Cannabis Startups and Investing Series

110799

Strainz CEO on building a national cannabis startup

Strainz partners with production facilities to create cannabis products, like oils and vape pens

Innovation series by Steven Loeb
August 16, 2016 | Comments
Short URL: http://vator.tv/n/469b

Note: The CannaVator accelerator, which includes a 10-week online and in-person program, is accepting applications until August 15, 2016 for its Fall 2016 cohort. More details about the program and how to apply here.

Anyone paying attention knows that the cannabis industry is rapidly becoming a multibillion dollar industry—in spite of existing limitations and regulations. To learn more about the companies fueling this growth, we’re doing a series of profiles on the biggest names in cannabis. 

One of those companies is Strainz, a national cannabis brand management company, which uses the cannabis plant to create products ranging from vape pens and CBD oils, which it currently sells in Nevada, Colorado and Washington.

Founded in November 2013, and headquartered in Las Vegas, Strainz has raised a total of $8 million, including a $6 million round of Series A in April of this year.

I spoke to Hugh Hempel, co-founder and CEO of Strainz, about his company, the challenges of working in the cannabis business and how regulations will affect his business in the future.

The origins of Strainz

The origins of Strainz are extremely personal to Hempel: his 12-year-old identical twin daughters were born with Niemann-Pick Type C, a fatal and progressive neurological disease which he describes as a "Childhood Alzheimer’s.” The condition causes delay and loss of cognitive and motor function, as well as severe seizures. One of the ways Hempel decided to treat his twins’ seizures is with medicinal cannabis.

The problem Hempel faced in 2013 is that he lived in Nevada, a state where he could not find cannabis oil supply. In order to give his daughters the treatment they needed, he decided to start making some himself. Hence, Strainz was formed.

“I entered into this business in order to solve the problem of providing super, high-quality, predictable, doseable cannabis oils to my kids," Hempel told me. "My wife and I soon realized we wanted to provide CBD oils to anyone who needed it. From kids to adults to people with pain." 

Hempel was uniquely qualified to take on that task, due to his experience in both the pharmaceutical world, and in the tech world.

Hempel co-founded HopeLink, a service that helped match cancer patients with clinical trials. He spent years creating a drug for his daughters called cyclodexrin and the effort to develop the compound has received international attention. In addition, he also worked for IBM, Apple and Netscape. Hempel, and his wife, Chris, who also is part of the company and has a background in tech, were able to leverage their business and personal experiences to transition into the cannabis world.

"The first thing we did for our children was provide the humane treatment of their disease with FDA compassionate use. The bottom line is we transitioned from making pharma products, making drugs, into the cannabis world, so we'd have the opportunity to transfer that experience. We were motivated by our kids, and lots of other folks, who needed help," he said.

The challenges of being a cannabis company

What Hempel didn't realize, though, was just how hard it would be to enter the cannabis space, with all of the regulations and restrictions put in place by both Federal and State governments.

"I could have done a small-scale operation, built a cultivation and
created extracted products to sell in Nevada, but I realized how complex the industry is, and how difficult it is to do it correctly. There’s no way you can build a successful business without some amount of scale," he said.


Basically, the only way Strainz could afford to do the kind of research and development necessary to create products that would really help customers who needed cannabis was to sell products across all legal states. That’s easier said than done.

"We essentially took a play out of the tech playbook, and used it for our own enlightenment. In the early days of tech, everything was vertically integrated, but, over time, tech became more specialized. That became our strategy, to be a horizontally-focused business that crosses jurisdictions," he said.

The ultimate goal for Hempel was to "build a national brand of well recognized products in all the legal jurisdictions we can reach. That's a daunting task, and very few attempt to do it."

What stops so many others from being able to achieve the same goal is that, since cannabis is still classified as a Schedule I drug, products that actually contain cannabis aren’t allowed to cross state lines. Strainz can only ship things like hardware and packaging, and even that comes up against regulations on a state by state basis.

"Packaging in legal states like Colorado and Washington have to be different due to state by state regulations. In some cases, states have residency requirements to even be able to manufacture products in their state, requiring forming partnerships which is not always easy in this industry. The process is long and daunting," he said.

