibility – there wasn’t much there before.
Bill Gurley famously says that marketplaces “shouldn’t be afraid to do unscalable things” in the beginning. Can you talk about the origins and some of the unscalable stuff you did to get the business off the ground?
It’s not specific to just the beginning, but because of cannabis industry regulations, we had to build our marketplace in a specific way. Each state is basically walled off from each other – if you’re a retailer in Colorado, you can’t see California brands or products. When we say we’re in 25 different markets, we’ve literally built 25 separate marketplaces that are highly fragmented.
Every time we launch in a new market, we need to again create that liquidity. It’s become somewhat easier because we work with some companies that are growing into new markets, so they already know of LeafLink, we know them, and we can grow together. Typically, though, we always start with the supply side – finding a larger player that has the majority of the retail shops in the market purchasing from them.
We called these times ‘shadowdays,’ because when we created software for the back end of the sale process we’d go with the sales reps to the retailers. When they were doing a sale, we would be able to say, “by the way as you’re buying x products you can also place an order through LeafLink for free.” We would then go to the next largest retailers and so on, and get a list of them signed up. We’d go back to brands and show them all the buyers we had signed up, and then go to a new buyer and show them our list of brands. It was really about that back and forth until we got up into the few dozen brands or retailers in a market.
I remember the first order that got placed through LeafLink was on March 16, 2016. I was in the manufacturing facility for that first brand, and we had our only sales rep at the time on the ground with the brand’s sales rep. I was on the receiving side of the order, and she was helping the retailer register and place a first order to see if the software would even work. It worked and it was really exciting –but it was that manual in the beginning, and I think being that high touch with a growing but small community was very important.
What were the early actions you took in launching and scaling that business that made it successful? Which side of the marketplace did you focus on first and why?
We focused on supply because one challenge (or advantage) of our space is the newness – the fact that the supply side didn’t really have a CRM, and hadn’t really run at scale companies previously. A lot of them had been in the illegal space before, so they just didn’t have access to many of the tools that are taken for granted – we knew what value to bring. We also focused on them because at least for the first few markets, the brands had more power than the retailers. Because of those inefficiencies on the brand side, they weren’t creating enough product, and retailers were always jockeying for their attention.
There have been some markets, though – Nevada’s a good example – where there are very few retail licenses, maybe less than 100. So, they adjust because retailers – say on the Vegas strip for example – have way more power than any given brand. There, we have to rethink the strategy, but generally speaking we start from the supply side. Thanks to the regulations in the space, there’s also some limitation on ways in which we can make money. Charging the brands a flat fee was the best we could do from a regulatory perspective, and a lot of our initial focus has revolved around supply side for that reason, too.
Once you got initial traction, what was your growth strategy? What growth levers did you use and how did you think about timing? What worked/didn’t work? How has your growth strategy changed over time?
As far as the initial growth strategy goes – we created a really strong referral program, which was powerful in the beginning. We also had some other ideas that didn’t work out as well. Growth was fueled by a lot of hard work from the sales, client experience, and marketing teams because in our space, we really can’t take advantage of online ads through social media platforms or search engines. We couldn’t build a funnel virtually like many other companies are able to do. Instead, it was about on-the-ground sales. It was old-school in a new space.
To this day, our KPIs center around GMV, number of retailers, and number of brands. What we’re trying to understand is how many brands or retailers, or what percent of market penetration do we need to have to feel that a market is moving into a mature stage for us. These are still very much living analyses that we are always trying to better understand.
On take rate: in our space, if we take a percentage or if we call it a “transaction fee,” we’re considered a broker by regulators – if we do anything that impacts the price of the transaction, we’re a participant in the transaction. That’s the case in most states, so it means we’d need to get a cannabis license in every state. To avoid that, we went for a low flat fee instead of a take rate. It was $300 a month per brand at the beginning, and it would go up to $1,500 rate based on a multi-brand shop. We decided to focus on scaling, to try to get as many buyers onto the platform as we can, and to keep GMV growing.
Regulation aside, I think this is actually one of the main differences between B2B and B2C. In B2C marketplaces, there are so many consumers that sellers can assume every transaction will be the last with a buyer, and transactions are smaller. In B2B marketplaces, typically everyone knows each other – they’re more tightly knit communities – so we thought we had to bring additional value to be able to add a take rate to larger transaction sizes.
Recently, we launched a financial product as a compliant answer to a take rate. The service is called LeafLink Financial, and it’s effectively an AR / AP consolidation tool for our clients. We take a percentage for providing the financial service. We worked with regulators and lawyers on compliance, and it allows us to provide what is deemed a financial service versus being a participant in the transaction – that’s how we can add a little extra value for the community while also beginning to monetize the platform in a real way.
