Has Colorado Marijuana Hit the Ceiling for Investors?

The cannabis industry may still be young and bright-eyed in Missouri and New York, but Colorado is already passing puberty. The majority of the state's largest dispensary chains and a rising number of established edibles brands are now under new ownership, and almost all of the new owners are multi-state operators based outside of Colorado.

We're not just seeing all that maturation on the plant side. The tech surrounding cannabis is growing up fast, too, and some of it is staying put in Colorado. Denver's own Flowhub, a point-of-sale provider for dispensaries and menu websites around the country, closed on a $19 million round of funding earlier this month, bringing the total amount of funding raised so far to almost $50 million. But it wasn't just the dollar amount that made news for Flowhub: According to the company, Jay-Z made a personal investment during this latest round.

We caught up with Flowhub founder Kyle Sherman, who's been involved in the legal cannabis trade since the early 2000s, to learn more about the state of Colorado cannabis and how investors are currently reacting to the industry.

Westword: How much has changed in Colorado cannabis since your early days of working at companies like Weedmaps and Dixie Elixirs?

Kyle Sherman: Things are changing a lot, and Colorado has matured in an incredible way. The biggest retailers in the state are definitely not who they were back then. We've seen a lot of these companies become more efficient in their manufacturing processes, the maturation of the products themselves and the stability of pricing. A lot has changed since 2014.

Is Colorado's cannabis industry already hitting its ceiling?

I am a big fan of things being fluid and always changing. The cannabis industry is probably going to be different in Colorado ten years from now than it was today. It will continue to mature. We'll see consolidation, and we'll see small and mid-sized business grow, too. It won't just be big businesses. There will be a lot of small and mid-size growth. Colorado is a mature market compared to all of the rest. It was the first highly regulated market, and you've seen a lot of others try to copy the rules made here.

Colorado in itself is a leading market and mature in so many ways. I wouldn't define it as an up-and-comer, like somewhere like Maryland might be. But I truly believe we're still in the early days across the board and that this industry will eclipse alcohol by leaps and bounds.
click to enlarge Flowhub founder Kyle Sherman (third from left) and his executive staff. - COURTESY OF FLOWHUB
Flowhub founder Kyle Sherman (third from left) and his executive staff.
Courtesy of Flowhub
How does raising money for a marijuana software service work? Is it the same as any other tech funding, or are there more hoops?

It's definitely harder to raise money in cannabis than in any other tech company. There's still that certain stigma carried with cannabis, which can make it harder to traditional investors to come in the space. But we've raised around $50 million so far, and we're one of the few companies in our space to raise that much. It's been a journey, but it's getting easier as that stigma pulls away and more investment funds become comfortable with this.

Are investors still waiting for a weeding-out process, and for the major players in the cannabis tech space to emerge?

I don't think so. There are clear leaders, like Flowhub and Weedmaps — in fact, Weedmaps just built an integration on top of Flowhub, which is pretty cool. It's becoming clear who some of these winners are today, and that's where investors are pointing their capital. I wouldn't want to be a new founder right now, or just starting off what we're doing now in cannabis. We've been doing this for nearly seven years, and so have some other players.

We've raised almost $50 million, and our next nearest competitors have raised around $8 million and $3 million. Resourcing matters, and players have absolutely established themselves. Look at Weedmaps and LeafLink. There are very defined leaders in the market.

Speaking of investors, we saw the recent funding news. How did the Jay-Z investment come about?

Everything starts with a great story and a great network. We'd done some incredible work over the last many months on social equity, and were talking about his interest in social equity. We've given over $1 million in free software through these grants to social equity applicants and license holders. I think for Jay and his team, they're particularly interested in impacting businesses, and he sits on the board of Square, so he gets payments and financial services, and he understands point-of-sale. And that's what we do.