Why do so many cannabis start-ups that seem to have everything going for them—loyal customers, enviable market share, deep-pocketed investors—flame out? Ask the founders of Dockside Cannabis, and you might hear a cautionary tale about “scaling.”
They would know. Several years ago, Aaron Varney, Maria Moses and Oscar Velasco-Schmitz undertook an ambitious plan to scale their small Seattle-based cannabis dispensary business but thought better of the idea and decided to reverse course.
“We had a moment where we thought, ‘It might be time to take this to the next level and go big,’” Varney tells Cannabis Dispensary. “At the end of the day, we realized that’s actually not what we’re about. Our commitment is not to get big for financial gain or to scale for the sake of scaling.”
One could understand the impulse to want to grow the business. Dockside has been a mainstay of Seattle’s cannabis scene since 2011, when Varney and his co-founders opened their first store, a medical co-op called Dockside Co-Op. The company operates four locations today in a crowded Seattle market that now has more than 50 cannabis dispensaries, and it consistently ranks atop best-of lists. How did the company do this?
Prioritizing Customer Experience Over Customer Transactions
In a highly competitive market where consumers have no shortage of buying options, Dockside has differentiated itself not on price nor product variation, but on customer experience. Varney, Moses and Velasco-Schmitz reasoned that while consumers could go anywhere for their cannabis, they would come to Dockside for the experience—and maybe pay a premium for that.
Borrowing a page from Apple’s retail playbook, Dockside made a deliberate strategic decision early: Sales staff would not focus single-mindedly on selling stuff—on aggressive cross-selling and upselling—but instead strive to build meaningful relationships with customers over time and make their lives better. Dockside would be an educator, community builder and ambassador for the plant, not a bottom-line-driven sales organization. Budtenders would enrich lives, not push product. So, Dockside set about to over-deliver on every dimension of customer care, pairing a vast, thoughtful menu of options with knowledgeable and approachable budtenders in big, bright, open spaces (as Velasco-Schmitz put it, “just to be a good retailer”).
The strategy produced incalculable brand equity for Dockside. Naturally, the founders began to wonder what was next. “If we were going to go big, we needed to partner with investors,” Varney says, noting many options including an offer for a reverse takeover to list on the Canadian Securities Exchange. “That meant making some sacrifices.”
But the possibility of losing control of day-to-day operations and even the cultural direction of the organization was just too much to stomach. To the founders, corporatizing Dockside represented a bureaucratic threat to their entrepreneurial souls and the very core of what they created. So, they pulled back.
“The word ‘corporate’ was being used, and not in a positive way,” Varney says. “It was like, ‘Great, we’re getting more corporate. Here come the policies, here come the less-personal touches.’”
In fairness, this attitude speaks nothing of the founders’ business-management acumen. In fact, one could say Dockside’s plan for “scaling up” followed a classic business-school model for growth and even moved at an overly cautious pace.
First, they decided to bring in more functional experts (HR, advertising and supply chain pros, even a general counsel with cannabis sector experience) to take the enterprise to the next level. In one strategically savvy move, Dockside hired its first-ever CEO from outside the cannabis industry. In the dispensary business, the retail experience underlies everything from customer retention to workplace culture to brand identity, so Dockside opted to hire someone who understood retail: Charlie Cain, who had spent the previous four years as the vice president of retail operations and concept and franchising for Seattle-based Starbucks.
What followed next for Dockside were predictable machinations in the life of a young company attempting to scale: new management structures and corporate policies to accommodate increased head count; and new financial maneuvers in preparation for one day going public on a major stock exchange. But Varney and his partners were growing increasingly concerned the path to scaling would put them in an untenable financial situation and undercut the ability to negotiate with investors. He wasn’t ready to bring in a whole new set of decision-makers and take a step back. “You get money or control, but you don’t get both,” he says.
Velasco-Schmitz, too, began to question where Dockside was heading. “I had a very good conversation with my father-in-law, and he said, ‘Do you need to do this now?,’” referring to trying to scale Dockside. Velasco-Schmitz had more questions: “What is the purpose of Dockside? What is the growth potential? And as founders, what is the driving force behind the actions and deeds we undertake on a day-to-day basis?”
Committing to Slow and Steady Growth
“I don’t think the market was ready for it, and I don’t think we were ultimately ready for it, either,” Varney says of Dockside’s initial growth plans. “At that point, there was a need for the three of us to really reengage fully back into the business, and that was a shot in the arm for Dockside.”
