The Long View

Dutchie: A Case Study of Vertical SaaS in Emerging Industries

Mission-driven entrepreneurship, transformative M&A, and building a platform in a highly regulated and dynamic market.

Dutchie is one of Tidemark’s portfolio companies and is (in our humble opinion) one of the most impressive vertical SaaS vendors (VSVs) active today. Building a VSV for any industry is never easy but Dutchie has tackled the challenge of doing it in a nascent, highly regulated one: cannabis. Navigating the byzantine landscape of local regulations is not an easy path. However, once understood, regulations can act as a competitive advantage by which to better serve merchants. 

Dutchie has the opportunity to advance the cannabis industry by providing payment and financial services that are compliant with a complex and shifting regulatory environment. If successful, Dutchie can transform the industry and help its cannabis dispensary customers thrive.

Dutchie is relevant for study for all entrepreneurs because it simultaneously captured two control points: point of sale and channel management. Even more unusually, they did this via M&A very early on in their journey. Most advice would say to wait, but Dutchie did things differently. 

I had a great time sitting down with Ross Lipson, CEO and Co-Founder of Dutchie, and Tim Barash, Executive Chairman at Dutchie, to talk through the Dutchie journey.  It’s a fascinating story of mission-driven entrepreneurship, transformative M&A, and building a platform in a highly regulated and dynamic market.  

This interview took place on May 24, 2022 and has been lightly edited for brevity and clarity.

Full Transcript:

Dave: Today’s interview is part of our Vertical SaaS Knowledge Project, where the ambition is to provide frameworks and success stories for the next generation of SMB and vertical SaaS entrepreneurs.

This session is about the emerging success story of Dutchie. We have Ross and Tim, the CEO and Executive Chairman (and all around pillar of Dutchie), respectively. Dutchie is a portfolio company of Tidemark, Tim is a venture partner of Tidemark, and we’ve adopted Ross as a venture partner, Fellow, and general friend of Tidemark. We’re really excited to have you guys on, and are grateful to be a small part of the Dutchie story. Maybe we can start off with your own personal journeys, and a little background on yourselves.

Ross: First, thanks for having us. I appreciate everything you guys do at Tidemark, and you, specifically, Dave.

I’m 35 years old. I started out roughly 17, 18 years ago at Michigan State University, at a time where the internet was really starting to shape consumer habits. We were starting to see daily habits digitized—whether it was talking to friends, listening to music, buying things from Amazon, etc.—but the online food ordering wave hadn’t really hit yet. It was still a very archaic process: we were taking paper menus and slapping them up on the wall, pinning them on the corkboard, shoving them in a drawer. My buddies and I were placing orders for food delivery like everybody else, and simply thought that the space was overlooked. There was room for improvement. We ended up finding a group of folks that had a similar idea, and we partnered with them to launch online food ordering at our university.

Fast forward a few years, we were one of the first companies to pioneer the online food ordering craze. (Which is wild to say, looking back. That industry has become such a strong one, that we all frequently use and know so much about.) Four years later, that group expanded through hundreds of universities and became one of the largest online food ordering services in the world. Through that, we learned the depths of SMB retail tech and how tech can create value for both consumers and merchants alike.

We ended up exiting that business, and saw an untapped market in Canada. Nobody was doing online food ordering up there, so my partner and I moved to Canada in 2008 and launched Grub Canada, Canada’s first online food ordering service. We really blitzscaled the market, created a household name, and built a great team. Then we sold it to Just Eat in 2012 – great exit, great outcome. I took a few years off and moved back to the States.

My background really was in online food ordering, and understanding how to bring tech into a retail environment and create value for the entire chain from consumer to the business.

[When it comes to Dutchie,] I’ve always been passionate about cannabis. I was living in Oregon about five years ago; I was 30 years old when Oregon was one of the first states to legalize cannabis for recreational use. I’m a passionate consumer that saw the culture and the opportunity behind cannabis—the opportunity to bring health and wellness, social justice, and to empower local communities for tax revenue. I was standing in line that first day of legalization. I’ll never forget it. A hundred-plus people in that line, and the lightbulb was going off (more like a disco ball!) in my head: online ordering’s a no-brainer. 

