Troubled Eaze finally closes $35M funding to roll out a new vertical model selling its own cannabis

Six weeks after we broke the news that cannabis startup Eaze was running out of money, laying off more employees and scrambling to pay its bills and stay afloat as it worked on a pivot to selling its own supply rather than just that of third-party providers, the company has finally closed some funding and appears to be moving forward with its plans.

Today Eaze — which claims to have 600,000 registered customers and completed 5 million legal deliveries — confirmed a bridge round of $15 million, plus a further $20 million as part of a Series D round of funding, totaling $35 million in funding. It will be using the money to help steer the company away from its original pure-marketplace model — where it worked with third parties to source cannabis products, which it then sold on and delivered to users — and into a strategy based around the idea of “verticalization,” where Eaze itself will be running a retail and distributor operation of its own, alongside the resale of some 100 licensed brands via retail partners.

“Verticalization is Eaze’s second act,” said CEO Ro Choy in a statement. “Until now, we’ve invested in proving our market fit, building an enormous and loyal customer base, and becoming California’s biggest marketplace for legal cannabis delivery. Now, we’re proving we can make this business work in a more sustainable and profitable way, while continuing to grow Eaze’s existing services.”

We had reported that the fundraising was in the works in January. The Series D portion of the funding is coming from a group of investors led by a firm called FoundersJT LLC, and the bridge round is coming from Rose Capital and DCM, both previous investors. Eaze said that it has the facility to extend the Series D by another $20 million. It’s not disclosing its valuation.

The news brings some resolution to a very troubled period at the startup, which has been through several executive changes, a couple of rounds of layoffs and general employee attrition — losing key people like its chief strategy officer, its chief of staff and a number of engineering staff — while struggling to build out a sustainable business working with cannabis retailers to use the Eaze platform to resell and deliver their products.

Eaze’s big promise was to come out early and build a brand in the cannabis market, a very emerging area of consumer goods that had only relatively recently been decriminalised in California (and is still not completely legal everywhere).

Tapping a new opportunity to sell cannabis products to a new class of consumers — those who might not have been keen to purchase products when they were illegal, or already regular or semi-regular cannabis users who were happy to pay more for the convenience of using an app to shop and get delivery — Eaze believed that California’s move was just the beginning of a bigger swing, and it projected growth across the U.S. accordingly. With one of its co-founders formerly an executive from Yammer, it became the first cannabis startup to raise money from Silicon Valley VCs, and positioned itself as the “Uber of pot.”

But as we’ve seen time and again, being an early mover is not always the best position in the tech world.

The legalisation swing has not played out quite as Eaze predicted, and so the startup’s national expansion plans were curtailed. Meanwhile, in addition to dealing with the basic struggles that every e-commerce company faces — customer acquisition, logistics and scaling a company’s business, talent and so on — Eaze has had a number of challenges particular to its specific industry.

They included issues around payment acceptance — credit card companies didn’t want to allow the company to accept card payments, so for a while it operated on a cash-only model, prone to error, fraud and more — through to poor (negative) margins reselling other retailers’ products. And ultimately, legalisation meant a lot of price and product competition when it came to capturing customers.

The funding Eaze finally announced today (which it has been trying to close for months) will be used in part to help specifically with a few of these challenges: margins and supply.

We reported in January that Eaze was in the process of buying assets from a bankrupt former partner, DionyMed (which had, at one point, also been involved in a complicated lawsuit against Eaze), and that deal now has closed.

Eaze will now resell product from DionyMed’s former subsidiary Hometown Heart (HTH), which has depots in Oakland and San Francisco, and Eaze said it will expand that with its own consumer brands “in partnership with local licensees while continuing to support a broad array of independent, world-class California brands and independent licensed retailers across the state.”

Despite all of the above problems, Eaze’s basic business appears to have been growing, which is likely the reason why the company and its investors believe there is something worth saving and restructuring.

Eaze said that in 2019 it had a 97% annual increase in new sign-ups; 74% annual increase in first-time deliveries; a 71% annual increase in overall deliveries; and 104% annual increase in customers age 50+. Notably, it did not disclose today how many repeat, loyal customers it has amassed in that growth, so that is one to watch going forward.

Along with the funding news it announced today, Eaze also said that Megan Miller, who had formerly been in finance, was appointed its new COO, while John Curtis became the new CFO.

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