CannaConnect is a business plan my team and I developed for an entrepreneurship class during my MBA. The following is a snippet of our work. See the full business plan and investor pitch deck here.
CannaConnect is a B2B e-commerce platform that connects buyers with sellers of wholesale cannabis goods and facilitates the sale. The goal is to disrupt the traditional business model run by distributor incumbents and democratize the supply of cannabis.
The legal cannabis industry as a global market has exploded as cannabis pushes its way further into the cultural mainstream. After delivering $6.9 billion in global sales in 2016, $9.5 billion in worldwide revenue in 2017, and an estimated $12.2 billion last year, global sales are expected to grow 38% in 2019 to $16.9 billion, and hit $31.3 billion by 2022. That’s a compound annual growth rate of 26.7% between 2017 and 2022. Additionally, as more and more states are moving towards legalization, drug regulators are approving marijuana to treat some of our most common diseases, which could potentially make these numbers grow exponentially.
The cannabis industry is still relatively young, as there are no large logistics companies that offer large-volume, long-distance, secure transportation of marijuana across the state. The most common mode of transportation of cannabis are armored trucks and white vans. Because of the risk of theft, dispensaries order only 10 pounds or less of cannabis goods at a time, and the distribution of cannabis is local or regional.
In the highly complex map of the cannabis supply chain, distributors reign in the middle because cannabis goods cannot be delivered between sellers and buyers without a licensed distributor. Distributors offer a diverse range of services. Some are solely transporters. Some have warehouses and sell a catalog of brands in bulk at wholesale prices. Some offer sales and marketing tools. Although it’s convenient for retailers to work with a single distributor to purchase a set of products and have them transported by one driver, the distributor model has also proven to be troublesome. Dispensaries:
- Are limited by what the distributor has in stock and what brand the distributor carries,
- Must perform additional research and background checks to compare prices and ensure that the distributor is carrying quality-controlled products,
- And must rely on word-of-mouth to discover more brands available outside their distribution circle.
Cannabis continues to be highly regulated at the local, state, and federal levels. Cannabis businesses are divided into two types: “plant-touching” and ancillary. Plant-touching businesses directly interact with the production and sale of cannabis and are subjected heavily to zoning laws, quality assurance requirements, and taxes. On the other hand, ancillary businesses provide services to the cannabis industry but do not directly interact with the production or sale of cannabis, such as lighting, security, and software. As a result, CannaConnect is not inhibited by the same rules and risks that plant-touching businesses face.
Marijuana legalization will be a prominent issue in the 2020 presidential election. A majority of the Democratic candidates heavily supports legalizing marijuana, so a Democratic win could bolster the marijuana industry as a whole.
California state lawmakers are pushing to require municipalities to lift bans on cannabis stores if voters there supported Proposition 64-the 2016 initiative that legalized sale of the drug for recreational use in California. A bill moving through the legislature would require those cities to permit at least one cannabis retailer for every four bars or restaurants with a liquor license or one for every 10,000 residents, whichever is fewer. Assembly Bill 1356 would mandate 2,200 new cannabis stores throughout the state, more than three times the 631 shops legally operating now, state officials estimate.
CannaConnect charges a 5% service fee on each transaction made on the platform. The fee is charged to both the seller and buyer. Sellers can also pay to sponsor their products or to rank higher on the website’s internal search engine, thereby generating advertising revenue.
CannaConnect is an ancillary business responsible only for connecting buyers with sellers and facilitating the transaction of goods via the online platform.
Sellers are responsible for the delivery of purchased goods to the buyers. Sellers either have their own distributor license or can work with third-party distributors available on our platform to transport the product to the destination.