We could solve for the consumer and make a more convenient experience. I’m standing there as a consumer myself, in a hundred-plus-person line. That was ridiculous! But maybe more important than the cannabis itself was the education behind it. It’s not like the food space, where anybody anywhere could decide what they want to order even without a menu. I mean, if it’s pizza, I know I’m good for pepperoni, mushroom, onion. That’s just what I eat. Doesn’t really matter the cost of the slice. Doesn’t really matter the review. I know what pizza is; I don’t need to know too much more.

Cannabis is a nascent space. It lacks education. From a discovery standpoint for the consumer, it was really important that we educate the consumer on things like THC/CBD percentage of every product, and the type. Is it Sativa? Indica? Hybrid? High CBD? I want to look at a photo, or even sometimes smell the product and talk about it. I want to read a description. I want to understand the brand and the farm that it comes from. And the price! You’re not going to order one slice of pizza over another because of a huge difference in price. At least, I haven’t seen that. With cannabis, it’s all across the board. You can have a gram of flower at 10 bucks, and then another gram of similar flower at 35 bucks. 

That was the impetus for the launch of Dutchie. We started off as an ecommerce tool, an online ordering service, for the cannabis space.

Dave: Ross, I love to talk to entrepreneurs. I say, “Tell me about yourself,” and you start with a personal background that rolls directly into the formation of your passion and your joy, which is your company. And it ends with a pitch! 

Ross: I’ve got to plug! Dave, have you read Outliers by Malcolm Gladwell?

Dave: Yeah, it’s on the shelf.

Ross: You’ve got to read it. I felt like a chapter out of that book. The stars totally aligned. And for anybody that’s going to listen: it’s just about right person, right place, right time. That leads to success more than any smart person working really hard and staying focused.

Dave: Yeah. I just love how you think about yourself in relationship to your company. That’s amazing. Tim, maybe you could share a little bit about your personal background.

Tim: Yeah, a couple hundred pitches usually help sharpen the founding story for all of us! I’ll make my story quicker, because I joined later. 

I spent the seven years prior to joining Ross at Dutchie at a company called Toast that, obviously, Dave, we’ve worked together on for a long time. I was the commercial chief business officer, CFO-person over there. I was fortunate to work with an incredible team there as well, a very strong technical founding team and early exec team.

There certainly was no Vertical SaaS Knowledge Project. We read AVC, and we read Saaster, anything we could, because we had no idea, right? I mean, some people had some legacy on-prem software experience in companies like Indica, but all of that stuff was new, even the basic stuff like CAC to LTV. We just learned from anyone we could. 

Obviously, Ross and I both come from the restaurant world. It’s a big market, dramatically underserved by technology, with a lot of consumer interest in the category. The wallet share is high, but the mind share is incredibly high. It’s a category where a lot of memorable social experiences happen. We just kind of went after it, and it turned out that most of the things that people thought were weaknesses – the big, scrappy, GTM sales team, developing hardware, selling payments – ended up being huge strengths. We were really fortunate to have an incredible run, and obviously the company has gone public and the team is bringing it to even better places.

I had that run at Toast, and I worked with you, Dave, at a couple different firms trying to find the next generation of companies. I invested in probably a couple dozen, one of which was Dutchie. As I started to think about what to do next, I spent a lot of time with different portfolios, like angel book companies. It was a really fascinating space that I hadn’t thought about as much. Ross would probably say I’m a newbie on this stuff, and he’d be right.

I’ve used cannabis for sleep, and I have a few friends with family members that use it. One of my good friends has a nephew with autism, and CBD and THC dramatically changed how he interacts with the world. Just a few of those stories, combined with knowing how many millions of people out there don’t have access to cannabis, along with social justice and other causes, ended up being really relevant. I saw that this is a really clear mission. I won’t call out any particular big tech players, but some of the products and services we love and use have some pretty material downsides, whether it’s information transmission, labor, etc. To me, Dutchie was an obvious pure-play, positive thing for the world, combined with a really talented founding team, in a space that had not yet found that defining, market-leading company. All those things, for me, were, the right-place, right-time. And I was very happy to not have to do the hard work of actually starting the company, so thank you, Ross and Zach and co., for that!

It’s been a really incredible journey. It’s an interesting thing, when you have one of these long runs like I had at Toast, to go do another one. I know Ross has the same experience. There are so many things that are the same, but also a lot of things that are very different. You’ve got to be careful, especially after an exit or two, not to just bring your playbook with you. Then there’s also parts of the process where you say, “Wait, this is exactly the right one.”

