Bowery Capital and Balance explain how B2B marketplaces can think about payments.
We first made note of the opportunity for software to bring structure and efficiency to the cannabis vertical in our Opportunities in Vertical Software v2.0. In our third edition, we focused on cannabis as a high growth market with many opportunities. While the US market for legal cannabis is relatively new, state and federal legislation alongside a massive wave of new data continue to open up new SaaS opportunities in the cannabis vertical.
33 states and the District of Columbia currently have legislation broadly legalizing cannabis use in some form, and the House of Representatives approved an amendment that would block the Justice Department from enforcing marijuana laws in legal states. It is also worth noting that the Agriculture Improvement Act of 2018 (colloquially known as the Farm Bill) confirmed the legalization of hemp and outlines terms for its production, distribution and sale. As legislation slowly continues to favor the cannabis industry, so too do VC’s (perhaps not as slowly, however). Venture capital investments in the cannabis vertical totaled $409mm in 2017, $1.024b in 2018, and $1.265b in the first half of 2019. Software investments have represented only a small fraction of activity: since the beginning of 2017, just over $153mm of venture capital has been invested specifically in cannabis SaaS companies across 27 deals. 2017 to 2018 saw a 35% increase in capital invested in cannabis-focused SaaS companies, and 2019 is on track for a 45% YoY jump. It may be worth noting, however, that many companies are experiencing such growth due to the overall vertical’s growth and not because of differentiated product offerings. In 2018, the market for legal cannabis in the US was valued at $11.9b; by 2025 it is expected to be $26.3b.
The “big data” trend is a significant driving force behind many software products servicing the cannabis vertical. Up until Colorado became the first North American jurisdiction to legalize cannabis in 2014, much of the available data was collected by the government and likely to be skewed; current data scientists only have around five years of solid recreational cannabis data to use. Historical medical data is more plentiful, but still relatively scarce. While still a relatively nascent market, there is certainly a lot more data being created and analyzed throughout the cannabis ecosystem as seed-to-sale software products, which are required by virtually every jurisdiction, become more fine-tuned. Once cannabis becomes federally legal, the sheer amount of data will explode and increase exponentially over time. Current data analytics platforms will become increasingly more powerful (due to both the amount of available data and increasing AI/ML functionality), and new opportunities will be created around the collection, analysis and insightful deployment of cannabis data.
As the legal landscape opens up and data continues to accumulate in all areas of the cannabis vertical, we see multiple areas for SaaS opportunities:
1. Payments & Banking. The House Financial Services Committee recently advanced the Secure and Fair Enforcement (SAFE) Banking Act, which would allow banks and credit unions to service the currently cash-only cannabis industry. Currently, however, only about 1 in 30 banks or credit unions accept cannabis customers due to regulatory risks. As lawmakers go back and forth and most cannabis businesses are left unbanked, some companies have begun to offer circumventive financial solutions to US based cannabis businesses. PayQwick offers a closed loop payment system for cash-intensive businesses to transact electronically throughout their supply chains from seed to sale. In addition to consumer oriented payment cards and terminals, Linx offers fully compliant bill and tax payment solutions for cannabis businesses. If the SAFE Banking Act is enacted, larger financial institutions will likely jump at the opportunity to acquire the leading startups in this particular space within the cannabis vertical, providing strong exit opportunities for VC investors. Smaller startups with less traction, however, may face a very steep uphill battle as the competition will only get stronger. If enacted, both banks and businesses will require robust and encompassing compliance solutions, such as the platform that KIND has deployed in Canada.
2. Retail & Marketing. From the retailer’s perspective, having access to market data-driven, actionable insights is key to staying ahead. Headset allows retailers to make sense of the increasingly complex product landscape by aggregating data from retail and dispensary POS integrations to identify category, brand and product trends, in real time. Cannaly‘s data-driven platform simplifies dispensaries’ purchasing process by providing insights on the industry’s leading brands. BDS Analytics’ Consumer Insights provides actionable insights regarding consumer behavior, enabling retailers to more effectively segment their target markets. Larger companies can leverage big data insights to assess (and acquire) competition going after similar target segments, creating a variety of exit opportunities for investors in this space while also driving the early stages of what is eventually likely to be a consolidated cannabis landscape (most recently exemplified by the massive, albeit contingent, Canopy – Acreage deal).
3. Cultivation. From the cultivator’s perspective, having access to real time big data analytics provides an edge in terms of compliance, planning and the technical requirements of cultivation. Given the long grow cycles of the cannabis plant, forecasted market demand is invaluable. Due to the various medical and recreational uses, precision growing will continue to be chiefly important to cultivators in order to stay in regulatory compliance, and to increase profits by maximizing yields. MJ Freeway and Viridian Sciences both have robust cultivation management platforms (CMPs) that are integrated into their seed-to-sale offerings. Artemis, which recently raised an $8mm Series A, offers a CMP for enterprise greenhouses, indoor and high tunnel farms. Similarly, lab testing, drug discovery, and biotech/genomics companies rely heavily on massive amounts of data. Phylos, for example, holds the world’s largest database of hemp and cannabis genetic insights. As CMP’s evolve, so too will third party hardware products, creating new and unique opportunities for integration and further automation. Speaking of hardware products, Seedo is a mini-fridge sized device that completely automates the cultivation process for a variety of plants; could enterprise scale cultivation facilities one day use the same type of system?
While technology has touched virtually every aspect of the cannabis vertical, there are still SaaS opportunities to be found in this rapidly growing space. Timing is and will continue to be key as state and federal legislative changes create new investment and exit options around the entire supply chain: cultivation, manufacturing, distribution, and retail.
If you liked “SaaS Opportunities in the Cannabis Vertical” and want to read more content from the Bowery Capital Team, check out other relevant posts from the Bowery Capital Blog.
Bowery Capital's Loren Straub and Gabe Hawkes chat with Jimmy Fong, Chief Commercial Officer at SEON, about Buy Now Pay Later (BNPL) fraud and what the future of security looks like in the space.