- Digital storefront
- Online listing
- Increased sales volume
- Marketing tools
- Paperless back office to manage orders, inventory, and customers
- Access to a network of brands available across the state
- Lower costs
- Online ordering process
- Transparency into prices, availability, and quality
- Online directory
Market Research and Analysis
The legal Cannabis market constitutes about 8% of the global Cannabis market or $12.2 billion and is poised to grow at a CAGR of 38% in 2019. The US represents about 90% of the legal market, followed by Canada and the rest of the world.
|Region / Market||Legal ($USD Billions)||Illegal ($USD Billions)||Total ($USD Billions)|
The following chart illustrates the flow of product and money in the supply chain for the cannabis industry.
Growers who have a distribution license can also deliver products directly to the retailer. However, because a distribution license is limited, expensive, and hard to obtain, the majority of flow of supply happens in the middle lane where a wholesale distributor acts as the middleman for retailers.
The CannaConnect platform services only the B2B market in the cannabis goods supply chain.
On the CannaConnect platform, users are divided into two profiles: sellers and buyers.
Sellers consist of licensed growers, manufacturers, suppliers, distributors, and wholesalers.
- Increase sales volume
- Lower costs
- Advertise their product catalog on sales channels
- Online presence to build brand awareness
- Marketing tools
- Paperless back office to manage orders, customers, and inventory
- Difficulty finding customers using traditional sales tactics, such as cold calling and physical visits to retail stores
- Don’t know what trending products are desired from retailers
- Are influenced by distributors to produce products
California houses the highest number of legal cannabis farms in the US at over 1,142 acres and 50,000 growers, 6% of which are legal. Although the California market can only support 2 million pounds of sales, there is currently an oversupply at nearly 9 million pounds of product each year. In the cannabis industry, California is famous throughout the US for the Emerald Triangle, a region in Northern California made up of Humboldt, Mendocino, and Trinity Counties. The Emerald Triangle is the largest marijuana-producing region in California, producing roughly 1.7 million pounds per year.
Buyers consist of brick-and-mortar dispensaries and online stores.
- Increase sales volume to consumers
- Maintain inventory to prevent lost sales
- Lower costs on bulk and repeating purchases
- Convenient, online ordering process
- Online directory of brands across the state
- Transparency into prices, availability, and quality of products from distributors
- Highly valued brands are always out of stock
- Difficulty finding other distribution channels to supply high-demand products that are frequently sold out
- Spending money and time reaching out to suppliers and seeing what brands they carry and whether the products they carry pass all legal and quality requirements
- Rely on word-of-mouth to find reliable, qualified suppliers
There are 631 legal dispensaries operating in California. The number of licensed shops so far is only 10% of what the state officials expect. The dispensaries are concentrated in the Northern and Southern California regions, with the majority of them in the major cities such as San Francisco, Sacramento, Los Angeles, and Long Beach.
In California there are 631 legal dispensaries operating. Dispensaries, on average, sell 0.5–2 pounds of cannabis per day, and due to the risk of theft, shelf life concerns, and limited mode of transportation in small armored trucks, dispensaries order in small quantities of 10 pounds or less from suppliers. At an average wholesale price of $4000 per pound, roughly $1B in B2B transactions are made each year between buyers and sellers.
Given our business model, if we charge 5% to both the seller and buyer on each transaction, our total available market (TAM) across California is $100 million.
California is the largest and one of the fastest growing cannabis economies in the US. Servicing the California market first is key in developing a large network of brands on CannaConnect that buyers can source from. We anticipate that in the next 5–10 years, major progressive changes will happen in the industry, loosening regulations and potentially allowing the interstate sale of cannabis if the federal ban is lifted. California, being one of the largest producers of high-quality cannabis in the US, will see a large outflow of product. If CannaConnect can build a strong foundation in California before these changes occur, then we expect CannaConnect to become the platform of choice for making purchases from California-based suppliers.
Within California, our target market is further refined to the Northern and Southern California regions. As mentioned previously, transportation of wholesale product is limited to armored trucks and white vans, which can only travel short distances and carry a limited amount of cannabis goods — dispensaries purchase only 10 pounds of less of cannabis per order. As a result, logistics operations are concentrated in regions, like Northern and Southern California.
