It was a rocky start to the year for Chris Violas, CEO of a growing software startup that services the cannabis industry. Violas got the kind of news that no one really wants to hear: Their payment processor, Stripe, had dumped them.
That meant they couldn't get paid.
"We're not selling weed over here, we're selling software," said Violas, CEO and co-founder of Newport Beach-based BLAZE. "But it's because people keep track of all their weed in our software" that "they wiped their hands."
Stripe did not respond to multiple requests for comment.
As cannabis markets in legalized states continue to mature, troubles with banking and payment processing have impacted growing companies -- even if their workers never even touch the cannabis plant. Companies that exist up and down the supply chain are finding themselves affected, like BLAZE, by the lack of federal decriminalization that makes traditional money-handling institutions wary of finding themselves on the wrong side of federal law.
For Violas, the sudden shift in tone in the fourth quarter, ultimately resulted in BLAZE becoming classified as a "high risk" company by banks and credit card brands. It has to secure a new high-risk merchant account, which means higher fees, to handle payments.
The irony, he told dot.LA, is that BLAZE aims to make compliance easier for those in the cannabis business through its platform that keeps track of their operations. The company, which started in 2016, has 250 clients today and is in use by dispensaries in California, Oregon, Alaska, Michigan, Montana, Colorado, Oklahoma, and Canada, Violas said. BLAZE processes roughly $30 million a month, he said
"You're enforcing all these regulations that continue to get more complex day by day, and we're a tool that's trying to help with this," Violas said. "Our chief compliance officer wrote the regulations for the city of Long Beach. We're trying to help as best as we can, but at the end of the day, we're a venture-backed startup."
The landscape of federal laws and the lack of decriminalization means that companies and professionals in the supply chain of any cannabis-providing entity, can often end up twisting themselves up into pretzel-like forms to try to abide by existing laws.
Tyler Beuerlein, the chief revenue officer of Hypur Inc., which aims to provide technology for financial institutions to enter and scale within highly regulated industries like cannabis, regularly fields calls from attorneys, accountants, companies who lose their banking relationships because their institutions find out they're related to the cannabis industry.
Among those are daily calls from merchants who say "we lost a credit product, a debit product, a reverse ATM, we got shut down," said Beuerlein, who is also the chairman of the Banking & Financial Services Committee for the National Cannabis Industry Assn. But, "the only thing that's going to affect this from a branded card perspective is federal legality."
Beuerlein can cite the U.S. Treasury's Financial Crimes Enforcement Network (FinCEN), guidance by heart, noting that per 2014 guidance, the only remaining guidance that pertains to this industry, "if an entity derives a dollar of income from the industry they're technically a marijuana related industry."
That means that anybody running any form of branded credit card in their cannabis shop is essentially committing fraud by misrepresenting the nature of their business to gain access to that payment processing infrastructure, Beuerlein said.
Beuerlein said Stripe, which uses the branded card rails for their transactions, made the right call on dropping BLAZE because from a regulatory standpoint "if they participate in an industry that's prohibited...they're potentially risking all of their other business lines."
But Brad Rowe, a public policy lecturer at University of California, Los Angeles, who is an expert on cannabis legalization issues and is currently working with municipalities across California on cannabis compliance issues, said it "just doesn't sound right to me."
While noting that he's not an attorney, he wonders why a company providing financial services to another company that provides software for cannabis businesses is a risk. But perhaps the issue is that the money that's being processed is considered "dirty money."
And that's the root of the problem, it seems.
"Any payment solution, including cities and states receiving taxes, are all money laundering," Rowe said. "Eventually the money has to get cleaned so it's useful somewhere. until federal decriminalization. That's the problem with all of this. Everyone's guilty of money laundering."
Rowe reads the legal guidance slightly differently from Beuerlein, using a two-step rule.
"If you are knowingly providing support for a plant-touching business, that is a federal crime, so you are aiding and abetting," Rowe said. "You can be two steps away. So, if you are running a grow and I'm your attorney, your compliance advisor, I'm aiding and abetting in an operation. If someone is providing taxation services to me while I'm working with you that's two-degrees separated and that's OK."
Banks must fill out Suspicious Activity Reports under federal law with FinCEN and cannabis is illegal under federal law.