"Other companies that make extracted products most often sell them in a single jurisdiction. There's only a handful of companies that are currently selling their product in more than one state due to the capital requirements."

Strainz also cannot sell any cannabis products online, as only products that are derived from hemp are able to be sold this way.

"We sell our products exclusively through licensed dispensaries. That's the only way we can operate in each state," Hempel explained.

With all that red tape to sift through in numerous states, it’s taken a lot of patience and resources to create products, and the only reason Hempel says he was able to do it was because of the benefit he sees in his daughters.

"They give me the fire in the belly to get up each day and get it done."

Strainz products

Strainz is a brand-management company, which has strategic partnerships with multiple state licensed cultivation and production facilities. Together, they create a portfolio of premium-grade cannabis products, including oils and vape pens.

"We build products that have both THC and CBD in them. They are not 100 percent CBD-only products. Our children benefit from the entourage effect, and multiple cannabanoids in the product,” said Hempel.

The entourage effect refers to different molecules in the cannabis plant being combined with each other for maximum effect. It’s a term coined by Israeli scientist Raphael Mechoulam, who, back in the 70s, discovered the endocannaboinaoid receptor system.

"The idea is that the cannabis plant has been used by humans for thousands of years, and, over time, we developed a receptor system in our bodies to utilize cannabinoids," Hempel explained. "The cannabis plant is extremely complex, and has numerous active molecules, including THC and CBD. The entourage effect is the combined effect of different molecules in the plant."

In making its cannabis oils, Strainz picks different plant strains to extract, and combines them in a specific ratio of cannabinoids. For example, the company sells a vaporizing pen with 20 parts CBD to one-part THC, and reverse. It does this because different combinations have been known to help different conditions.

For example, those who suffer from seizures often benefit from a higher dose of CBD, and low THC. Those suffering from PTSD, on the other hand, have been reported to benefit from high THC and low CBD.

"Those molecules are like an orchestra. They are like each other’s yin and yang," he said.

Another factor that can affect how one person responds to a ratio can be their metabolism. For example, women, who generally have a higher metabolism than men, may be able to take a lower per pound dose and have the same effect.

"There’s a growing body of anecdotal data that will inform someone as to where they should start. The reality is, with homeopathic and natural products, you can customize to your needs and what ratio you want to use. We discovered that people respond differently to the plant, unlike pharma, where there is a tendency to promote one pill fits all. With cannabis, there's a lot of trial and error, and experimenting with strains and ratios," said Hempel.

Many customers will even buy two products and combine them to make their own ratio.

From medicinal to recreational?

While the genesis of Strainz was medicinal, Hempel can already see the value of recreational use as well, though he sees little difference between the two when it comes to the effect that cannabis has.

"I believe, to some degree, that medicinal and recreational is legislatively driven, and artificial. That distinction will slowly disappear, and not just because ballot initiatives are successful. The products we build for use as medicine, in theory, can be used recreationally and vice versa," he said.

"We are seeing significant traction in the management of pain, as well as seizures in children, which is getting a lot of publicity thanks to people like Sanjay Gupta. PTSD is also increasingly being studied, as lots of veterans who experienced trauma use cannabis to tamp down anxiety."

When asked what the future of the cannabis space looks like, Hempel gave probably the most honest answer he could to the question: he simply doesn't know.

"I would have to be Kreskin and look into my crystal ball. The oversimplified answer comes down to ballot initiatives in states like Arizona and California, to either push medical forward, or legalize recreational. How that turns out on a state level is anyone's guess," he told me.

One thing for sure, the changing regulations, and whatever the outcomes, will have an impact on Strainz going forward, and will determine how the company is able to grow.

For example, there's a big conversation about rescheduling, which depending on how it shakes out, would either make it easier for Strainz to do business, or possibly allow big pharma to come into the space in a bigger way and squash the smaller companies due to their essentially unlimited funding. Even if cannabis is not rescheduled, it might work to the advantage of companies like Strainz to leave it as it is now, to keep the big pharma guys at bay.

Regulations in California, and how they change, will also have a clear impact. Strainz has purposefully not entered the state so far, Hempel told me, even though he believes that doing so could have accelerated his business, potentially by a few years.