By targeting a specific region with a high concentration of both suppliers and dispensaries, CannaConnect can streamline its logistics operations and reduce delivery time and costs, thereby ensuring high quality service for its users.
Our main competitors are the incumbents with the traditional distributor model.
Wayv / Indus
Wayv is an e-commerce platform for selling and promoting cannabis goods online. Wayv handles the software and has partnered with Indus Distribution, an established cannabis wholesaler, to manage inventory and delivery of cannabis brands.
Indus has over 80 brands in two facilities across California and maintains 2-week inventory stock on each brand. As a result, Indus is able to promise 1-day shipping on purchases from retailers.
Recently, in October 2018, Wayv received $5 million in seed from Craft Ventures and has launched Dynamic Distribution, which allows third-party distributors to also list themselves on the platform.
Wayv is our largest competitor.
Nabis is a distributor that has two warehouse locations across California, houses 80 brands, and sells to 99% of dispensaries across the state. They offer delivery within 36 hours of ordering, and charge at a minimum 12.5% of the wholesale purchase volume.
Flower Company is a wholesale distributor and is called the “Costco for cannabis.” Flower Co. works directly with growers to develop house brands and promises customers prices 40% lower than what they would purchase at dispensaries. Their primary revenue stream is the annual $119 membership, which guarantees the customers higher discounts, faster delivery times, and access to private events.
Flower Co. recently raised a $2.8 million seed round from investors including Slome Capital, Prehype, Rob Stavis, Adam Draper, Josh Abramson and Camille Hyde.
CanIDeal is a B2B online marketplace focusing on the sale of CBD and ancillary cannabis products across the United States. This means that they don’t touch the plant and are therefore able to sell and transport their goods interstate.
CanIdeal takes a 2.5% on each vendor transaction. Vendors can use the platform for free and are provided services such as inventory management, data reporting, CRM, and brand exposure.
- An online directory of products and sellers with all information available allows buyers to make informed purchases.
- Buyers can find sellers from across the state
- Third-party distributors can sign up on the platform to provide transportation services CannaConnect is not subject to the rules and regulations associated with plant-touching businesses.
- CannaConnect doesn’t own any distribution centers or delivery vehicles.
- By being platform-only, we can charge lower service fees compared to our competitors.
- Reviews and ratings enforce higher standards and accountability
- Can’t guarantee 1–3 day delivery windows. Shipping times are dependent on the seller’s capabilities.
- No online payment processing.
- Because anybody can sell on our platform, there’s a risk of low-quality sellers joining the platform
- If the federal ban is lifted, CannaConnect could be the primary choice of platform for the interstate sale of cannabis goods.
- CannaConnect can quickly expand to other states.
- If CannaConnect can build a strong foundation in both Northern California and Southern California, that would pave the way for the future when large-volume, long-distance distributors enter the market and are able to distribute across the state.
- Network effects can lead to “hockey-stick” growth.
- Wayv launched a year ago and has a head start.
- Regulations are highly volatile and at any moment could inhibit growth.
- The team lacks the necessary network and relationships to kickstart the business.
- Buyers and sellers may leave the platform to handle transactions on their own.
As a result of being an ancillary platform with no long-term assets, CannaConnect can run as a highly cost-effective business and therefore charge lower service fees than the competition. CannaConnect is also an open marketplace, so the size of the platform’s catalog of products is only limited by the number of sellers that sign up for our platform. Our competition, the traditional distributors, require additional warehouses and trucks to expand their product offerings and fulfillment services.
Big thanks to Professor Al Bruno at Santa Clara University and to my teammates Eleazar Bradley, Shamir Kumar, Mike Lee, and Jorge Vergara-Vega.
If you’re interested in seeing the full business plan and investor pitch deck, click here.
Thanks for reading!
Connect on Twitter @KennethLNg