Dave: Totally. I think that’s the art, right? It’s very rarely a playbook, but it’s also not a snowflake. 

One big difference here is, cannabis is a vertical unlike any others for a whole bunch of social and regulatory reasons. In particular, this market where you guys play and where you built your business is a point-in-time market. Tell us about the cannabis market from a regulatory standpoint, from a consumer standpoint, from a consumption standpoint.

Ross: Yeah, I’ll take a stab at it. The situation really fits the mindset of Tim and myself, as well as the entire team. We like to do difficult things. The reason why we like to do difficult things, outside of the fact that it keeps us on our toes, is because there’s an innate defensibility built into it. The easier something is for you to do, the easier anybody can do it.

Cannabis sets us up really well for that. The mission that Tim was talking about is really the energy and the lifeline that pushes us forward, and motivates us to solve these difficult and complex problems. With cannabis, the regulations are both a positive and a negative, right? Negative in that we can’t scale up as fast as we want. We can’t work with all the providers that we’ve worked with in the past, or that are out there for our customers—which is where our focus is. It’s all about the customer for Dutchie. It’s one of our core values, and we center around that. They’re facing an uphill battle, and it’s important for us to really feel that, to walk a mile in their shoes and support them. 

Those things are tough, but also good. The highest-level summary here is that the cannabis space is in its nascence, in its infancy. The regulations are evolving rapidly, which is really difficult to manage and maintain, but we’ve built out a phenomenal team to do that. That’s one of our strengths, one of our competitive advantages. 

Further, it’s a territory-by-territory framework: state-by-state in the United States, province-by-province in Canada. It’s difficult to scale—another positive and negative. We’ve built out a very robust compliance engine that allows us to scale from territory to territory and manage it accordingly. It’s a lot of sludging through mud, and we’ve been doing it since the beginning, but we’re proud to do it, excited to do it, and motivated to do it because of the mission behind it. We’ve built the right team that has that grit and determination to continue forward, but it’s not easy. It’s definitely two steps forward, one step back.

We’ve not yet gotten to a point where we have a good grip on the cannabis space and built out the foundation that allows us to push forward on offense. We’re starting to yield the results that we’ve been after for many years, but that’s not to negate the complexity of cannabis. 

Tim: Yeah. There’s a complicated regulatory nature. There are a lot more product requirements. It means compliance with legal is a much higher bar than the average company like this. It also means there’s a lot of exciting and sometimes strange parts of being in what we would consider the top 5 or 10 biggest consumer disruption waves over the last century.

If you start with alcohol prohibition ending, there's the internet, electric cars, solar power, and maybe global ride hailing. Maybe food and instant delivery – Amazon and all that stuff. Cannabis really ranks up with one of these big disruption waves. It’s a wave of change, not just for us, but for our customers. It’s just wild. I mean, some of these retailers are growing at rates that don’t make any sense for a standard retailer. There are really intensive capital requirements. And the regulatory stuff sometimes literally will change on a weekend, because the regulators are trying to figure it out on the fly too!

It’s a very interesting space to be in. Being dynamic and fast-moving, which I think Startup Land is usually reasonably good at, is even more important. But it’s been a lot of fun, and there’s a lot of interesting culture and entertainment crossovers as well because it is such a big, exciting theme that we bump into.

Dave: For sure. The regulatory complexity does speak to the value of software to be able to adjust to changing ground rules for these small businesses. The state-by-state issue speaks to the slog that, Ross, you described. It sounds like both things are true, right? It’s both super dynamic but hard to scale.

The hard-to-scale piece is perhaps a great motivation for how Dutchie got really started. We talked about the genesis story, but there was a Big Bang story as well, right? Dutchie didn’t build a product, find product market, and hire 10 sales reps; it was an inorganic build to get things going, which is quite unusual. Tell us the Big Bang story of Dutchie.

Ross: As I was saying in the founding story, we started off as an ecommerce tool for dispensaries to reach consumers through online ordering. At Dutchie, we always want to be pushing the industry forward, and we want to make this industry successful. As the tide rises, all boats rise with it. A business cannot succeed in an industry that’s failing. This industry is facing an uphill battle, and so are all of our customers, the merchants, and the dispensaries.