The founders realized that scaling fast required near-perfect organizational conditions—just the right systems, capital and people in place to withstand the breakneck speed of growth. Otherwise, the company would spiral out of control.
“There’s always somebody sitting off in the shadows who’s looking to take advantage of a … nascent, fast-growing industry,” says Joshua Ashby, cannabis practice co-chair at the Seattle law firm Lane Powell, who has experience dealing with startups. While an IPO was never a serious consideration for Dockside, “there have been instances where people have tried to lure successful cannabis companies into that IPO, get-rich-really-fast path," Ashby says. IPOs are the right path for some cannabis companies but not all.
In deciding to stand pat, Dockside was effectively accepting slower and more stable growth rates. There was no way the company would now see tech-startup-like “hypergrowth”—the term first coined by Alexander V. Izosimov in the in 2008 to connote situations where businesses expand rapidly, company valuations soar and compound annual growth rates hit 40% and higher.
But Dockside was just fine with that. The leadership team would rededicate themselves to the four existing stores and their mission of community-building and advocacy.
So, will there ever be a fifth? Time will tell, Velasco-Schmitz says. Whether that expansion will mean stores in more states or more products, growth will be on “our terms,” he says.
Still Seeing Plenty of Room to Grow
“We’re getting a lot of knocks on the door,” Varney says. “We don’t feel like we’ve quite made it out of the forest with just having a smooth-running retail organization; nonetheless, there are calls like, ‘Do you want to open something in West Virginia?’ or, ‘Do you want to open something in Michigan or California?’”
In terms of size, Dockside is still a relatively small player. According to Arcview Market Research and BDS Analytics, the largest publicly held U.S. cannabis retail chain by market capitalization is Curaleaf Holdings Inc., with 44 stores in seven states. Have a Heart, one of Dockside’s major competitors in Seattle, will soon have 14 locations across three states (six in Washington, six in California, and two in Iowa).
In other words, Dockside still has plenty of room to grow. The market is only getting bigger. Arcview Market Research and BDS forecast cannabis sales to increase at a compound annual growth rate of 20% through 2024, reaching $30 billion. Today, just four states (Oklahoma, California, Colorado and Oregon) make up 80% of the total active retail licenses as of the fourth-quarter 2019, according to BDS. It’s a clear indicator that the cannabis industry is still a relatively immature consumer retail channel, BDS reports.
With just four stores, Dockside can carefully think through every design decision, Velasco-Schmitz says, making each count. For one recent store opening, Dockside hired a local architecture firm, Graham Baba Architects, to create a space that would enable more natural conversations between budtenders and customers. The designers started by cutting out a large skylight in the roof, giving the store an open, airy feel. They opted for brightness throughout—light-stained maple and white oak for the walls and tables and minimalist wood cabinets. They also designed the sales counter to be indistinct from the rest of store to encourage budtenders to engage freely in conversation.
“You can take a number of different philosophies to retail,” Velasco-Schmitz says. “You can get ’em in, get ’em out quickly and have it be a positive, economical experience. Cheap ganja is highly popular after all. Or it can be a bit more curated of [an] experience. You take time. ... [With] that model, you’re really building a long-lasting relationship with your marketplace.”
Paul Barbagallo is a Boston-based writer and a former senior editor for Bloomberg News and beat reporter for Bloomberg BNA.
8 Tips for Fighting Cannabis Moratoriums
Columns - Guest Column: Business
An adverse local government can present continuous roadblocks, preventing cannabis businesses from operating efficiently.
Virtually every state cannabis program has an element of local control, which can be a blessing and a curse. Strong local approval of the cannabis industry can make doing business easy, from licensing to operating, and a favorable local government can influence state-level regulators. An adverse local government, meanwhile, can present continuous roadblocks, preventing cannabis businesses from operating efficiently—or, as in the case of moratoriums, preventing them from operating at all.
We have worked with clients and local governments to either rescind cannabis moratoriums or to prevent those moratoriums from being enacted. The process can be long and sometimes arduous, but we have had success educating local officials and residents about the reality of the cannabis industry. Most opposition, we find, comes from a lack of understanding and subscribing to outdated stigmas.
Here is a road map should your business encounter local cannabis opposition, along with eight tips for addressing the pushback.
If legislation enacting (or rescinding) a moratorium is referred to a committee, you need to be at the committee meetings.
