Investing In Vice Companies

by Kera DeMars March 22nd, 2022

At Hustle Fund, there are certain startups we're not allowed to invest in.

Why? Because of the vice clause.

Vice clauses prohibit many institutional investors from supporting companies in industries like gambling, alcohol, and cannabis.

So, founders in these verticals often look to angel investors when they’re raising.

Let's face it: vice companies can bring in a ton of revenue. After all, people can’t live without [insert vice of your vice of choice], right?

So I wanted to know: what’s it like for the founders who are building these businesses?

And what signals should early-stage investors look for when deciding whether or not to invest in a vice company?

To answer this question, I interviewed David Hua, co-founder of Meadow

But first, a note about bumblebees

There’s a myth about bumblebees: they shouldn’t be able to fly.

Bumblebees have big bodies. And their wings are teeny tiny. 

Aerodynamically, they shouldn’t be able to lift off the ground. But the bees don’t know that. So they fly anyway.

Ok, wait. Before you open Twitter and start screaming at me – I know. Scientists have disproved the myth.

But Meadow is this bumblebee. They should not exist. 

They should have failed years ago. 

Spoiler: They haven’t failed

Meadow is a B2B SaaS company in the cannabis industry. Their point-of-sale system is used by dispensaries across California. 

Currently Meadow powers $50-60 million in cannabis sales every month. They’re backed by angels like Justin Kan, Garry Tan, and Steve Huffman. 

And their retention is insane. Meadow’s average customer has been with them for 4 years, and their employees have been with them for an average of 5.5 years.

Based on these metrics, it appears that David and team have found a stronghold in the cannabis industry. Their investors, we can assume, are pleased.

But their journey is about as rocky as it gets.

Building Meadow in a green field

In 2011, cannabis was made legal for adult recreational usage in Colorado.

Out in California, David and his co-founders predicted California would soon follow suit. So they started Meadow with the faith that their early entry into the industry would pay off.

There were concerns, of course. Telling their parents was high on the list.

Jail time was a possibility.

The fear of being blacklisted by future employers if Meadow failed.

There was also the looming question of WHEN cannabis would be legalized in California, and how long it would take for the industry to get regulated.

But David and his team believed in the power of cannabis. There are medical benefits, like reducing anxiety and alcohol consumption. There are societal benefits, like reducing opioid usage. And there are economic benefits, like creating more jobs and delivering tax revenue.

So, the Meadow team decided to build a consumer-facing mobile app to power cannabis delivery. Think DoorDash, but for weed.

There was just one problem: weed was still illegal at the federal level. And at the state level in California, weed was illegal for everyone except adults with a medical card.

You can probably guess what happened.

The mobile app was rejected from the app store.

This is not surprising. Until it became legalized and regulated, corporations didn’t want anything to do with cannabis. 

Pivot… PIVOT!

David and team launched the Meadow app – and promptly got rejected – in April 2014. It took another 6 months to launch the desktop version of their delivery app.

Then, in 2015, they pivoted again.

They found that a huge obstacle to driving sales was that their customers didn’t have a medical license for cannabis.

So, they launched Meadow MD solve this problem. Users could set up consultations with a legit doctor, receive their medical license, and (presumably) buy cannabis through the Meadow app. 

And while they served 10,000 customers through Meadow MD, the numbers still weren’t working out in Meadow’s favor.

See, when you're selling a federally illegal product, it's really hard to buy ads for that product.

In fact, it’s impossible.

And since he couldn’t use ads to acquire customers, David relied on heavily discounted promos to entice new users to try out the delivery service. They were bleeding money.

While all this was happening, Meadow’s dispensary partners who actually filled the orders were over-burdened.

Before cannabis was legalized for recreational usage in California, dispensaries processed their orders using pen and paper. There was no SaaS system to rely on. 

So, Meadow pivoted again. 

They built a SaaS platform for dispensaries to process and fulfill orders. Then they built e-commerce tools. Then they built buyer verification systems to keep delivery drivers safe.

Before they knew it, Meadow had completely pivoted from a B2C delivery app into a B2B SaaS company.

And they all lived happily ever aft– nope.

Things were going well, for a while.

Meadow’s customer base grew to about 500 dispensaries across California, and they raised outside funding from angels and a few VCs.

And then the most wonderful thing happened. Or was it the worst thing? 

Cannabis was legalized for adult recreational usage in California in 2016. It took two years for legislators to establish regulations across the industry… from the cultivators and manufacturers to transportation and dispensaries.

All the regulations were signed into law in 2018. California's medical collectives, which had numbered in the thousands, dropped to about 200 licensed dispensaries.

See, as soon as the industry became regulated, every business had to have a license to operate. And licenses were REALLY hard to get.

By the end of 2018, California had issued about 11,000 cannabis licenses to businesses. Of those, only 3% were issued to retailers / dispensaries.

Plus, there were no delivery licenses. Like, they didn’t exist.

So, what does Meadow do? They flutter their tiny little bumblebee wings and lift themselves off the ground.

If you come, they will build it

David and his team knew that they would only succeed if their customers succeeded. So they poured their energy into helping their customers succeed.

They educated themselves about the regulatory processes. They became active in the political world of legalized cannabis and in trade groups. They helped their customers navigate the license process, filled out applications, and wrote SOPs. 

They advocated for delivery licenses on their customers’ behalf.

And while they were doing all that, they started rebuilding Meadow’s customer base, one dispensary client at a time.

What’s the lesson here?

David and the Meadow team believe federal legalization is inevitable, and that by 2030, the cannabis industry is projected to be over $103B. They (and I) believe they will grow with this explosive industry.

But they haven't seen hockey-stick growth yet.

When you consider writing a check into a startup, you know the odds of that startup succeeding are low. 

And in the case of “vice” companies, the odds might be even lower, thanks to things like 

  1. being illegal at the federal level
  2. too much or too little regulation
  3. limited availability of legal licenses
  4. steep taxes at every phase of the product’s lifecycle
  5. steep pushback at the local government level
  6. all of the above

There’s also the fact that vice companies struggle to raise from institutional investors, simply because of the vice clause.


There’s also the chance that you find a founder like David. A founder who has committed his life to making cannabis accessible because he sees the benefits – medically, economically, and societally. 

A founder who has overcome enough obstacles that quitting is not an option.

The vice companies you invest in today may not become unicorns soon, or ever.

But if you’re lucky, they may become bumblebees.

David Hua is the co-founder of Meadow. And he's speaking at Camp Hustle in June 2022. Book your ticket to hear more about his journey building a cannabis company.


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