We noticed that, with the nascency of the space, it became very, very fragmented. We see nowadays that all industries—if you pull the layers back and really look under the hood—are built on the foundation of tech. There’s a tech ecosystem that powers pretty much every industry. We see that in all retail environments with point of sale, ecommerce, marketing automation, payments, and so much more. In cannabis, the barriers to entry have kept the bigger companies—the Toasts, the Squares, the Shopifys—from jumping in. The regulations and the nuance of the space didn’t allow for it; they’d be building from scratch. Barriers to entry and a nascent space equals a very fragmented ecosystem. As an ecommerce player, we are dependent on the point of sale.

To compare again to the food delivery industry: food menus are, for the most part, pretty static. They might update a couple times a year with inflation on price, or a new special to change up the menu, but it’s so infrequent that you can manually manage the menu through a platform like Toast or DoorDash. In cannabis, these menus, this inventory, is dynamic; it’s turning over every hour on the hour. Dispensaries are getting in new product and selling out of product constantly. The product content is really important, and there’s a lot of it that we have to service in order to make a great customer experience, which is important to the whole industry working successfully.

We came to the realization that, given the fragmentation and our dependence on the point of sale, this entire ecosystem needs to communicate effectively in order to succeed and push the industry forward. It was a heavy lift for us to continuously support and better all of these partnerships, but it’s something that’s really important. Further, for the dispensary, or merchant, they didn’t have one “throat to choke”. It wasn’t a streamlined ecosystem; they had multiple players that had to do every individual little thing.

That was the impetus for a transformative move. We saw an opportunity to move the entire industry forward, make our dispensaries more successful, and create more value by taking the point-of-sale side of the business and the ecommerce side and combining it. Toast, a great example, has done this in a very successful way that we respect and admire. Many other companies too: Square, Shopify. This playbook has been written. It was a very clear and obvious move to propel the industry forward, to streamline the operations, and to create more value, not only for our company, but for our customer, the dispensary, and the industry as a whole. 

We acquired Greenbits and LeafLogix, which are both point-of-sale companies, in the same transaction. One is more focused on the enterprise side, the other on the SMB side, so they’re very complementary. We completed those acquisitions a little over a year ago, and in doing so we were able to streamline operations for the dispensary by creating kind of an all-in-one, one-stop shop. That then unlocks the opportunity, as you guys both know, to run for so much more going forward. It’s a really fun, transformative move that ultimately pushed the industry forward.

Dave: The industrial logic makes all the sense in the world. We describe that phenomenon as a single point of accountability from an account ownership standpoint. 

Tell us a little bit about the deal dynamics. I remember having a call with Tim while you guys were in motion and saying, “Dude, there’s no way you’re going to be able to do two deals at once.” Complexity is the enemy of all deals. How were you able to get this done? How were you able to build trust with other players that maybe not directly, but tangentially, competed with each other, and with you, to some extent? 

Tim: At Dutchie, we actually, all in one day, closed these transactions and raised the money behind the deal, all at the same time! It was almost like a headless private equity rollout, but with very early-stage, mission-driven, high-growth businesses. I think one of the things that people saw, to Ross’ point, was that there wasn’t a category leader, at least on the core B2B software stack. It’s pretty freaking hard to become that; it requires significant capital and R&D scale. One of the things that really helped the deal dynamics was that scale mattered. To that end, our company is now around 700 people, which is much bigger than anything else in the space, at least on the software side.

We were managing basically three boards and a new investor group all at the same time. As you can imagine, it was like a cartoon, where you’re in a boat and there’s a leak, and you cover it with your hands, but then two more leaks spring up. Then you’re stopping leaks with your feet, and then you kind of run out of limbs. There’s definitely a little of that feeling. But at the end of the day, the core group of people that are going to be working together have to have trust and faith that it’s the right decision, that one plus one plus one equals five instead of three. That’s really what allowed us to get it done. Though it definitely was the craziest deal I’ve been part of!

At the time, there weren’t a ton of Stanford and Harvard MBAs graduating and thinking, “I’ve got to get in that cannabis industry. The TAM is amazing!” Now, maybe that’s happening more – and if so, great, come work at Dutchie. But at the time, anyone that was in the industry was in it because it was a passion, or they had some deep involvement. There was a really strong sense of mission alignment. 

