The first cannabis startup to raise big money in Silicon Valley threatens to burn out. TechCrunch has learned that Pot Delivery middleman Eaze has experienced unannounced layoffs, and the depleted cash reserves jeopardize the possibility of paying payslips or paying the AWS bill. Eaze was forced to build a bridge to keep the lights on as he prepares to set an important "touch the plant" pivot by selling his own marijuana brands through his own depots.
If Eaze fails, it could reveal serious growing pain from the “green run” of startups into the marijuana business.
Eaze, the startup that was funded with around $ 166 million and once positioned itself as "Uber of Pot" – a marketplace where pot and other cannabis products from pharmacies were sold and delivered to customers – recently launched a 15- Million dollar bridging round completed multiple sources. The fund should keep the light on when Eaze is struggling to increase its next round of funding due to problems with reasonable margins in relation to the current business model, litigation, payment processing issues and internal disorganization.
An Eaze spokesman confirmed that the company has little money. Sources report that the company, which had laid off around 30 employees last summer, is now preparing another round of cuts. The spokesman refused to discuss personnel issues, but noted that layoffs had occurred in many late stages as investors expected companies to cut costs and increase efficiency.
As far as we know, Eaze is currently trying to win a $ 35 million Series D round based on his pitch deck. The $ 15 million bridging round was carried out by unnamed current investors. (Previous supporters of the company included 500 startups, DCM Ventures, Slow Ventures, Great Oaks, FJ Labs, the Winklevoss brothers, and a number of others.) Eaze had originally tried a Series D amount of $ 50 million upset, but the investor had tried to do so Athos Capital is said to have left in the eleventh hour.
Eaze is investing in fundraising with an enterprise value of $ 388 million. This is evident from company documents that have been checked by TechCrunch. It is not clear which rating will be sought in the next round.
An Eaze spokesman declined to speak about fundraisers, but said to TechCrunch: “The company is currently in a very important upheaval and, through acquisitions of former retail partners, is becoming a company that we hope will enable us to do business more efficiently to continue leading good service to customers.
Desperate to increase margins
The news comes when Eaze hopes to do a "verticalization spurt" that goes beyond online business and delivery of third party products (roller joints, flowers, vaping and edible products) and directly procures, brands and distributes the product , Instead of just moving the marijuana brands of other companies between third-party pharmacies and customers, the company wants to sell its own brands through its own supply depots in order to achieve a higher profit margin. Given the difficulties of some other cannabis companies, there is hope that they can acquire brands in areas such as marijuana flowers, pre-rolled joints, vaporizer cartridges or edible products at low prices.
An Eaze spokesman confirmed that the company plans to announce the pivot in the coming days, and told TechCrunch that "it is a fairly significant change from service provider to operating in this way, but also to operate its own depot." is. "
The startup is already taking steps in this direction and is currently acquiring part of the assets of a bankrupt cannabis company called Dionymed from Canada, which was originally a partner of Eaze, then became a competitor and then sued over payment disputes before finally selling part of its business , These assets also include the Oakland pharmacy, Hometown Heart, which was acquired as part of an all-share transaction ("Eaze effectively bought the lawsuit," one source described the sale). This will be Eaze's first supply depot.
In a recently released presentation deck that Eaze used to address investors – which TechCrunch has received – the company describes itself as the largest direct-to-consumer cannabis retailer in California. The company has completed more than 5 million deliveries, served 600,000 customers and achieved an average transaction value of $ 85.
So far, Eaze has only settled in another state outside of California, Oregon. The aim is to add another five states this year and another three states in 2021. However, the company appears to have expected more states to legalize marijuana for recreational use earlier, which would have resulted in a geographic expansion. Eaze appears to have overwhelmed too early to gain market share as soon as it becomes available.
A company employee tells us that on a good day, Eaze can have net sales of between $ 800,000 and $ 1 million, which sounds great, except that this is the total value of the goods before cuts are made to suppliers and others become. Eaze is only a fraction of this amount, which is why it is now trying to play a more important role in the ecosystem. And that's before you consider all of the costs associated with running the business.
Eaze suffers from a common problem in the marijuana industry: a lack of working capital. Because banks often do not issue working capital loans to weed shops, suppliers such as Eaze may experience delayed vendor repayment. According to a source, late payments have caused some brands to stop selling through Eaze.
Marketing efforts were another burden on finance. According to one source, out-of-home advertising (billboards and the like) was said to be a significant effort at one point. It has to compete with other ways of buying pots, e.g. B. the personal visit of retail stores, the use of the internal delivery service of the pharmacies or the purchase through startups like Meadow that act as aggregated online sales outlets for multiple pharmacies.
In fact, Eaze claims that its pivot in verticalization will generate $ 204 million in gross sales of $ 300 million. The presentation points out that an average sale of $ 85 will mean $ 9.04, or $ 18.31, if private label products are successfully launched and more control over the depot consists.
Selling weeds is not a shame
Weak margins are just one of the issues with Eaze's current business model, which the company admitted to in its presentation, and which has resulted in an inconsistent customer experience and poor customer loyalty to its brand, especially given the competition from a number of other suppliers.
The on-demand topic, which deals with the delivery of everything, connected it with two customer bases. First there Cannabis users are already using some form of delivery service for their delivery; and a newer, more established, disposable income target group who had been more interested in cannabis products but may have felt less comfortable when they went to a pharmacy or bought from a black market dealer.
