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A Look Into Eaze's $35M Equity Raise, Move Into Branded Cannabis Products: 'Retail Has Value'

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A Look Into Eaze's $35M Equity Raise, Move Into Branded Cannabis Products: 'Retail Has Value'

Last month, cannabis delivery service Eaze announced the closing of a Series D funding round of $20 million in cash, with the opportunity to raise another $20 million over time.

The closing of this round comes after the California-based company's completion of a recent $15-million bridge round. This puts Eaze’s newly raised capital at $35 million, all of which comes in the form of equity.

Eaze’s New Business Model: A Brand Of Its Own

Up until this point, the “Uber of Weed" based its success in connecting consumers with retail brands through its delivery service. With the announcement of the Series D round, the company also unveiled what it plans to do with the money.

Eaze is going vertical. This means that, aside from the products it already sells and distributes, Eaze will add its own brands to the catalog, working with local licensees to market a selection of cannabis products.

After the announcement, a wave of online criticism arose from members of the cannabis community who wondered whether Eaze’s move could hurt its partners.

By working with its own platform, Eaze could be inclined to incentivize sales of its own products, taking a chunk out of its partners’ sales. Critics also noted that Eaze might take advantage of years of consumer-generated data extracted from millions of operations in order to create products that outrun any possible competition.

The biggest concern with these views is that they involve a shift in the perception of the company for licensed retailers: from their biggest ally in driving sales to a not-so-friendly strategic partner and competitor.

“All is fair in love and war — and business,” says Roderick Stephan, partner at Altitude Investment Management, a firm that holds a vast portfolio of cannabis companies.

“Distribution and getting product to consumers is the biggest challenge branded product companies have. With this part of the equation solved, why would a company not produce its own products and retain a higher all-in margin than a branded product manufacturer who has to pay for delivery?”

Eaze Says Changes Don't 'Reshape The Whole Market'

While the move makes obvious sense from a business perspective, Elizabeth Ashford, senior director of corporate communications at Eaze, said the company's critics are formulating their arguments without a clear understanding of how Eaze's business model works.  

“While yes, this is a change, it doesn’t reshape the whole market, or what Eaze does to support retailers, brands and customers.”

Ashford told Benzinga that part of the motivation behind Eaze's leap to verticalization comes from the need to fill in certain market gaps that exist in California.

They occur for a number of reasons, leading to a smaller supply of certain products on the menu at certain moments in time, she said. 

“I know that there’s an instinct to see this idea that certain brands or certain retailers are going to be usurped, but that is simply not the case. It’s an additive.”

While Eaze expects to see some minor changes in supply and demand for its retail partners, they should be made up in volume, the spokeswoman said. 

Since verticalization is part of Eaze's expansion strategy, retailers who work through Eaze shouldn’t be afraid to lose sales, since whatever business they lose due to competition with Eaze’s products will be balanced out by the growth of the overall sales volume, she said .

Lastly, in order to create new products, Eaze is utilizing members of existing brand’s supply chains to create their own brand.

“We didn’t go and buy property and start growing cannabis. We’re sourcing it from people who are already within our supply chain,” Ashford said. 

Eaze Secures Equity Investment In Difficult Market  

The $35-million fundraise comes at a time when markets are closing down due to cannabis’ poor performance in terms of profitability during 2019.

Most companies in the sector are resorting to debt and M&A as ways of staying afloat, while equity investors remain on the safe side.

So, how did Eaze manage this raise in today's environment? 

Eaze is no average player. Larry Schnurmacher, managing partner at Phyto Partners, a leading cannabis VC firm, told Benzinga that “investors can see the Eaze model working in an emerging and explosive cannabis market and want to participate in that growth.”

Altitude’s Roderick Stephan said Eaze has been one of the biggest beneficiaries of investor capital going back to 2016, when venture capital companies loved their model, which did not touch the plant and used technology to power dispensary deliveries.

“Licenses have value. Gateway to buyer has value. Retail has value,” Stephan said. 

Is Plant-Touching The Path To Profitability?

In January 2020, High Times Holding Corp., the parent company of 46-year-old cannabis magazine High Times, announced its incursion into the dispensary business.

The move comes as part of the company’s plan to diversify its revenue sources after a few years of negative balances.

High Times plans to open branded stores in Los Angeles and Las Vegas.

Paul Henderson, who was recently named president of the company, said the leveraging of High Times' brand recognition and loyalty was way overdue.  

Altitude's Stephan said High Times had "mid-year 2019 revenue of $10.7 million and a six-month operating loss of $11.3 million for its media and events businesses," giving it a "further impetus to broaden revenue streams." 

While High Times’ move into retail could be read as a move to drive profitability for the longtime media brand, Eaze's diversification could be explained by events that are systemic to the industry as a whole.

Does it mean there's a larger trend of cannabis companies targeting retail to make ends meet? 

"Currently almost everyone in the cannabis industry is trying to diversify their revenue source to mitigate risks," said Sal Villanueva, president of Driven Deliveries Inc (OTC: DRVD), which is one of Eaze’s largest competitors in the Golden State.

"However, whenever you move into different businesses in the same industry you take a substantial risk.”

For Eaze’s Ashford, the company’s diversification can be traced to struggles that are common to the entire California industry, including regulation, access to capital, taxation, banking issues and the prevailing success of illicit markets.

Altitutde's Stephan said markets have clearly awarded value to hard asset-rich companies with brick-and-mortars, land, buildings and licensed entities. Companies struggle to find verticals where they can find profitability, or at least cash flow, he said.

Instead, they find profitability in becoming licensed entities.

While there's a diversification trend, businesses must exercise caution and not overextend themselves or "drown in opportunity," said Driven's Villanueva. 

"Focusing on your core competency is the right move.”

Eaze is a portfolio company of Casa Verde Capital, the cannabis investment fund co-founded by Ted Chung, Karan Wadhera and Calvin Broadus, a.k.a. Snoop Dogg.

Photo courtesy of Eaze. 

 

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