Then, a lot of it was the right-place, right-time, like we said. I think the background of the Dutchie team and some of those other teams aligned pretty well to allow people to say, “Hey, Dutchie’s the last mover, but customers love this thing. I never had such positive NPS calls as when I was first starting to get involved.” But luck and timing are a huge part of how things work, and I think the stars did align. I don’t think it’s something you can copy-paste. It all lined up for us in a really strong way for a bunch of different reasons.

Ross: I’ll add a couple of quick points to that, though I agree with everything Tim said. There are three things that stand out to me that allowed us to succeed in that deal (because it wasn’t easy). One was the alignment with our investor base. We were fortunate to bring a great group of folks around the table—great investors that have run this playbook in other industries and have backed all stages of companies that have gone the distance, that we admire and respect big-time. They were fully aligned on the playbook that we were going to run.

The second thing was the team. We were fortunate to bring together a team in which everybody had their respective area locked down, and a lot of whom had gone through M&A before. I think M&A is a beast in itself, no matter how big or small you are, or if you’re acquiring one company or two. We were small and acquiring two, to make it a little bit more fun for all of us! It was about getting that team, that trust between each other, and that collaboration, because no one person or few people can manage something like this.

The third thing was the mission. There was really no hole in the reason behind what we were doing. We are here to make this industry successful. This was the only way we saw to mature, accelerate, and scale the retail environment effectively. Without it, this industry would have been continuously held back and weighted down. It’s similar to climbing Everest. The mission is not egotistical; you’re doing it for the right reason. You’re not doing it to take a photo at the top, you’re doing it because it’s your life’s work. You’ve been training for it, you have the backing of a team, the support network behind you. It’s everything you believe, and there’s no way to get around it. You need that in order to get to that top. Fortunately, we had that. That was the foundation that allowed us to take the risks that we did, and to stay aggressive on it.

Having crystallized around all three of those things in an extreme and confident way allowed us to get through—to use Tim’s example—times when a leak popped through the boat and you got stretched pretty thin. I felt like, what was it? Stretch Armstrong? There were many times, and still are today, where we’re doing tough stuff. It’s what we appreciate, it’s what we love doing, and we signed up for it, but it doesn’t make it easy.

Dave: Yeah, that’s fantastic. 

You talked about category leadership and vision driving you. Forget about VC, any deal maker would say bringing together three companies at once isn’t going to work. Was there a lot of pre-work done, Ross, in terms of building relationships with the core teams over the years?

Ross: You know, this was a difficult thing. The answer is, unfortunately, no – which made it more difficult. I wish the answer was yes, but we grew up overnight and we grew up in the pandemic. Just to take a step back to before the acquisition, we were an ecommerce tool in an industry deemed essential. On March 15th, when really it was day one of the lockdown, our business surged 700% overnight. We were just keeping up with the core ecommerce business while seeing the opportunity to parlay and propel forward.

There’s so much value in being in-person, from a team bonding standpoint, but all during the pandemic we couldn’t get together. You move at 10 times the speed in-person compared to remote. At least, that’s what we feel and have seen. The pandemic made it more difficult. 

It comes back to the mission and the alignment. Fortunately, being able to pull from a lot of our teams’ networks, we were able to lower that risk and work really tough with each other, get to know each other, and make sure that we were all in charge of our respective lanes. We had that trust. It comes back down to core values, so we were able to accomplish it. But I wish the answer was yes. It was a difficult time.

Tim: Yeah, I think we played catch-up pretty fast. I think that my only deep-COVID in-person business meetings were some of these relationships – which ended up being worth it, but it was a very interesting time to do it.

Dave: Well, hats off to you. You’ve done what seemed impossible. 

Tim: Still a lot of work to do.

[Laughter]

Dave: You combined the channel manager, the ecommerce tool, Dutchie, with two point-of-sales products. Now you have, arguably, the full front-end stack, right? The natural extension is to go into payments, financial services, maybe payroll and insurance over time, but the regulations are complex. Talk a little bit about your payments plans in light of the cannabis industry’s complexity.

Tim: Yeah, happy to. It’s interesting. As soon as this core SaaS control point extended to payments, lending, insurance, and payroll, and as soon as that playbook became something you could rinse and repeat and there were all these amazing fintech infrastructure partners you could work with, we decided to try it in cannabis. To your point, there are some pieces that are definitely very similar to the commercial and customer part of it, but there are parts that are just absolutely not. You have to do a lot of things from scratch that you wouldn’t normally be doing.