Know the Process
Every locality has a nuanced procedure for handling cannabis moratoriums. Some cities may enact a temporary ban while they craft final local regulations. Some may enact a permanent ban on an emergency basis (more likely in a state with a new cannabis law). In either event, understanding how to navigate the local process is key to a favorable outcome.
Local ordinances typically begin by a city councilperson introducing draft legislation to the full council. That draft legislation is referred for consideration to one of the various council committees, which meet separately from the full council. Committees are smaller than the full council and generally are comprised of only a handful of council members, with one member chairing the committee.
After considering a draft ordinance, the committee recommends that the full council either pass or defeat the ordinance. After draft legislation is introduced, it can take four to six months before that measure comes to a final vote.
If legislation is passed, the ordinance goes to the mayor, who can generally do one of two things: The mayor can sign the legislation (in which case it becomes law), or the mayor can veto the legislation (in which case it does not). If the mayor does nothing, local and state law likely determine whether that ordinance goes into effect.
Too often, companies affected by local ordinances attend full council meetings, but fail to attend meetings of the relevant committees considering those ordinances. TIP 1: If legislation enacting (or rescinding) a moratorium is referred to a committee, you need to be at the committee meetings. It can be difficult to get full council to override an adverse report from a committee because other council members will want to defer to their colleagues on a committee.
TIP 2: When attending council and committee meetings, be prepared to educate members on why cannabis can be beneficial for their community. Members who oppose cannabis will be concerned about increased crime, increased youth use and decreased property values. These are issues that we want our local officials to be concerned about. But there is good news. The data is in your favor on each of these topics.
A Cato Institute analysis of cannabis policy shifts in Colorado, published in 2014, found no significant change in murder, aggravated assault, robbery and burglary in Denver after commercialization in 2009, legalization adoption in 2012 or full implementation of legalization in 2014.
When border states enacted medical cannabis programs, violent crime fell by 13 percent on average, according to the U.S. study “Is Legal Pot Crippling Mexican Drug Trafficking Organisations? The Effect of Medical Marijuana Laws on U.S. Crime,” whose findings were published in The Guardian in January 2018.
There is also evidence to suggest that cannabis businesses do not attract more crime than other businesses, according to the report “Medical Marijuana Dispensaries Not Linked to Neighborhood Crime,” whose findings were published in U.S. News & World Report in June 2012.
Medical marijuana programs typically do not lead to an increase in teen usage, Forbes contributor Debra Borchardt shared from a Columbia University study published in The Lancet Psychiatry in June 2015.
Public Health Concerns
In states with medical cannabis programs, suicide rates for males aged 20 to 29 decreased 10.9 percent, and decreased 9.4 percent for ages 30 to 39, according to a study co-authored by professors from Montana State University, San Diego State University and the University of Colorado at Denver, reported by PBS NewsHour in February 2014.
And, annual deaths from prescription drug overdoses are 25-percent lower in states with medical marijuana programs, according to the Johns Hopkins Bloomberg School of Public Health.
The reason for that prescription drug overdose decrease may be that prescriptions decreased for painkillers and other drugs for which marijuana may be an alternative. On average, that resulted in 1,826 fewer doses of painkillers per year in legal states, according to the research article “Medical Marijuana Laws Reduce Prescription Medication Use In Medicare Part D,” published by Health Affairs in July 2016.
Property Value Concerns
Cannabis legalization can lead to increased commercial and residential real estate values. On the commercial side, cannabis cultivators generally prefer to purchase vacant warehouses in industrial areas, while cannabis dispensaries look to purchase (or lease) vacant storefronts in business districts, according to the November 2017 article “The Budding Impact of Marijuana on Real Estate” published by Poplogix.
The same article states that localities with cannabis businesses also tend to see an increase in residential sales as workers move to the area seeking employment. Data also suggests that states with legal cannabis see an increase in home prices, well above the national median.
Another finding from the Poplogix article: The main caveat is that residential areas near large cultivation facilities may see a dip in home values due to unavoidable odor from cultivation operations. For this reason, most localities limit cultivation and manufacturing to industrial areas.
Be a resource for local officials when it comes to your state’s cannabis program. Ensure they know you are available to answer any question, whether about your business or the industry.
