"Silicon Valley Trends 2015," Part 2: Marijuana Is Now a Natural Choice for Tech Startups

"Silicon Valley Trends 2015" is QDaily's special reporting series from Silicon Valley. Over the past few decades, hundreds of tech companies have been born here, and their technology has changed nearly every industry in the world. What are Silicon Valley's tech founders and investors watching and talking about today? This series of trend reports draws on what we saw and heard at dozens of in-person tech events in Silicon Valley this summer, and on our reading of industry figures such as investment and funding data.

One afternoon in late May, five minutes after an interview ended, the man I had just interviewed handed me a marijuana joint. "Just trying to help out a little," he said with a wink, as casually as if he were offering a stick of gum.

Our interview that day had nothing to do with marijuana, and neither did his industry. But when he heard I was working on a story about "marijuana startups in Silicon Valley," he gave me his joint as a show of support.

Marijuana stopped being forbidden in San Francisco long ago. This is the 19th year since California legalized medical marijuana, the first US state to do so. On San Francisco's streets you can now and then spot clinics selling joints and related products, though buyers need a doctor-issued marijuana card to purchase them.

But the past year has been different for the marijuana industry. Twenty US states now allow medical marijuana, and 2014 was even called a pivotal year for legalization, because nearly half of US states were pushing to loosen the laws on it. In Colorado and Washington State, "recreational marijuana," a looser category than medical use, was also legalized in 2013, so people there can smoke marijuana the way they drink alcohol.

American attitudes toward marijuana have relaxed as well. According to the Pew Research Center, as of March 2015, 49% of Americans admitted to having used marijuana, and support for legalization jumped from 42% in 2010 to 53% in 2015.

Warmer public attitudes and looser laws at home have given startups and investors a considerable push. The startup directory AngelList already lists 277 marijuana-related startups, and according to data on CrunchBase, marijuana startups received 29 investments totaling more than US$90 million in 2014.

There is even a firm devoted to marijuana investing, Privateer Holdings, which raised US$82 million this year to invest only in marijuana companies. Its investors include PayPal co-founder Peter Thiel. The market research and investment firm Arcview Group is even more optimistic: it projects that the marijuana market will reach US$10 billion by 2018.

In the US, marijuana startups are already doing business at every stage the law allows, from cultivation to delivery to monthly subscriptions. Investors, individual investors above all, are piling into marijuana startups, hoping to capture the most value before policy opens up and traditional investment firms move in. So how are Silicon Valley companies doing business in marijuana?

Order Marijuana the Way You Call an Uber

Only in the past few months have marijuana startups begun to appear often in the press and come to the general public's attention. Eaze and Meadow are two of them. Their sudden fame, however, is not all about marijuana. It also comes from the crossover pitch of an "Uber for marijuana," from an investment by the American rapper Snoop Dogg, and from the money and resources of two well-known US startup accelerators, 500 Startups and Y Combinator.

QDaily earlier interviewed David Hua, founder of Meadow, a fast delivery service for medical marijuana products. The company is less than a year old, and its core team has just four people, three of them engineers. Meadow joined Y Combinator in the winter of 2014 and received US$120,000 in seed funding. It was the first marijuana startup Y Combinator ever invested in.

You go online, pick a strain and a supplier, and place an order; within an hour the supplier delivers the marijuana to your address, and Meadow charges the supplier a fee on every completed sale. Some media have called Meadow an "Uber for marijuana," though we think it is closer to a marijuana version of the takeout app Ele.me. And if you lack the medical marijuana card needed to buy and can't be bothered to go to a hospital, Meadow can send a doctor to your address at the same time to issue one on the spot.

"I use marijuana myself. If I need to stay alert, I pick Sativa; if I want to relax, I pick a strain that's higher in CBD (cannabidiol)," David Hua said. He said he is long past the stage of wanting to get high; marijuana is now a medicine that improves his quality of life. David Hua negotiated with each of the suppliers on Meadow himself, because Meadow neither grows nor sells marijuana. It simply takes US$3 from every order.

David Hua told QDaily that he thinks this is the best moment for marijuana startups in the US. "There's a loud call for looser policy, and the market is still taking shape, so it's a great chance to do business."

Marijuana Has Its Own Brands, Too

On Meadow's website you can browse marijuana of different strains and brands, all from the suppliers David Hua signed up one by one. Marijuana differs not only in origin and variety but also in extraction methods, and each producer has developed its own, so the US market has distinct marijuana "brands." Of the US$82 million that the marijuana investment firm Privateer Holdings raised in 2014, US$75 million came from a newly created marijuana brand, Marley Natural.

The brand began its branding and marketing before it had released a single product. It chose the late Bob Marley, the father of reggae, as its face, and stresses that its marijuana is grown in Jamaica. Because Bob Marley's music carries a good deal of political and cultural meaning, Marley Natural wants to tie that to marijuana's not-yet-fully-legal status and build a marijuana brand with cultural weight.

There's Even an App That Teaches You to Grow It

Some users prefer to grow their own. When it comes out of their own garden, and they choose the fertilizer, soil and growth supplements themselves, they feel more at ease. About 2.5 million people across the US now grow marijuana in their gardens. GrowBuddy, an app based in Colorado, is one startup that has gone into the growing side of the business.

Founded in 2013, the startup currently makes an app that gives advice on growing marijuana. Users log each stage of their home plants and their current height, and the app suggests when and how to fertilize and tend them.

"This is the fastest-growing industry in the US," GrowBuddy CEO Rob Rusher told QDaily. Rob Rusher is no longtime marijuana user; he worked in marketing at a tech company and only spotted the opportunity and joined the industry eight months ago. "The very first marijuana startups were definitely founded by marijuana enthusiasts and users. But now a lot of businesspeople like me are coming in to do real business."