The exciting part is that consolidating vendors is definitely helpful to small businesses. They can focus on doing what they love, because most of them are very passionate but don’t have a background in IT or software or whatever. That’s awesome. 

In our space, though, it’s basically all cash. They’re getting kidnapped or held up at gunpoint, they have armored cars. We have people on our team that have worked in dispensaries where they walked around at night with a backpack with 300 grand in cash in it to go pay taxes. Crazy stuff. These are not “first-world” problems; these are really serious problems. The other classic SMB vendor consolidation stuff is also really important but in this case we’re trying to solve these problems. There are definitely in-store payment methods that we’re helping with right now. We’re also working on a digital-first closed-loop payment product. We’ve had to bring in a lot of deep fintech experts from the bigger fintechs, as well as some banks and serious regulatory compliance experts. 

We’re even starting to look at the capital needs of the industry and how can we help with that. Insurance is very, very complicated, and a little strange in this industry. We basically have to go a couple layers deeper in the stack than we normally would. Usually, you integrate some kind of infrastructure partner and make it a really good customer experience, you commercialize it the right way, and boom, you’re done. There are a few more steps here, but like Ross said: the harder the thing is to do, the harder it is for someone else to do, and most importantly, the harder it is for a customer to be able to solve the problem by themselves. It’s definitely like banging your head against the wall sometimes, because it is a more complicated scenario, but we think we have the right team and have brought on some amazing people to go after it.

It’s still early innings, but we’ve been getting positive feedback. We always need to do better for our customers, and we’re definitely working on that, but overall we’re pretty excited about how the journey will play out.

Dave: Is the regulatory functionality intrinsically combined with some of the fintech infrastructure? Or do you see over time having a spoke of this regulatory functionality independent of fintech, and maybe you use a third-party to handle it? How does this play out? You’re building it all yourself right now, right?

Tim: Yeah. Maybe we could have talked about this a little more in the cannabis section. The answer is, we don’t know. Nobody knows. If they’re telling you that they know, they’re lying.

The reality is, there are many different state and federal laws. One of the questions we get a lot is, “When this federal law passes, everything’s going to be different, right?” I usually say, “Alcohol has been legal for a hundred years, but I’ve spent a lot of time in Boston. There’s no happy hour there, and that’s probably not going to change anytime soon.” If you talk to anyone that has to deal with sales tax at-scale, they’re going to probably tell you that we should abolish states as a concept. There’s a lot of very complicated regulatory state-by-state stuff that’s never going to change. There are some things that, if they do change, are going to change very slowly. There are also some federal changes that would bring bigger banks and bigger fintech partners into the space, as well as affecting the actual size of the TAM.

If you look at public estimates, they say the legal market is between 25 and 30 billion in the US, and it’s growing high double digits. It’s the fastest growing segment of the entire economy. For it to really matter at global fintech scale, you’ve got to be around the hundred-billion-plus mark, which I think people now have a line of sight on. 

Between that and federal laws changing, a lot of bigger players will get into the space and there will be a lot more traditional infrastructure available, but when and how that happens is not totally clear yet. Then, in cannabis—and alcohol, and pharma, and other regulated spaces—there continue to be industry-specific requirements. For example, in legal payments, there’s some complicated trust accounting that comes up. We’re almost forced to make multiple bets at the same time to make sure we can cover our customers’ needs yesterday, today, and in the future. From a business planning perspective, we do have to actually plan for multiple outcomes.

Dave: Yeah, it’s really interesting. When Ross was talking about the state-by-state, my mind went to local taxes with all the layers. Then, I thought about some of the regulation around traceability and this idea that the infrastructure you’re building for fintech, for dispensaries, might actually be applicable to all stakeholders within the cannabis industry over time.

I guess that’s a good segue to, how do you think about starting to sell beyond dispensaries? You’ve got the control point, you’re doing all the fintech; the next natural extension would be to the suppliers. Is that on the roadmap?

Ross: We don’t want to get ahead of ourselves. We haven’t achieved our core mission and goals with our retail customer yet, so we’re going to continue work on that and never lose sight of that. 

