I. The New Consumer

II. Product Segmentation

III. Regulatory Environment

IV. Emerging Opportunities

I. The New Consumer

As legal cannabis products move into the mainstream, the cannabis consumer profile is changing dramatically. Incremental steps towards legalization, a proliferation of new cannabis product categories, and a better understanding of potential health benefits have changed the “why” and “how” consumers are using cannabis. Many of today’s consumers no longer identify with the classic “stoner” stereotype. Instead, the vast majority of new users see themselves as part of a new cannabis culture and identify as “social”, “sophisticated” and “professional”. According to recent Minor & Co study surveying 800 legal cannabis users in North America, 90% stated that they include cannabis as part of their wellness regimen alongside diet and exercise. Additionally, 95% of respondents preferred a high that allows them to be “present”, “mindful”, and/or “focused” rather than “stoned” or “out of it”. They are also spending their money on products with lower concentrations of THC and higher concentrations of CBD, a cannabis product that reportedly offers many health benefits without the mind altering high. The new consumers are also much more likely to try emerging product categories including edibles, concentrates and vape pens.

The principal driver of the new user trends is the significant demographics shift taking place within the industry. Before medical and recreational marijuana legalization started to gain traction, cannabis users were primarily young men in their late teens and early twenties who were willing to purchase buds illegally and with little assurance of quality or safety. Although that public perception still partially lingers, cannabis demographics are rapidly changing.

New Identity: According the Minor & Co. study, the average Cannabis consumer is ~30 years old, married, making more than $75,000 per year, and likely has a child under the age of 18.

Key Demographic Statistics:

  • 88% consider themselves part of a new cannabis culture – identifying as social, sophisticated and professional individuals
  • 65% have a household income of $75K or more
  • 63% married or living with a significant other
  • 84% employed full-time
  • 42% parents of children < 18
  • 49% Democrat; 45% Republican
  • 52% of market revenue comes from millennials (but fastest growth is coming from Baby Boomers and Gen Z)

What the New Consumer Wants:

  • 90% say they adopt brands based on flavor, taste and the type of high.
  • 80% say “attractive packaging” influences purchase decision
  • 60% say that a celebrity association is at least somewhat important in choosing a new brand
  • Key concerns are: privacy, safety, social acceptance
  • Medical benefits (CBD as introduction, helps remove stigma)
  • Social responsibility is important to generate positive public opinion of space

Generation Breakdown:

Although Millennials (ages 23 – 38) make up roughly half of the legal cannabis market, Gen Z and Baby Boomers make up most of the remaining market and account for a disproportionate share of growth.

Source: IBIS World Data

II. Product Segmentation

Cannabis products can generally be divided into 5 key categories: Flower/buds, Edibles, Pre-rolled cigarettes, Concentrates, and Vape pens.

  • FLOWER products, or buds, now make up nearly half of all cannabis products purchased, but its growth has slowed considerably compared to other product categories. Flower makes up roughly 45% of the cannabis market, down from nearly 70% in 2014.
  • EDIBLES are cannabis infused goods that can be taken orally. Products include mints, baked goods, candies, beverages along with many others. Edibles are one of the fastest growing categories and currently makes up roughly 13% of total cannabis sales.
  • PRE-ROLLED CIGARETTES, or “joints”, make up about 11% of cannabis revenue and are especially popular with new marijuana smokers. This category is expected to grow quickly as looser regulations bring new consumers into the market.
  • CONCENTRATES include any product created by an extraction process. Products include kief, hash, butane hash oil, and tinctures. This category currently makes up 9.5% of the market.
  • VAPE PENS have gained popularity extremely quickly and have been the product of choice for many new marijuana consumers. Growth slowed in 2019 as a result of several serious medical problems related to vitamin E acetate, a chemical sometimes included in vape solutions. The problems mainly resulted from the purchase of illicit and unregulated vaping cartridges, but the public remains somewhat weary of the category in general. Vape products makes up roughly 8% of the market.

III. Regulatory Environment

The regulatory environment is always the elephant in the room when discussing the cannabis industry, and for good reason. At the federal level, cannabis remains a schedule 1 narcotic along with the likes of heroin and MDMA. Dispensaries, even in states where cannabis is legal, still face significant barriers to success.

Cannabis Company Regulatory Issues:

  • Ineligible to make standard tax deductions for business expenses
  • At risk of asset seizure by federal government
  • Difficulty obtaining non-dilutive financing
  • Products and services cannot be sent across state lines
  • Advertising is heavily regulated and restrictions vary drastically from state to state
  • Murkiness surrounding legality discourages many new consumers

The regulatory environment is complicated and constantly changing, but there have been real steps toward legalization over the last decade or so. There are now 33 states that allow marijuana use for medical purposes and 11 that allow recreational use. The majority of the US public supports legalization, and progress appears to be headed in that direction.

Recent Milestones Toward Legalizing:

  • 1997: California is the first state to legalize medical marijuana
  • 2009: US Justice Department instructs prosecutors not to “prioritize” prosecuting businesses following state cannabis laws
  • 2012: Colorado and Washington become first states to legalize recreational marijuana
  • 2014: Obama signs a bill prohibiting Federal funds to be used to target dispensaries in states where cannabis has been legalized
  • 2016: The federal government loosens restriction on studying the benefits of medical marijuana
  • 2019: The House passes the SAFE banking and MORE acts. The bills will make obtaining financing easier and less dilutive for cannabis companies and will remove marijuana from the controlled substances list if approved by the senate.