It is not the only startup that is following this audience. Other competitors in the broader market for the discovery, distribution and sale of cannabis are Weedmaps, Puffy, Blackbird, Chill (a brand of Dionymed that was founded after the previous relationship with Eaze ended) and Meadow, whose value in the broader Industry is estimated to be $ 11.9 billion in 2018 and forecast to grow to $ 63 billion by 2025.
Eaze was founded on the premise that the gradual decriminalization of the potentiometer – initially legal for medical purposes and gradually for recreational use – would spread throughout the U.S., making cannabis use much more pervasive and playing a major role in opportunity Eaze and other startups like it.
There was an interested audience among consumers, but also technicians in the Bay Area, a narrow market for recruiting.
"I was excited about the opportunity to join the cannabis industry," said a source. "It got a bad reputation for the most part, and I saw Eaze's mission as a noble thing and the team looked like good people."
This impression did not last. The company, the employee was told when they joined, had sufficient financial resources, with others on the way. The newer funding never came and when Eaze tried to find the best way forward, the company drove with different ideas and leadership skills: ex-Yammer manager Keith McCarty, who founded the company with Roie Edery (both are now founders of another cannabis startups). Wayv), left, and the CEO role was transferred to another ex-Yammer manager, Jim Patterson, who was then replaced by Ro Choy, the current CEO.
"I personally lost confidence in the ability to implement part of the vision when I got there," said the former employee. "On the one hand, I thought that a picture was painted that was not true. As we got closer and I was there longer and had problems with funding, the story changed why we had problems." Various sources related to the Business development and culture were familiar, Eaze called "Shitshow".
No "push for kush"
The rapid changes in strategy were a recurring pattern long before the company found itself in a tight financial situation.
One employee remembered an acquisition that Eaze made a few years ago for a startup called Push for Pizza. Push for Pizza was founded by five young friends in Brooklyn and went beyond a simple concept: you set up your favorite pizza order in the app, and if you wanted, you pressed a single button to order it. (Does that sound silly? Don't forget that this was also the era of Yo, which was either a low point for innovation or a high point for cynicism when it came to average consumer information … maybe both.)
Eaze's idea, according to the employee, was to turn the basics of Push for Pizza into a weed app, Push for Kush. There, customers could put together their favorite mix and order them at the push of a button, which further lowered the procurement barrier.
The company was very excited about the deal and the prospect of the new app. They planned a major campaign to spread the word and hosted an internal event to get employees excited about the new app and business.
"They even made a film that they showed us that featured a cartoon of Jim," the then CEO said, "hanging on the sunroof of a limousine." (I could find the opening.) Segment of this video online and the Twitter and Instagram accounts created for Push for Kush, but no more.)
Just a week later, the entire plan was discarded and the Push for Pizza founders fired. "It was just brushed under the carpet," said the former employee. "Nobody could get anything out of the management that had happened."
However, something had happened: the company accepted card payments when it was taken over, but the process was never stable and until then it had switched back to the pure cash model. Push for Kush with cash was less attractive. "They didn't think it would work," the person said, adding that this was the normal course of business at launch. "Big initiatives would simply die for spreading new things on the product team's radar."
The Eaze spokesman confirmed that “we have purchased Push For Pizza. , but ultimately decided not to pursue [launching Push For Kush], "
Payments were a recurring problem for the startup. Eaze initially only accepted payments in cash. However, as the business grew, this became more and more problematic. The company was released from the credit card network and was stuck in a less understandable, error-prone (and theft-prone) cash-only model when an employee was estimated to generate sales of between $ 800,000 and $ 1 million a day.
After all, it was about cards, but not smoothly: Visa explicitly did not want Eaze on its platform. Eaze found a workaround, the employees say, but it never went overboard, which became the subject of the lawsuit between Eaze and Dionymed. Currently, the company appears to only accept debit cards, ACH transfers, and cash, not credit cards.
Another incident tells how the company viewed and handled security issues.
Can Eaze Rise from the Ashes?
At some point, employees reportedly found that Eaze stores essentially all of its customer data – including user signatures and other personal information – in an Azure bucket that was unsecured.
The company was made aware of the vulnerability. It was up to the product to fix this, but the job was put on the list. It finally took seven months to fix it. "I've always seen things with all these huge holes that just weren't ready for prime time," said a former employee about the condition of the products. "Nobody listened to engineers, and nobody seemed to be looking for viable products." The Eaze spokesman confirms that a vulnerability has been discovered, but claims that it has been addressed promptly.
Today the topic is more pressing: the company has run out of money. Employees have been informed that the company may not be preparing their next payroll, and AWS will shut down its servers within two days if no payments are made.
Eaze's spokesman tried to remain optimistic while admitting the company's dire situation. "Eaze will continue to do everything possible to support customers and the entire legal cannabis industry. We look forward to the future and recognize the challenges that the entire community is facing. "
When access to medical marijuana and recreational marijuana became legal in some states in the last 2010s, entrepreneurs and investors flocked to the market. They saw the opportunity to use the end of a big ban – a one-off event. However, high government taxes, persistent black markets, intense competition, and a lack of financial infrastructure ready to deal with legal uncertainties have led to significant setbacks.
While the pot business sounds rather uncomfortable, it is important for companies like Eaze to coordinate logistics under high stress with low profit margins and little potential for errors. Many food delivery startups from Sprig to Munchery went under after experiencing similar difficulties, and at least banks and payment service providers would work with them. Given the many opportunities, Eaze has a difficult road ahead.