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.
Seed-To-Sale Tech Guide
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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.
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Though the article topics are varied, a strong theme persists throughout the issue—the importance of treating employees well and fairly. Showing staff you appreciate what they do, especially around the holidays, with spoken words and written thank-you notes is important. It matters, it costs nothing and takes little time. However, actions tend to speak louder than words, and to be competitive in this job market, companies need to do more year-round.
Human resources expert and regular HRHQ columnist Maria Denzin didn’t just write about ideas for keeping associates happy for this month’s issue. Her tips revolve around making sure another dispensary doesn’t scoop up your staff. Poaching is a business reality in a job-seeker’s market, and one of the main reasons people leave their jobs is money. Retailers can’t just pay the market rate to keep great employees. They must do better.
This sentiment was echoed by Bianca Blanche, a flower host with Original Cannabis Café (formerly Lowell Café,) a cannabis consumption restaurant in Los Angeles. Blanche notes, “By compensating budtenders properly, it tells them you care about their well-being and want to see them succeed. A happy budtender equals a happy customer.” Most of us know this, but not all have internalized it, as some budtenders in even expensive markets like L.A. don’t make a living wage.
Dockside Cannabis, featured in this issue’s cover story, also works to ensure budtenders—who Dockside co-founder Aaron Varney says are the “face of the company”—are making competitive wages, both regionally and nationally.
Benefits are important, but as Denzin notes, they must cater to what really matters to your employees. Vacation time is more important to some than a 401K. Others value a work-life balance or trust and flexibility, where time-off requests aren’t met with resistance or aversion. Discovering what each person on your team wants and customizing benefits when possible demonstrates how valuable they are to your operation.
These strategies not only benefit your employees, but they benefit your business. “The cost of replacing an individual employee can range from one-half to two times the employee’s annual salary—and that’s a conservative estimate,” according to a 2019 Gallup report. “A trillion dollars. That’s what U.S. businesses are losing every year due to voluntary turnover.”
What’s perhaps more important is that in many cases, employee turnover can be avoided by working to keep your employees happy. “The most astounding part is that most of this damage is self-inflicted,” reports Gallup.
Whether you’re looking to create a better workplace for your employees and prevent talented employees from leaving the company or make important decisions about expansion or marketing, this issue of CD is designed to help you close out 2019 with implementable strategies for the coming year.
Best wishes for continued success and a healthy and happy holiday season!