"The licenses we have in Nevada, Colorado and Washington are privileged licenses, like for tobacco or alcohol. It's easy to get yourself into hot water in California, due to a lack of clear regulatory framework. Right now, it’s hard to operate there with any degree of confidence," he explained.

"There have been too many companies like ours that have been and that could jeopardize our business in other legal jurisdictions. So I'm glad we made that choice."

The good news, he said, is that the state legislature knows what it has to do, which is to explicitly make the extraction and creation of extracted products legal.

"Right now, there's no law in California that establishes a license to operate the form of business we are running. Extractions appear legal in some local municipalities, but the state hasn't sanctioned it, so you're at best in a grey area with the Feds, and the DEA. That makes you subject to potential investigation."

Even if California doesn't put the right laws into effect, the states where the company is currently operating "more than suffice," and the company will be fine as long as the Federal government doesn't reverse the stand it has taken in recent years in regards to cannabis. And Hempel thinks we've gone too far to ever go back to the way things were.

"We’re not putting the genie back in the bottle as there would be an uprising of such a magnitude. There's too much revenue at stake, too many patients, and too many politicians committed to ending prohibition. I believe the states’ rights issue will keep cannabis protected," he said.

(Image source: Strainz.com)

As Vator was getting ready to launch CannaVator earlier this week, we have been taking a look at different aspects of the cannabis industry, from regulations to how different sectors are working.
Cannabis is a new, and growing space, and many companies are still very young. So, we thought it would be interesting to take a deeper look at some of those companies that are more established in the space, who have been around a few years, to see how they've seen it changing and where they see it going.
One of those companies is Strainz, a national cannabis brand management company, using the cannabis plant to create products ranging from, including vape pens and CBD oils.
Founded in November 2013, and headquartered in Las Vegas, Strainz has raised a total of $8 million, including a $6 million round of Series A in April of this year.
I spoke to Hugh Hempel, co-founder and CEO of Strainz, about his company, the challenges of working being in the cannabis business and how regulations will affect his business in the future.
The origins of Strainz
The origins of Strainz are extremely personal to Hempel: his 12 year old identical own twin daughter’s children were born with Niemann-Pick Type C, a fatal and progressive neurological disease which he describes as a "Childhood Alzheimer’s.”horrible neurological condition.” The condition It causes delay and loss of cognitive and motor function, as well as severe seizures. One of the ways Hempel decided  toto treat his twins’ the disease seizures is with medicinal cannabis.
The problem is that Hempel faced in 2013 is he lived in Nevada, a state where he could not find that he said has no cannabis oil supply. So, to give his children daughters the treatment they needed, he decided to start making some himself and formed Strainz.
“IWe enteredgot into this business in order to solve the problem of providing super high quality, predictable, doseable cannabis oils to my kids.broadly. My wife and I soon realized we wanted toWe wanted to provide CBD oils to anyone who needed it. Froms it: kids toor adults to people with , if they have anything from seizures to overall pain," Hempel told me.
Hempel was uniquely qualified to take on that task, due to his experience in the pharmaceutical world, having co-founded HopeLink, a service that helped match cancer patients with clinical trials. He spend years creating a drug for his daughters called cyclodexrin and the effort to develop the compound has received international attention.  In addition, He also had experience in thehe came out of the tech world, having previously worked for IBM, Apple and Netscape. Hempel, and his wife, Chris, who also is part of the company and has a background in tech, were able to leverage both of thosetheir business and personal experiences to in his to transition into the cannabis world.
"The first thing we did for our children was provide the humane treatment of our kidskids’ disease with FDA compassionate use. The bottom line is we transitioned from making pharma products, (making drugs), into the cannabis world, so we'd have the opportunity to transfer that experience. We were motivated by our kids, and lots of other folks, who needed help," he said.
The challenges of being a cannabis company
What the Hempel’s didn't realize, though, was just how hard it would be to enter the cannabis space, with all of the regulations and restrictions put in place by boththe Federal and State governments.
"I could have done a one offsmall scale operation, built a cultivationgrow and created extracted products to sell in NevadaReno, but I realized how complex the industry is, and how difficult it is to do it correctly. There’s no way you can build a successful business without some amount of scale," he said.