The issue is "if any money passes through FinCEN, it's got to go through Washington, D.C. If it's got to go through a federally-touching system they're just not supposed to be dealing with that money," Rowe said. "I can buy cannabis with my ATM card, the reason is when I punch my PIN it is withdrawing money from the local bank. It doesn't touch the Treasury. It's all completely ridiculous."
In BLAZE's case, being shut off from one company in particular caused significant cash problems because the cash that came in one day did not come in the next, said Michael Silton, managing director at Act One Ventures, noting that as a lead investor in BLAZE, Violas reached out to him for counsel after he learned about what happened with Stripe.
"From a financial viewpoint, It impacted their cash flow," Silton said. "These customers signed up and were paying for Stripe, all of a sudden, they had to pay for them a different way."
After all, he said, getting paid is critical for a company's ability to grow. Even so, Silton said that despite the temporary setback, he is "optimistic" about the investment and BLAZE because the founding team is so well versed in the industry.
It's made up of a lawyer who has dealt with regulation around cannabis compliance, Violas who built a dispensary and grew a business, and a grower who understands the challenges of growing and producing cannabis.
"Every industry has regulatory risk," Silton said, "and it's a matter of assessing what that risk is, compared to the opportunities and the investment return."
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At a time when the clinical health care workforce is suffering from burnout and attrition in the wake of the pandemic, Regard’s technology looks to alleviate some of the pressure on health care workers. The startup’s AI-enabled software is integrated directly into a provider’s system and uses an algorithm to analyze patients’ medical records, allowing physicians to more easily diagnose them.
Since launching its flagship product in 2020, Regard’s technology has been used on more than 30,000 patients, according to the company. The startup charges health care providers around $500 to $700 per month for access, co-founder and CEO Eli Ben-Joseph told dot.LA, with its customers including Torrance Memorial Medical Center, Cedars-Sinai Medical Center and roughly a dozen other hospitals across the U.S.
“We’re building something that’s a game-changer for doctors,” Ben-Joseph said. “It’s helping them catch medical conditions that they would have missed. So regardless of market conditions, we’re able to have value and I think investors saw that and got excited.”
Co-founders from left to right: CEO Eli Ben-Joseph, CTO Thomas Moulia, and COO Nate Wilson. Courtesy of Regard
Founded by pre-med students Ben-Joseph, Nate Wilson and Thomas Moulia in 2017, Regard got its start through Cedars Sinai’s Techstars-backed accelerator program. It was at the accelerator program that Ben-Joseph observed physicians’ workflows and saw the need for a product like Regard’s; he recalled noticing how doctors would constantly pop in and out of a patient’s room, shuttling between the patient and a computer where they could enter data and notes.
“I think that’s why so many doctors are burning out now, as they just don’t have software that really enables them,” Joseph said.
Ben-Joseph—who coupled a bachelor’s degree in bioengineering from MIT with a master’s in computer science from Stanford—noted that Regard’s technology can automatically detect up to 50 of the most common medical conditions, including heart failure, diabetes, obesity, depression and anxiety.
“We have a 90% accuracy rate at the minimum,” he said. “Physicians will look at our software and accept it, but it’s not perfect. We tell physicians to treat it like the relationship [with a] medical student.”
This year’s focus will be different from the typical accelerator: Startups in this group will test their products directly with companies active in the ocean economy for four months, collecting data on what works, what doesn’t and further developing proof of concept. Braid Theory will help these startups come up with their business plan and pitches, and connect them to investors and potential partners in the field. In return, it takes an equity warrant that can be converted after three years.
The startups joining Braid Theory typically span industries like port logistics, aquaculture and energy, all of them aiming to test their technologies and untapped opportunities of the burgeoning industry. The accelerator’s goal is to bring those companies from pre-revenue into commercialization.
And all of them are looking to solve challenges within the blue economy ecosystem, many of which have also been exacerbated by the COVID-19 pandemic. With 31% of all goods floating across the ocean to and from the U.S. pass through the Port of L.A. and the Port of Long Beach, COVID-19 strangled supply chains and increased the volume of goods handled at L.A. 's premiere dock by nearly 16% between 2020 and 2021. This created numerous logistical challenges for the dwindling workforce at the nation’s busiest ports while increasing emissions.