However, the supply chain is all connected, and it’s a very complex supply chain here in cannabis. There are some other industries, like grocery, where I think it’s similar. We understand that by streamlining and creating value earlier down in the stack (the supply: cultivators, manufacturers, distribution) you’re streamlining the retailers’ opportunity as well. We’ve not shifted focus, but we are investing in that area of the business because we see how it pushes the industry forward and creates value to the retailer, which is where our focus is right now.

Ultimately, we’ve invested in it in two ways, on the bill side and the partnership side. There are great companies out there that are solving for the cultivator, for the manufacturer, and for the distribution companies in cannabis that we’ve found strong synergies between. There are a few partnerships that we’re starting to invest in that are showing early signs of promise and strength, and we’re going to continue to invest there.

Dave: That’s great. Maybe moving forward into the consumer – You guys don’t currently have a marketplace, but you’re on the front lines, so to speak. You are a front-office software engaging with the different marketplaces. How do you think about, over time, providing demand to your dispensary merchants?

Ross: I’ll take that, and Tim, you’ll add on, I’m sure. It’s a fun topic. There’s a lot to unpack here. 

You’ll hear a theme. I sound like a broken record: industry first, retailer first. It’s all about the industry and the retailer. Otherwise, we don’t exist. We want to be really thoughtful and mindful of how any move we make, partnership we complete, or area we invest in impacts the retailer and the industry as a whole, for the long term. Sustainability in a long-term mindset, that’s first and foremost. That’s the lens that we look through. Bringing demand to a retailer is undoubtedly a good thing, but you have to make sure you do it in a way that’s scalable and sustainable, that the checks and balances are there. Alibaba is a great example of a company that’s done a phenomenal job of bringing demand and allowing the retailer, supplier, manufacturer—whoever is selling the actual product—to really have control and build a long-term, sustainable model. 

We do want to see an opportunity where we can bring consumers, through education, discovery, and accessibility. Our mission is to create safe and easy access to cannabis; we know that if we do that effectively, the tides rise for everybody. We want to create accessibility through education and discovery, which is the job of a marketplace. Being that we have the point-of-sales side, the inventory, we’re the ones that could unlock that opportunity for the retailer and the demand side. We do see it as our responsibility, in that if we do it the right way it’ll create value for the entire industry, including the consumer. We’re still very focused on the B2B side of the business, but we’re starting to look at some B2C opportunities, at ways we can take a thoughtful, mindful approach to bringing consumers into the fold, and helping them with access to cannabis.

Tim: Yeah. And there are probably some verticals where it’s obvious that there should be one three-layer-deep, control point player that can influence demand and supply, and have a true closed loop. For most spaces though, especially the bigger ones, if you’re the core system of record in a vertical, you’ve got to let people choose their own adventure, both for the consumers and the merchants.

I always think about it like this: in the restaurant industry, there are dozens of permutations on how a commerce transaction can be completed. Someone can use a QR code on a table in a restaurant; they could use an app with the store’s name on it; they could go to a store’s website; they can order on DoorDash; they can order on Uber. They can eat in the store, or the food can be delivered by the restaurant or by a third party, or they can pick it up. If you’re the core system of record, you want it to be such that any way the transaction happens, it’s going through some version of your pipe. In some cases our brand may be more evident, and in some cases less. In some cases it’s higher basis points, and in some cases it’s lower. Either way, you want to be that platform. 

For us, it’s a really untapped opportunity that I think will happen through partnerships. There’s no way that it’s going to happen with just one company. It’s about allowing consumers to choose how they want to buy, and allowing merchants to turn off any pipe, anytime they want (though they probably don’t want to, because to Ross’s point, we want demand to be as high as possible). You’re basically offering the individual components of the three- or four- or five-part marketplace and the retailers are enabled to turn things on and off.

Again to Ross’s earlier point, I think we’re now at a point where small business owners are pretty educated, and we’ve got to be very transparent. Transparency is probably the most key point. Most companies in the supply and demand side of it pretty much always pick demand, and it almost always leads to a terrible brand on the supply side. In some cases demand is so important that it’s fine, but when you grow up on the B2B side, it has to be a do-no-harm mentality. Does this help them? Is there real P&L with a real contribution margin, not some report we paid a banking person to write with whatever we wanted them to say? Contribution margin is high, and if the retailer flips the switch, they make more money, whether it’s through us or a partner. That’s an important thing to make sure we’re focused on.