Basically, the only way Strainz could afford to do the kind of research and development necessary in to create products that would really help customers who needed it cannabis, was to sell products across all legal states. That’s easier said than done.
"We essentially took a play out of the tech playbook, and used it for our own enlightenment. In the early days of tech, everything was vertically integrated, but, over time, tech became more specialized. That became our strategy, to be a horizontally focused business that crosses jurisdictions," he said.
The ultimate goal for Hempel was to "build a national brand of well recognized products in all the legal jurisdictions we can reach. That's a daunting task, and very few attempt to do it."
What stops so many others from being able to achieve the same goal is that, since cannabis is still classified as a Schedule I drug, products that actually contain cannabis aren’t allowed to cross state lines. Strainz can only ship things like hardware and packaging, and even that comes up against regulations on a state by state basis.
"Packaging in legalthe statestates likeof Colorado and Washington have to be different due to state by state regulations. Formulations have to be different, and those are just some examples of that. In some cases, like Washington and Colorado, states havethere's a residency requirement to even be able to manufactureer products in their state, requiring. I'm not allowed to start making product in those statesforming partnerships which is not always easy in this industry., so I have to form a partnership, vet them, get to know them and that takes time and energy. The process is long and daunting," he said.
"Other companies folks who make extracted products most often sell them in a single jurisdiction. There's only a handful of companiesthat that are currently selling their product in more than one state due to the capital requirements."
Strainz also cannot sell any cannabis products online, as only products that are derived from hemp are able to be sold this way, so all of the ir their products have tomust  be sold through local dispensaries.
"We sell our products exclusively through licensed dispensaries. That's the only way we can operate in each state.” Washington and Seattle. We are currently in a handful of shops that carry our products, which are manufactured in Washington under a brand license. We get a brand royalty," Hempel said.
With all that red tape to sift through in numerous states, it’s taken the company two and a half years just to get to the point where it has only just begun to start actually selling a product. Needless to say, it’s taken a lot of patience and resources to create products, and the only reason Hempel says he was able to do it was because of the benefit he sees in his own childrendaughters.
"Theyat gives me the fire in the belly to get up each day and get it done."
Strainz products
Strainz is a brand management company, which has strategic partnerships with multiple state licensed cultivation and production facilities. Together, they create a portfolio of premium grade cannabis products, including oils and vape pens.
"We build products have at least a modest amount ofthat have both THC and CBD in themin them, they are not 100 percent CBD only products. Our children benefit from the entourage effect, and multiple cannabanoids in the product,” said Hempel.
The entourage effect refers to different molecules in the cannabis plant being combined with each other for maximum effect.  ItsIt’s a term coined by Israeli scientist Raphael Mechoulam, who, back in the 70s, discovered the endocannaboinaoid receptor system. It
"The idea is that the cannabis plant has been used by humans for thousands of years, and, over time, we developed a receptor system in our bodies to utilize cannabanoidscannabinoids," Hempel explained. "The cannabis plant is extremely complex, and has numerous active molecules, including THC and CBD. The entourage effect is the combined effect of different molecules in the plant."
In making its cannabis oils, Strainz picks different oils toplant strains to extract, and combines them in a specific ratio of cannabinoids molecules. For example, the companyit sells a vaporizing pen with 20 parts CBD to one partone-part THC, and reverse. It does this because different combinations have been known to help different conditions.
For example, those who suffer from seizures often benefit from a higher dose of CBD, and low THC. Those suffering from PTSD, on the other hand, have been reported to benefit from high THC and low CBD.
"Those molecules are like an orchestra. They are like each other’s yin and yang," he said.
Another factor that can affect how one person responds to a ratio can be their metabolism, and women, who generally have a higher metabolism than men, can may be able to take a lower per pound dose and have the same effect.
"There’s a growing body of anecdotal data that will inform someone as to where they should start. The reality is, with homeopathic and natural products, you can customize to your needs and what ratio you want to use. We discovered that different peoplefolks respond differently to the plant, unlike pharma, where there is a tendency to promote oneone pill fits all. With cannabis, tThere's a lot of trial and error, and playing aroundexperimenting with strains and ratios," said Hempel.
Many customers will even buy two products and combine them for theirto make their own ratio.