Armed with this information, what is the most effective way to persuade your local government to allow your cannabis company to operate? We find that a multi-pronged approach works best. TIP 3: Talk to the councilperson for the area in which you want to operate. They are the most important person you need to persuade. Get a feel for whether they have preconceived notions about cannabis and have an honest discussion about their concerns. Find out whether any residents have contacted them about cannabis and what their response was.
TIP 4: Talk with local officials on council and in the mayor’s office and loop in the local police chief. Build a rapport with everyone you can so that they feel as if they can trust you. Explain that you want to be a partner in the community and keep the lines of communication open.
TIP 5: Campaign for your company. We have gone door-to-door with clients to talk with residents about what life would be like with a dispensary next door. Many times, apprehension comes from not knowing who wants to do business in the community. Residents are rightfully afraid that some out-of-town company wants to move in and maximize profits sans concern for the community. TIP 6:Explain the data above, as well as the security measures your company will implement to keep the community safe. If you plan to donate to or support local community programs, let them know.
Talk to the councilperson for the area in which you want to operate. They are the most important person you need to persuade.
Be a resource for local officials when it comes to your state’s cannabis program. Ensure they know you are available to answer any question, whether about your business or the industry. TIP 7: Be candid about the unknowns—this is still a relatively new industry, after all.
TIP 8: Don’t be afraid to help local officials craft permanent legislation that would authorize your company to operate. It doesn’t have to be more onerous than state-mandated requirements, but maintaining some semblance of local control may make it more likely that a moratorium will be rescinded or avoided altogether.
The process to address local cannabis moratoriums can be lengthy. It can feel like pushing a boulder up a steep hill. But we have found that by developing relationships at the local level, our clients emerge not only with a more favorable local framework, but with a true operating partner in the local government.
Thomas Haren is an associate at Frantz Ward LLP. He assists clients with license acquisition, regulatory compliance and more. Patrick Haggerty is chair of the Frantz Ward Litigation Practice Group. In 2015, he created the firm’s Cannabis Law and Policy Group. Mark Stockman is an partner at Frantz Ward LLP. His counsels clients through all phases of real estate development and construction.
Seed-To-Sale Tech Guide
Special Advertising Section - Seed-To-Sale Tech Guide
Cannabis resources for: traceability, point-of-sale, inventory management, digital menus, video surveillance, secure WiFi and cellular failover.
Fundraising is a skill set, but it is not one that is typically taught in classrooms or business accelerators. It’s no wonder that it is often the No. 1 issue for businesses, and doubly so for cannabis businesses. Here are a few tips–from someone who has codified a methodology used successfully by both founders and fund managers to raise anything from $300,000 to $300 million–on how to raise money.
1. Challenge and Invert the False Power Dynamic
Fundraising starts in your head. In order to do it efficiently, you need to be in the right mindset and operating with an appropriate set of assumptions. If you are not one of a tiny percentage of people who feel fundamentally entitled to ask for and receive money, you are probably stuck in an unhelpful framework that assumes investors are busier, more prized, more important and ultimately more valuable than you and your offering. Founders who believe this suffer everything from anxiety, inhibition, self-consciousness and fear in relation to asking for money. They also fail to do the critical job of recognizing that early-stage investors need to be educated and nurtured into feeling comfortable investing. Check in on, and challenge, any feelings that would put you on an unequal footing with investors. Recognize and treat them as customers to your business with the product being equity in your company or a significant return on their investments. Replace solicitousness, chasing and sucking-up in general with direct professional communications, and establish boundaries that appropriately value your time and your business.
2. Schedule, Structure, Process and Boundaries
You must be the leader of your own financial raise campaign and present investors with an invitation to participate in the defined process you have for executing it. This process should include a schedule, a framework for sharing your investor package that keeps you in total control of that information, as well as a communications strategy that keeps all interested investors updated in a group format that will save you a ton of time, and keep you in line with securities law around like disclosures to all investors in due diligence.
3. Find Your People
Fundraising should never become an exercise in trying to convince someone of your value. You will pitch to a lot of people, and some of them will resonate naturally with you and your offering. Those are the people you need to invite into your process as you quickly cycle through and move on from anyone who does not meet that criteria. Building a smaller group of like-minded, value-aligned investors around your business and then working closely with them through a structured process is an extremely efficient way to raise capital and a great way to build a resilient capital network around your company that will serve you now and as you move forward with your plan.
Sara Batterby is CEO and founder of The Equity Capital Collective.
California's Tax Hike Coming in January
Departments - Fast Stats
The new rates put even more pressure on the legal industry in California.