With recreational marijuana legal in eight U.S. states and legalization only a year away in Canada, a Toronto-based startup has its sights set on dominating the global cannabis media market and becoming the central marketplace for buying weed online. However, the lack of legal clarity around marijuana advertising and online sales means the company's business model isn't a sure thing.
HERB, an online publication focused on cannabis culture, has expanded rapidly over the past two years. Since being acquired and rebranded in 2015 by Toronto entrepreneur Matt Gray, the website has grown from 100,000 unique monthly visitors to more than five million. HERB's videos – which range from industry news to segments on how to roll the perfect joint – are viewed around 250 million times a month, according to the company, and its social media following rivals established online media outlets such as HuffPost and Vice.
27-year-old Mr. Gray previously co-founded coding academy Bitmaker, which was sold to U.S. education company General Assembly several years after his departure. Since completing a round of fundraising in March, HERB has doubled its staff to 15 full-time employees and around 15 contract workers.
The rapid expansion has attracted investment from such people as Harley Finkelstein, chief operating officer of Shopify, and Eric Hippeau, former CEO of The Huffington Post and co-founder of media company NowThis News.
"The legal cannabis market is expanding really rapidly. I've seen some numbers that say it will be as high as a $20-billion market within a stretch of two years. So in that respect, a market like that deserves a big media company," said Mr. Hippeau, whose venture-capital fund – Lerer Hippeau Ventures – is one of HERB's main investors, and who acts as an adviser to Mr. Gray.
"This is a market where all the brands are brand new… so all of these brands have to establish themselves, they have to communicate their message, so advertising is going to be the best and most efficient way to do so," added Mr. Hippeau.
HERB currently makes most of its revenue off native advertising – product placement in videos and branded content paid for by companies in, or related to, the cannabis industry. In September, the company is relaunching the website and entering the next phase of an ambitious business plan that aims to transform the media company into an online marketplace for marijuana.
To start, HERB plans to sell paid listings to companies in the industry. "Once you have this database of all this cannabis information, you have all these dispensaries listed, and deliveries, and products and strains, it's simply a matter of putting 'Buy Now' buttons on all of this stuff," Mr. Gray said.
Within three years, he envisions generating most of HERB's revenue through online sales, taking a percentage cut of transactions between buyers and listed dispensaries, and organizing the logistics around delivery.
"The largest cannabis company in the world won't touch the plant, and won't grow cannabis. It's going to be a technology company that facilitates the logistics and delivery of cannabis," Mr. Gray said.
The model will likely differ from one jurisdiction to another, he admitted. And there are still many legal unknowns, as the regulatory landscape in both the United States and Canada undergoes a seismic shift.
In the United States, HERB's largest market, "marijuana remains a Schedule 1 controlled substance under federal law," explained Garrett Graff, an associate attorney with Colorado-based Hoban Law Group, which focuses on the cannabis industry. "An online presence can very quickly lead to a determination that someone is operating across many states and thus has implications with respect to federal law."
Online advertising, even in the eight states that have legalized marijuana use for adults, remains complicated and relatively restrictive. In Colorado, for example, marijuana advertisers can't promote their products across state lines and they have to show that at least 70 per cent of their audience is over the age of 21. Online sales remain illegal in all states.
"You could reserve an order online, subject to going into the store, picking it up and having to satisfy all the identification scrutiny that is required," Mr. Graff said.
The situation in Canada is similarly restrictive, and it's likely to remain so even after legalization, expected in 2018, said Alan Young, a professor at Osgoode Hall Law School and expert on marijuana regulation.
"Regardless of what the provinces do … they're going to have to comply with the Cannabis Act, which is only really going to allow distributors and producers to give informational brochures, without a high degree of promotion or testimonial."
Things may change over time, however. "The model to look at is how we legalized gambling in the late eighties and had huge restrictions on advertising," Mr. Young said. "Now, there's advertising everywhere. Every day I see a Casino Rama advertisement on television."
Whether or not Mr. Gray's online marketplace model is able to operate as planned, investors such as Mr. Hippeau and Mr. Finkelstein, of Shopify, see promise in the size and engagement of HERB's online community.
"I'm less concerned with how eventually they figure what their final revenue model is going to be, and I'm far more interested in the fact that you have a very strong team with an incredible leader, going through probably the biggest shakeup in any industry since prohibition 90 years ago," Mr. Finkelstein said.
"It reminded me of the story when Rolling Stone Magazine came onto the scene," Mr. Finkelstein added. "Prior to Rolling Stone, you had a bunch of these very small, scrappy publications that talked about the music industry. It was only when Rolling Stone came about that they sort of professionalized the publishing of content around the music industry, and I very much believe what Rolling Stone did for the music industry, is what HERB is doing for the cannabis industry."