Legalization by State:

  • Legal Medical Use States: Arizona, Arkansas, California, Colorado, Connecticut, Delaware, Florida, Hawaii, Illinois Louisiana Maine, Maryland ,Massachusetts , Michigan, Minnesota, Missouri, Montana, Nevada, New Hampshire, New Jersey, New Mexico, New York, North Dakota, Ohio, Oklahoma, Oregon, Pennsylvania, Rhode Island, Utah, Vermont, Washington
  • Legal Recreational Use States: Alaska, California, Colorado, Maine, Massachusetts, Michigan, Nevada, Oregon, Vermont, Illinois and Washington

The Road Forward:

The road to full legalization is extremely uncertain but the movement is clearly gaining traction. Aside from the 11 states with legalized recreational use and the 33 with legalized medical use, many more districts are at least moving to decriminalize marijuana use and possession. There are now only 8 remaining states where cannabis possession is a uniformly criminal act at the state level (Full map here). The mounting tax revenue windfall for states with legal recreational use is also likely to bring other holdout states into the fold. According to the Institute on Taxation and Economic Policy (ITEP), the eight states with active recreational sales in 2019 brought in a total of $1.9 billion in cannabis related tax revenue for the year, a 33% increase over 2018.

IV. Emerging Opportunities

Despite the tough year for many public cannabis companies, VC investment in the space has continued to grow. According to Pitchbook data, VCs invested roughly $2.6 billion across 277 Cannabis startups in 2019, up from $1.5 billion the year before. Investment trends show significant interest in consumer brands, cannabis platform technology, and compliance software.

Cannabis Brands:

The cannabis consumer is more discerning than ever, and effective branding has become extremely important, especially as new competitors flood the market. People new to cannabis products rely heavily on branding to signal safety, quality, and social acceptance. The most successful brands will be the ones addressing these needs for consumers while targeting new demographics, focusing on growing product categories, and partnering with established consumer brands to encourage adoption.

Caliva – Targets new consumer demographics, focuses on growth categories, A-list celebrity involvement, vertically integrated

Caliva is a vertically integrated cannabis cultivation and dispensary company successfully reaching the new cannabis consumer. Caliva’s offers products from growth categories including edibles, pre-rolls and concentrates, each with varying concentrations of THC and CBD to attract both the connoisseur and the first time user. Caliva has also recently brought in Shawn “Jay-Z” Carter as Chief Brand Strategist.

HQ: San Jose, CA
Founded: 2015
Founder: Dennis O’Malley   
Total Funding: $75 million Series A (Jan 2019)
Investors: Joe Montana, Carol Bartz (Former CEO of Autodesk and Yahoo)

 Papa and Barkly – Capturing share in the growing Baby Boomer cannabis market.

Papa and Barkly provides consumer wellness and lifestyle products focusing primarily on pain relief. Papa and Barkly has successfully courted the rapidly growing Baby Boomer generation through education programs and brand messaging. According to Eaze Insights, Baby Boomers are one of the fastest growing segments in the market and tend to spend more than other demographics.

HQ: Los Angeles, CA
Founded: 2015
Founder: Adam Grossman
Total Funding: Early stage VC round (Nov 2017)
Investors: Landis Capital

Cannabis Technology Platforms:

As cannabis products become more pervasive in the lives of everyday consumers, there will be a growing need for platforms that make buying, selling, and learning about new products easier and more efficient. Cannabis platforms will provide the infrastructure that the cannabis industry needs in order to reach its growth potential.  

Eaze – Largest online consumer marketplace for legal cannabis in the US

Eaze is Cannabis delivery app with over half a million customers. It positions itself as the “Uber of weed” and has built a significant customer network in CA. It has also generated a wealth of cannabis industry data through its consumer app.

HQ: San Francisco, CA
Founded: 2014
Founder: Keith McCarthy (now at WAYV) , Roie Edery (now at WAYV)
Total Funding: Raised $202 million total
Investors: DCM Ventures, 500 Startups, FJ Labs, Bailey Ventures…

WAYV – Digital payment and distribution platform for the cannabis supply chain.

Founded by the Eaze cofounders, WAYV is a distribution and payments platform that helps replace credit card and logistics services (FedEx, UPS, USPS, etc.), which are unavailable to many cannabis companies due to regulatory complications.

HQ: Los Angeles, CA
Founded: 2017
Founder: Keith McCarthy, Roie Edery
Total Funding: $5 million Seed round (Oct 2018)
Investors: Craft Ventures

Compliance Software:

The regulatory environment remains a serious and expensive hurdle for the cannabis industry. The legal landscape is incredibly complex and is constantly changing. Compliance systems and technology will be vital for any company hoping to succeed in the cannabis industry.

MJ FreewayCloud based seed-to-sale compliance software

MJ Freeway offers compliance software for businesses including retail, delivery, wholesale, cultivation, and manufacturing.

HQ: Denver, CO
Founded: 2010
Founder: Amy Poinsett, Jessica Billingsly
Total Funding: $10 million Series B (Sep 2018) $21M total
Investors: Batu Capital, Cresco Capital, Tao Capital, Evolution VC

Fyllo Cannabis industry compliant marketing software

Fyllo enables cannabis brands and online publishers to meet marketing compliance requirements on a large scale.

HQ: Chicago, IL
Founded: 2019
Founder: Aristotle Loumis, Chad Bronstein, Erik Shani, Michael Chock
Total Funding: $16 million Seed round (Sep 2019) $18M total
Investors: JW Asset Management, K2 & Associates




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