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Cannabis delivery startup Eaze Solutions Inc. has a lofty goal: By fiscal year 2020, it expects to ship the rough equivalent of a 33-foot-cube of marijuana — nearly three joints for every registered voter in the U. S. — to weed fans in America’s legal markets.
The goal of moving the equivalent of $1 billion in cannabis and related products in a year has led the company to burn about $1 million a month as it aggressively expands into markets that have, in some cases, proved costly, according to information provided to potential investors and exclusively obtained by MarketWatch. The documents render a snapshot of a company wrestling with complex, often difficult regulations, that’s pushing the boundaries of what’s legal in a market where the laws are changing rapidly and causing uncertainty about the potential for investments.
When contacted about this story, Eaze Chief Marketing Officer Stephen Matt wrote in an emailed statement, “While we don’t disclose revenue or discuss future plans, the marijuana industry is incredibly promising, and presents an opportunity that innovators, investors and policy makers alike are excited about.”
Born in 2014, Eaze’s origin sounds similar to startup success stories such as Airbnb and Uber, and like those two it also claims to only produce tech that connects people, rather than selling pot itself. Founder and former chief executive Keith McCarty used his own money to launch the company from his San Francisco apartment with four employees and the idea of promising delivery of medical marijuana within minutes. McCarty, an ex-Yammer employee who received a healthy payout when Microsoft Corp. /zigman2/quotes/207732364/composite MSFT +0.48% acquired the company for $1.2 billion in 2012, even helped fulfill early orders , packing driver kits in his apartment.
Since its humble beginnings, Eaze has developed an expansive delivery footprint in California that has given it a dominant position and attracted outside investment. It has banked $24.5 million in venture funding from investors including rapper and entrepreneur Snoop Dogg’s Casa Verde Capital LLC, as well as a number of well-known Silicon Valley venture-capital firms. It now seeks an additional $25 million in funding, according to the investor deck.
Heralded by the tech trade press as the Uber of pot, Eaze has expanded alongside the legal market, which has reached $6 billion in annual sales across the country, according to a report from Cowen and Co. Marijuana continues to be classified by the federal government as a Schedule I drug, along with heroin, LSD and ecstasy. As a result, federal law requires banks to report any marijuana-related transactions as suspicious activity, which could open them up to seizure by the Federal Deposit Insurance Corporation. .
Despite federal prohibitions, Eaze now operates in more than 100 cities as executives leverage generous promotions, fierce expansion and, per several sources, hardhearted negotiation tactics. It also launched a line of vaporizers, is planning to create private-label cannabis brands, and offers low-cost marijuana recommendations under EazeMD.
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Yet on-demand pot delivery has not blossomed to the same extent as the total marijuana market. The practice is banned outright in some states where recreational pot sales are legal, such as Colorado and Washington. Where it is legal, such as in Eaze’s home state of California, delivery is something of a work in progress, with regulations resembling a motley patchwork ranging from pot-friendly to effective prohibition.
Eaze claims in its pitch deck to potential investors that it will expand to one of the markets on the more negative side of that scale this year: Los Angeles, a city that has banned delivery outright. Los Angeles officials did not sit idly by as other delivery companies attempted to make bank on clandestine sales, squashing or muscling out several upstarts , and the pitch to investors did not give insight into how Eaze will avoid the same treatment.
But Eaze’s forays into other areas in Southern California show that regulatory roadblocks may not be the only issue that keeps Eaze from succeeding.
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The massive costs of 20-minute delivery
The promise of marijuana delivered within 20 minutes, while attractive to customers, has pushed per-delivery costs in Orange County to top out at $27, MarketWatch has learned. Delivery costs matter to Eaze. It does not charge for delivery but rather takes a cut from each sale that it looks to recognize in its financials as a technology fee, so large delivery fees on small purchases of pot can add up to big losses.
“In some of these markets, it can be prohibitively expensive to be sending drivers out to only be doing one or two transactions in an hour,” said Morgan Pahxia, managing director at Poseidon Asset Management LLC, an asset-management company that focuses exclusively on the marijuana industry. “That’s just crazy. You have to be at such high velocity.”