• Failory
  • Posts
  • The Failure of the Apple Store of Weed

The Failure of the Apple Store of Weed

How MedMen's valuation went from $3B to 0.

Author

Nicolás Cerdeira
May 09, 2024

Hey — It’s Nico.

Today’s issue takes 6 minutes to read.

If you only have one, here are the five main things:

Let’s get into it.

This Week In Startups

🔗 Resources

Nathan Barry, Nick Huber, and others discuss 6 keys to building a $40M business. 

📰 News

ICONIQ Growth raises $5.75 billion across two funds for tech investments.

Underscore VC raises $58M to invest in early-stage B2B software products.

💸 Fundraising

Wayve secures $1B from SoftBank to share its self-driving tech with other car makers.

Bolt raises €220M in credit as it prepares for IPO. 

Data and AI consultancy Indicium raises $40M for US expansion.

AI-powered promotion startup Monocle emerges from stealth with $7.5M.

Fail(St)ory

The Apple Store of Weed

When California legalized recreational cannabis use in 2016, MedMen was among the pioneering companies to enter this emerging market.

Adam Bierman, cofounder of MedMen, wanted to completely redefine what a drug store could look like. 

Imagine stepping into a cannabis shop. What comes to mind? If your mind conjures a dimly lit space adorned with bongs, jars of marijuana, and cannabis leaves plastered on the walls, then you probably haven't been to a MedMen store.

Bierman revolutionized the cannabis retail aesthetic by introducing spacious stores, minimalist design elements, and sophisticated branding reminiscent of Apple stores.

It is no wonder that people quickly started to refer to MedMen as the Apple store of weed. 

This strategy was successful, and in 2018, Medmen went public, reaching a peak valuation of $3B. They expanded quickly, opening new stores in seven states, including one on Fifth Avenue, and hiring over 1,300 people.

However, after four years of struggling to achieve profitability, MedMen declared bankruptcy last week.

Reasons For Failure

  • Overspending: In order to fuel their expansion, MedMen acquired hundreds of millions of dollars in debt, using it to establish 25 branches, including the high-cost Fifth Avenue location. Additionally, they allocated significant funds towards lobbying efforts to influence regulations in states like Florida and New York. Moreover, substantial investments were made in marketing campaigns aimed at destigmatizing marijuana, highlighted by an advertisement directed by award-winning filmmaker Spike Jonze.

  • Regulations: Despite the legalization of cannabis in certain states, it remains federally illegal, leading to strict regulations for businesses operating in this sector. Moreover, laws vary from state to state, and because the cannabis industry is still relatively new, these regulations are subject to frequent changes. For instance, in Florida, advertising for weed stores is prohibited. When MedMen opened its store in Key West, regulators raised concerns that passersby could view the products through the window, which was deemed as advertising. Consequently, MedMen was required to frost their windows to comply with regulations.

  • Taxes: Another consequence of cannabis being federally illegal is that businesses in this sector can not deduct their business expenses, such as employee salaries, from their taxes. Essentially, this results in cannabis retailers facing an effective tax rate that can soar as high as 80%.

  • Lawsuits: MedMen was sued several times. In 2018, MedMen workers sued the company, alleging MedMen had violated labor laws. In 2019, MedMen was sued for breaching its fiduciary duty as a public company. That same year, another suit alleged that Bierman was using company money to pay for personal expenses like his marriage counselor. Bierman was forced out of the company in 2020 after new lawsuits accused him of saying racial slurs to an LA city councilman.

The Future of the Cannabis Industry

MedMen’s case shows that the Cannabis industry is still full of complications.

However, numerous bills have been proposed at both federal and state levels that could deregulate the cannabis industry, potentially enhancing its profitability.

For example, the Marijuana 1-to-3 Act of 2023 aims to reclassify marijuana from a Schedule I controlled substance to a Schedule III controlled substance. This reclassification would simplify operations within the industry, as Schedule III substances are subject to fewer regulations compared to Schedule I drugs. Moreover, it could lead to significant tax reductions for cannabis companies, enabling them to deduct expenses from their taxes.

Furthermore, the support for legalizing marijuana has reached a record high of 70%. When you also consider that currently, over 50% of Americans report having tried marijuana, and 17% smoke it regularly, it becomes evident that the cannabis industry still has ample room for growth.

Go Deeper

Your Next Startup

A Thread Full of AI Ideas

Last week, Nat Friedman, ex-CEO of Github, asked people on Twitter for AI products that don’t exist but that they would pay for. The tweet went viral and received tons of really interesting ideas. Let’s look at some of them.

FBAR compliance in a box

Patrick McKenzie's suggestion is an AI that helps users fill their yearly Reports of Foreign Bank and Financial Accounts (FBAR).

This might seem niche, but I think that focusing the AI on a single type of report is clever, as it improves the odds of the AI actually being helpful and reduces the risks of errors or hallucinations.

All-in-One Audio Digest

Ryan Delk, CEO of Primer, proposes an AI capable of aggregating messages from various sources and condensing them into a concise 10-minute audio briefing.

I think that, if done correctly, the potential utility of such an AI like is evident. Personally, I know that having a summary of all my emails would save me a lot of time in the morning,  enabling me to kickstart my day earlier.

Also, receiving the summary in audio format aligns well with multitasking during one's morning routine, ensuring access to pertinent information while engaged in other activities.

Personal Money Manager Auto Categorizer

David Aronchick, CEO of expanso, would like an AI that auto-categorizes all his spending. It is a bit niche but also a very simple AI that could save a lot of time. 

Everyone tells you to track your expenses, and I agree. Being able to see where your money is going after each month can be very enlightening and help you save money.

However, categorizing each expense is a pain. Most expense trackers nowadays have ways of automating this process, but they rarely cover all scenarios, so you end up with a lot of uncategorized data. An LLM could easily fix this problem.

AI for BI

Marin Diaz suggests an AI that can replace Tableau and Power BI. This could potentially save a lot of time, helping companies get the KPIs they need in an easier way. 

We know AI is capable of doing data analytics. GPT-4 and its Code Interpreter are great at understanding what KPIs the user wants and finding them in a dataset. This functionality could be expanded and made easier to use for the average user.

Ideally, this AI would not only help you find your desired KPIs, but also suggest what indicators you should consider from looking at your data. 

Refer Failory, Get Rewards

Share Failory

Chances are you have some more friends who would enjoy Failory as much as you do. Share Failory with these friends and cash in on premium resources and swag.

You currently have 0 referrals, only 1 away from receiving my Pitch Deck Airtable.

Or copy and paste this link to others: https://newsletter.failory.com/subscribe?ref=PLACEHOLDER

Help Me Improve Failory

How Was Today's Newsletter?

If this issue was a startup, how would you rate it?

Login or Subscribe to participate in polls.

That's all of this edition.

Cheers,

Nico