There are marketplace founders that don’t have any experience in their space, some that have moderate experience, and others that are experts and have felt the pain points. How do you think about your founder’s perspective and experience/lack thereof?
Before LeafLink, we weren’t in the cannabis space, but we did have a lot of deep marketplace interest. I started selling things online at a very young age, and Zach, LeafLink Co-founder and CTO, actually worked at eBay on their B2B solution for a year or two before we started the company. My prior company was also rooted in equity crowdfunding as a concept – that was a heavily regulated space as well. We were talking to FINRA and SEC all the time, and the experience interacting with regulators translated to cannabis.
Something interesting and worth mentioning is that it took two or three years of working with Zach until he said one day, “I’ve had ideas for a cannabis marketplace since high school.” Although we didn’t have direct cannabis experience, I think some of these ideas were dancing around in our heads for a little while.
If people don’t have the experience, that’s ok – as long as you’re willing to get really deep in the weeds with your potential clients. Being naïve to a certain degree can be helpful, but if you’re not willing to listen to everyone who’s there already and to learn what you can from them then you’re just spinning the wheel and hoping you hit something. It’s ok to not know everything, though. Every space has some inefficiencies, and they’re harder to see if you already know it very intimately.
There have been a lot of consortium-led marketplaces and acquisitions by private firms. Your marketplace creates a lot of independence, which can be lost if acquired by a large strategic. How do you think about this and your exit strategy, given you have raised venture capital and are considerate of the outcome?
There are two ways we think that it could go, and one is definitely preferred.
First, I should mention that all of the larger tech companies that could do what we do aren’t touching the space until it’s federally legal, especially if they’re publicly traded. There are hints of some international companies looking into it, in geographies where it’s federally legal. In general, though, we have this artificial moat around the industry that basically will last us until cannabis is legal – at least another couple of years. That’s the race – let’s serve our clients as best as we can, let’s get our roots as deep as we can into these supply chains before the moat goes away.
When it does go away and other companies begin to look at this space more seriously – that’s the first exit opportunity. Maybe there is a larger marketplace out there that is exploring B2B transactions, as we know many of them are, and this is a space where they want to capture, say 30% of the market. We’ll reasonably be somewhere around there with market penetration within a year or two out from now and could be bought.
I think there’s a lot more available to us, though. What’s more exciting to us is to be the industry consolidator ourselves. We’re proponents of federal legalization but the longer it takes, the more opportunity there is for LeafLink. There are a lot of companies out there that don’t have as long of a runway, that don’t have a clear path to profitability, or that aren’t on that path at all – maybe we can get a partner and bring on ancillary or complementary solutions to what we’re already providing. If we’re working between brands and retailers right now, maybe there’s something between brands and growers, or between retailers and consumers that would be interesting. We could go wider on the supply chain. Having the ability to do that is the most exciting opportunity to us.
I do see us, longer term, as setting new standards for how these companies operate. Maybe in 10 years, we’ll be starting to look at other industries as well and bring the learnings we’ve found in cannabis. Maybe people will begin to think of the cannabis space as a model for tech-powered operations innovations and B2B marketplaces. We’re a big part of that story and want to pursue growing that technology for the long term.
How have you seen cannabis wholesaling evolve since LeafLink launched 5 years ago? How do you think it will continue to evolve, and what actions is LeafLink taking to adapt to these changes?
When we started LeafLink there was one state that was legal. Now there’s over a dozen. And that’s just recreationally, if you think about medical programs, it’s well over 30. And I think there’s six or seven states that are going to be voting to go legal as well.
I think we’ve already turned the corner on public perception that it should be regulated, taxed, and legal. Federally it’s hard to say when legalization will happen but what’s undoubtable is the momentum behind the space and the wind in the sails of our clients and the industry generally. There’s over 300,000 people employed by the industry now, hundreds of billions of dollars in equity – this is a real business that’s going to continue growing and I think that it’s now clearer than it’s ever been.
If you liked “B2B Marketplaces From The Front Lines: Ryan Smith (LeafLink)” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog. Look out for more content on B2B Marketplaces from us in the coming weeks.
The Bowery Capital team is embarking on a blog series covering B2B Marketplaces. We are doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. This week, Merritt Hummer & Allison Xu of Bain Capital Ventures join us to answer some of our questions. You can read all of the posts in our series by going here.
The Bowery Capital team is embarking on a blog series covering B2B Marketplaces. We are doing deep dives on various companies, interviewing founders and investors, and learning what it takes to build success in the B2B Marketplace arena. This week, Sarah Tavel, General Partner at Benchmark Capital, answers some of our questions. You can read all of the posts in our series by going here.