“The thing that we're trying to think about are ways in which we can leverage biological systems and software to make more immediate changes in markets that have a low barrier to entry,” Braid Theory co-founder Jim Cooper said of accelerator’s approach to addressing a wide range of climate and logistical issues.
Cooper founded Braid Theory with his colleague Ann Carpenter after the pair left PortTechLA, a maritime and logistics incubator that shuttered in 2016. The two wanted to create an accelerator for port and ocean startups that went beyond logistics and took into account other promising sectors of the ocean economy, including sustainable fish and plant cultivation as well as tools to make the shipping sector more efficient.
Jim Cooper co-founded Braid Theory with his former colleague from PortTechLA, Ann Carpenter.Image courtesy of Braid Theory
Accelerators like Braid Theory are attempting to fill a void in the blue economy ecosystem. Despite being home to several universities with robust maritime research centers and a giant port infrastructure that could be better optimized, few startups survive in Los Angeles due to a lack of early stage funding, according to a 2020 report from the Los Angeles Economic Development Corporation. The accelerator provides funds and lab space and investor connections to nascent startups tackling a wide range of ocean-related problems.
The same report found that ocean startups, particularly early-stage ones, have a difficult time getting funding to accommodate the need for expensive lab equipment like centrifuges, chillers and pipettes. Startups in the blue economy space are primarily funded through federal and state dollars, NGOs and philanthropies, and competitions. But while angel funding has historically been slow to trickle into blue economy startups, some are starting to take note of the size of the market. In the first cohort, eight out of 12 startups received federal funding and investor funding with the help of Braid Theory.
The accelerator’s first graduating class included Florida-based Tampa DeepSea Xplorers, which makes seafaring autonomous vehicles that can scrape the bottom of the ocean and collect data faster for researchers to use as they study climate change impact or source for different medicines. Irvine-based ReCreate Energy is another graduate, which sources algae to create a more sustainable bio-crude oil that can be used at gas and oil refineries. While FlashQ, a Canada-based AI platform, is trying to reduce truck congestion and the emissions caused by them at the port by creating a scheduling platform that optimizes waiting and shipment times.
“The key is the opportunity, the opportunity was there,” Mimi Carter, a biotech investor with the Pasadena Angels, said of the business opportunities in the ocean market. “We saw a market that was unaddressed and is still an emerging market.”
A cluster of cranes at the Port of Long Beach.Photo by DJANA 575/ Shutterstock
To Carter’s credit, L.A. County boasts 75 miles of coastline that the LAEDC expects by 2023 will produce more than $80 billion in regional output, make roughly $50 billion in gross county product, and create over 200,000 direct and indirect jobs, according to a 2020 report. And, according to the Los Angeles Economic Development Corporation, economic and job growth in this sector relies heavily on the creation and implementation of new technologies, making angel investors necessary players in bolstering the ocean economy.
“Not only do we want to be investing in a sustainable product, but someone we count as a first mover,” Carter said of her investment approach. Already, groups like the Pasadena Angels and Techstars L.A. have made investments in the space. Reece Pacheco, a blue economy angel investor, is quietly working on a new venture fund around the blue tech space that hasn’t been announced yet.
“What we're starting to see is there are entrepreneurs who are either coming up through these research firms, or there are entrepreneurs who have cut their teeth elsewhere but care about the ocean,” Pacheco said.
There’s also Braid Theory’s neighbor (and landlord), AltaSea, the nonprofit research hub that has facilitated a number of partnerships with companies across the world.
“We do want to become the leading destination for the blue economy in terms of technology, finance, the education pathways it takes for students to get into these jobs in the future, and then the actual workforce development for the jobs of the future,” said Terry Tamminen, the new CEO of AltaSea.
Braid Theory’s makeshift shipping container-turned-lab is next door to a slew of other startups and projects in the blue economy space. USC researchers are incubating bubbling cauldrons of kelp that could create biofuels and alternative food sources. While Oceanographer Robert Ballard, who found the Titanic wreckage in 1985, set up a sea exploration program a few doors down.
“The ocean is more than a destination for tourists and a place for Jacques Cousteau and David Attenborough to go diving,” Tamminen said. “It's actually something right at our doorstep that we need to protect for our own survival, but it’s also an economic opportunity.”
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