Even as itsWhile the genesis of Strainz was medicinal, Hempel can already see the value of recreational use as well, though he sees little difference between the two when it comes to the effect that cannabis has.
"I believe, to some degree, that medicinal and recreational is legislatively driven, and artificial. That distinction will slowly disappear, and not just because ballot initiatives are successful. The products we build for use as medicine, in theory, can be used recreationally and vice versa," he said.
"We are seeing significant traction in the management of pain, as well as seizures in children, which is getting a lot of public playpublicity thanks to people like Sanjay Gupta. PTSD is also increasingly being studied, as lots of veterans who experienced trauma use cannabis to to tamp down anxiety," Hempel said. "Our target audience are those folks, adults and children who benefit from the CBD moluce in particular. The plant is full of cannabanoids, and our belief all of those molecules, combined together, are what provided therapeutic value.”
The future of Strainz
When asked what the future of the cannabis space looks like, Hempel gave probably the most honest answer he could to the question: he simply doesn't know.
"I would have to be Kreskin and look into my crystal ball. The oversimplified answer comes down to ballot initiatives in states like Arizona and California, to either push medical forward, or legalize recreational. How that turns out on a state level is anyone's guess.”, but it is likely in to be successful in California, and defeated in Arizona, with a photo finish in Nevada," he said.
One thing for sure, the changing regulations, and whatever the outcomes, will have an impact on Strainz going forward, and will determine how the company is able to grow.
For example, there's a big conversation about rescheduling, which depending on how it shakes out, might either make it easier for Strainz to do business, or possibly allow big pharma to come into the space in a bigger way and squash the smaller companies due to their essentially unlimited funding. Even if cannanbisthe drug is not rescheduled, it might work to the advantage of companies like Strainz to leave it status quo, to keep the big pharma guys at bay.
Regulations in California, and how they change, will also have a clear impact. Strainz has not entered the state specifically steered clear of the state so far, Hempel told me, even though he believes that doing so could have accelerated his business. by up to two years if he had.
"The licenses we have in Nevada, Colorado and Washington are privileged licenses, like for tobacco or alcohol. It's easy to get yourself into hot water in California, due to a lack of clear regulatory framework. Right now, it’s hard to operate there with any aThat wouldn't allow me to operate with a degree of confidence," he explained.
"There It took a lot of willpower to walk away from the money in California, but there have been too many companies like ours folks that have been raided or busted and that could jeopardize ourmy business in other legal jurisictionsplaces.” So, in retrospect, I'm glad we made that choice."
The good news, he said, is that the state legislature knows what it has to do, which is to explicitly make the extraction and creation of extracted products legal.
"Right now, there's no law in California that establishes a license to operate the form of business  we are runningI want to run. Extractions appear It's legal in some local municipalities, but the state hasn't sanctioned it, so you're at best in a the grey area with the Feds, and the DEA. That makes you subject to potential investigation."
The good news for Strainz, though, is that even if California doesn't put the right laws into effect, the states where the company is currently operating "more than suffice," and the company will be fine as long as the Federal government doesn't reverse the stand it hass taken in recent years in regards to cannabis.
And Hempel thinks we've gone too far to ever go back to the way things were.
"Even if Chris Christie was to become Attorney General, we'reWe’re not putting the genie back in the bottle as there. would be an uprising of such a magnitude. There's too much revenue at stake, too many patients, andand there are too many and significant many politicians committed to their careersending prohibition. I believe theThe statesstates’ rights issue will keep cannabis protected," he said.
"There would be an uprising of such a magnitude. I'm not going to say with 100 percent certainly that it wouldn’t happen, but I can to  a very high degree. Something like 90 percent plus. There are too many folks who believe, and who have been enlightened. The stats across America are in the 60 percent plus range. How any Attorney General, or President, can step into new roll and tell 60 percent of the population to pack it up and go home, with billions already invested, I just don’t see it happening."
Ultimately, Hempel's goal with Strainz is to either be acquired, or to grow big enough to be an acquirer, as the space inevitable gets bigger and bigger.
"We are building ourselves to be self sustainingself-sustaining. Ultimately, there will be consolidation when big money enters the picture. That will happen, and whether we initiate consolidation and become a big guy, or we become an acquisition for a big guy, is yet to be seen. We are not building to be acquired, but we want the flexibility to do either."

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