Dave: I love the two concepts that you’re describing, Tim. The first is how you can change the consumer experience, centered around Ross’s concept around product education and building, fundamentally, a performance or brand around that. Maybe it’s just because I’m a newbie to this consumption category, but a big part of the experience actually is education – knowing where the plant is grown, the different attributes of it, etc.

I think the other piece is, because you own the point of sale, you can actually trace the transaction and really understand the incrementality. You don’t get these hotel owner equivalents grumbling about the 20% take rates, because it’s really nonincremental. I personally have a lot of passion for what you guys can do on the consumer side. I’ll be excited to see how you build that out.

Maybe we can end with a longer-term question. Three to five years from now, a lot of things are going to change: the regulatory environment’s going to change; the consumption patterns are going to change; technology is going to change. I know you guys have to be pretty fluid in your approach, but if you were to guess, three to five years from now, what will Dutchie look like? Is it the Alibaba for cannabis? Is it another analogy? 

Ross: That’s a good question. It might sound fluffy, but ultimately we’ve got to look at the industry as it grows up, because while we can influence how that happens, we can’t control the industry. There are things out of our control, like the regulations we talked about—although we do invest heavily in our government relations arm.

We want to make sure that the industry is set up for success for the long term. In other industries, maybe because of the timing with tech, the model came first and the industry came second. In our situation, it’s the opposite. To Tim’s point about growing up as a B2B company, that really enforces the values and the culture of Dutchie.

I think we’re set up for success if we can continue to keep that mindset going forward. Ultimately, we want to be that all-in-one, one-stop shop. We want to be the source of record that powers the ecosystem that lives on top of Dutchie. We never want to limit the opportunity or optionality for our clients and for this industry. There are such phenomenal partners in the space today, and there are so many more opportunities. I would say 90% of them haven’t started yet; they’re still cooking up in somebody’s mind. 

So, so much will come out of this industry. It’s important for us to stay on our toes and help power the industry. That’s the responsibility that we see, starting with the retailer but also going down the supply chain. It’s about creating this open network where we can build a foundation that powers the industry, propels it forward, and gives it opportunity and optionality, no matter what comes our way.

To be a little bit more specific, we’re excited to create value earlier in the supply chain with cultivation, manufacturing, and distribution through partnerships that we’re building. We’re excited to bring demand to the retailers, and excited to embed financial services along the way. The financial services piece in particular is awesome because it’s a democratization play for the industry. Things like insurance, lending, banking, or payments are taken for granted in other industries. There’s not much barrier there, and the options are abundant. There are new ones, legacy ones, ones in between. Our industry, unfortunately, has our hands tied behind our back. We see it as an opportunity but also a responsibility to solve that. All these things need to equalize to push an industry forward and make the dispensary most successful. Tim, I’ll let you add anything that I’m missing there.

Tim: I have a couple more specifics. In three to five years, one, nobody can be in jail for possession of cannabis anymore—not just well-to-do people from the East Coast or whatever. Restrictions on cannabis have been a systematically terrible and racist policy regime that existed for all the wrong reasons. As a lot of value is created here, for us as well as for our customers, we’re super excited but I think that’s one thing that has to be fixed. It is so obviously hypocritical and wrong.

For the business, like Ross said, we’d like to extend into a couple new, big, complicated product areas that have nonlinear value for us and our customers. I’ll also say I think of expanding into a couple more continents in the next three to five years. I think you’re going to see a wave of regulatory change outside of North America. It’s going to be pretty exciting.

Dave: I love it. That’s a great place to close. This has been awesome. I really appreciate you guys taking the time to share the Dutchie story. Thanks, guys. 

The information presented in this post is for illustrative purposes only and is not an offer to sell or the solicitation of an offer to purchase an interest in any private fund managed or sponsored by Tidemark or any of the securities of any company discussed. Companies discussed in these posts may include current Tidemark portfolio companies and/or prior investments made by Tidemark employees while at other investment firms. These companies identified above are not necessarily representative of all Tidemark investments, and no assumption should be made that the investments identified were or will be profitable. The information in this post is not presented with a view to providing investment advice with respect to any security, or making any claim as to the past, current or future performance thereof.


Dave Yuan

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