🤫 Buying market share is bad

A lot of things surprised me about the cannabis industry when I started working at Jane. Here’s a short list:

• People just didn’t show up to meetings. You’d have a nice rapport, you’d schedule a demo, and then - poof - nothing (to be fair, this has gotten better since 2017)

• The best business conversations often happened while smoking a joint. That didn’t happen a lot in commercial real estate or Big Beer

• Social equity was (mostly) window dressing, and many states only paid it lip service

• There was a deep, vibrant hatred of “the man” - even when retail operators had become “the man”

And, the most egregious realization:

• Companies were brazenly bribing other companies

🍻🍸🍪 It’s not limited to cannabis

Don’t get me wrong - I wasn’t born yesterday. I know there are backdoor deals in every industry.

I saw, first-hand, several shady deals take place in bev-alc. Big breweries, craft breweries, wine and spirits companies, everyone - sales reps would ‘swipe the card’ to encourage independent retailers to stock their products. The thinking was: if you can get a liquor store owner to stock your product in a primary placement over a holiday weekend, the sell-through was more meaningful to the company than the cost of the bribe. 🤷🏻‍♂️ It happened all the time.

Of course, for large retail chains (think general merch, grocery, club), “stocking fees” were illegal for alcohol. But what about every other product in the store? You bet your bottom dollar all the other CPG companies were paying for shelf space - and isn’t that a glorified bribe? (The answer is yes. Yes, it is)

So, why was the behavior in cannabis so noticeable to me?

Well - because the pay-to-play payments were coming from SaaS companies. Which I just wasn’t familiar with.

(*Note: there are product slotting fees everywhere in cannabis. I won’t be addressing those today) 

😲 What was actually happening?

I’ll clarify up front - this was not specific to one technology company in cannabis. There were plenty of tech startups trying to grab market share as quickly as possible from 2018-present - but there sure as hell were well-known repeat offenders.

The pay-to-play payments came in various forms:

• Direct payments to a customer in exchange for using software

• Bribes to competing sales reps to refer (or tank) deals 😬

• Overly-generous referral fee arrangements

• Overly-generous payments to trade organizations in exchange for favorable treatment

• And on and on

This kind of thing was rampant. Competing in this environment was hard. Maintaining pricing discipline was harder.

And we’re not talking a few hundred bucks - some of these payments were big.

🤫 What impact does this underhanded behavior have on an industry?

Glad you asked.

1. Customers are trained to seek out monetary compensation for ‘switching’ to a different software, which runs counter to what we hope is the primary objective: growing their business

2. Bribes create a transactional, short-term dynamic, which is incongruent with a healthy marketplace

3. Payments devalue the underlying mission of all other software providers in a given vertical

4. Payments diminish the credibility of the company that is paying - it’s just desperate. Once the money is spent, customers quickly come to this conclusion

❓So what’s next

Well…the predatory payment behavior got some traction early on, and won some deals. In a bunch of verticals. Companies celebrated their newfound foothold on the market.

Then, slowly, the money was spent. The value of the software became irrelevant, because there was no longer a good reason to continue using it. Better solutions entrenched themselves with superior products, and enterprise customers realized that a better-performing tech stack generated revenue that more than made up for a one-time bribe. The money-based relationships deteriorated and fell apart.

It’s a good lesson for all of us (perhaps especially relevant for investors). If your software product does not win business on the merits of its core competencies - paying someone to be your customer is a band-aid solution that will eventually blow up in your face.

This industry is never boring.

📚 tl;dr

• This industry is weird, and I love it - but I don’t love bribes

• Tech companies were paying off customers left and right over the last several years

• Payments trained customers to view tech partners as short-term, transactional piggybanks (which is bad for the industry and extremely bad for investors)

• Nearly every relationship that started with a bribe has fallen apart

• It is Friday