"It's like beer. You can buy it everywhere, and still 1.3 million people in the US brew their own at home. So this market isn't going away," Rob Rusher said.

Firms That Invest Only in Marijuana Startups

On the day we met Rob Rusher, he had just come out of a meeting with investors. Brands, growing and delivery are not the only businesses here: marijuana investing has become a business in its own right, and its biggest player so far is Privateer Holdings, the marijuana investment firm that raised US$82 million.

The three founders of Privateer Holdings

Founded in 2011, the firm caught the attention, and the money, of PayPal founder Peter Thiel, and this year it will launch Marley Natural, the brand described above. Privateer Holdings believes marijuana could grow into a huge US$40 billion market in the US, and it wants to get there first by investing in marijuana startups.

It has already made its first acquisition of a marijuana startup: Leafly, an online community for marijuana reviews. Leafly doesn't need to burn cash; it already brings in at least US$100,000 a month, and that figure is still growing.

A Marijuana Startup "Trade Show" and Incubator

At Runway Incubator, a startup incubator inside Twitter's building, QDaily also attended a "trade show" for marijuana startups. Here is how busy it was:

The event drew 200 people. Besides the dozen or so startups with booths, there were plenty of investors hunting for deals and people who were planning to start marijuana businesses and had come to learn more. Although many marijuana products, services and brands were on display, the event was held in an indoor public space, so the organizer, Weed Club, strictly banned everyone from smoking or selling marijuana on site.

At the show we met all kinds of interesting marijuana founders. Synchronicity, for example, run by women founders, is a monthly subscription service for marijuana samples. They took the idea from the cosmetics sample boxes now mailed to women shoppers in the US. "More than half of marijuana users are actually women, but they haven't had a voice in this industry. I thought we should build a service just for them. If you can subscribe to cosmetics samples, why not samples of different marijuana products and strains?"

These are Synchronicity's two founders. They pack marijuana products into attractive gift boxes and send them out monthly. If a subscriber likes one of the samples, she can buy the full-size product on their website.

These two young men are building PestoDoctor, an online medical service for marijuana, for people who would rather not visit a clinic in person to get a doctor's marijuana certificate. Through a phone or tablet app, they video-chat with a doctor and then receive a marijuana card. "A video call with the doctor takes just 10 minutes, and then we can mail you your marijuana card."

A company called Harvest is more interesting still: it wants to be the Starbucks of marijuana clinics. To pull it off, founder Marty Higgins has even poached several managers from Starbucks. He told QDaily that Harvest will open a new kind of marijuana clinic in downtown San Francisco this year, run the way Starbucks runs its stores: bright storefronts, polished interiors and fast over-the-counter sales of marijuana products.

If that still isn't specialized enough for you, there are also startups devoted to keeping the money in marijuana transactions safe, and startups that give marijuana companies political and policy advice...

Mike McCormick, head of the private equity firm Rubicon Venture Capital, was also there looking for promising companies and founders. He told QDaily that individual investors are very active in marijuana startups right now, because big investment firms have not yet entered the field, so there are plenty of opportunities.

Marijuana Even Has a University

In Oakland, not far from downtown San Francisco, a school called Oaksterdam University runs training courses devoted to marijuana. Its founder, Richard Lee, is an active marijuana advocate in San Francisco. The courses cover marijuana's history, cultivation, cooking, laws and regulations, medical uses, how to run a marijuana clinic, and marijuana business...

Despite the name, finishing the courses will not earn you a formal BA or BS, but Oaksterdam University does award a certificate of completion.

The outside wall of Oaksterdam University

The school puts heavy emphasis on marijuana knowledge that leads to jobs. One of its favorite slogans is "Come learn the history of marijuana, and meet people you can work with." By Oaksterdam University's own count, 15,000 people have earned certificates from its marijuana courses so far. David Hua, the Meadow founder mentioned earlier, is one of its graduates.

The Road Ahead Is Still Hard

Although the number of marijuana startups in Silicon Valley is growing fast, the industry as a whole still faces many thorny problems. The first is how to reach users. The major online ad platforms, along with app store search, still restrict the promotion of marijuana startups' services.

Rob Rusher, CEO of GrowBuddy, the app that helps people grow marijuana at home, complained to QDaily: "We went through the proper channels to advertise on the ad platforms of Google, Yahoo and other sites, but they all pulled our ads."

Because the app covers products such as marijuana fertilizer and growth supplements, and its marketing copy contains the word "marijuana," not every app store or online advertiser is willing to take it.

"Because of the industry we're in, we can't get users through app store search the way other businesses do," Rob Rusher said. He said promotion is extremely hard for marijuana startups. He even keeps several secondary accounts in the app store, which he uses to upload versions of his app with different descriptions and keywords, to test whether Apple's App Store will pull it.

Marijuana delivery services such as Meadow and Eaze can't get their apps into the app stores at all. Their current workaround is a mobile website that does the app's job.

"The web version certainly has its limits, but it's the best solution we have right now," Meadow's David Hua told us.

These restrictions exist because only parts of the US have legalized marijuana; in most places it is still illegal. On top of that, the debate over whether marijuana is a "gateway drug" has never stopped. Many people worry that although marijuana is not very toxic, its modest price and easy availability make people more likely to try other drugs later, such as heroin.

"That's exactly why we need legalization," David Hua countered. "It's not marijuana itself that's the gateway. The ban makes drug dealers the place people buy marijuana, and they're the ones who turn it into a gateway drug."

In this period of change, plenty of tech startups have collided with policy and tradition. We have already seen Uber take on taxis, Airbnb take on hotels, 23andMe challenge medical regulators... and now marijuana. In today's startup boom, it seems there is no industry left that tech founders haven't set their sights on.