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Leaf Trade Founder and CEO James Yi on Designing a “True Marketplace Experience”

20 minutes reading time (4099 words)

While eyes may glaze at the mere mention of POS (point-of-sale) software, where historically many if not most cannabis retailers first encountered technology that in addition to ringing up sales was supposed to keep an accurate record of the flow of product, the industry has come a long way from the days when shop owners were swapping out systems one after another in a seemingly never-ending search for consistency, accuracy, and scalability. In addition to running efficient businesses, of course, the need to integrate the proper software was reinforced by state regulations that (in most but not every legal state) imposed the use of track-and-trace software on every part of the cannabis food chain. Today, however, the proliferation of multi-state actors in the space has in no uncertain terms upped the ante for technological solutions that deliver in multiples.

Leaf Trade, a Chicago, Illinois-based tech company founded by CEO James Yi and officially launched in January 2017, a week after the birth of his son on Christmas day, was created to meet just that call, just as Yi’s resume seems to have predestined his current role.

“My background comes from helping start one of the largest dispensary groups here in Illinois back in 2014-2015,” he recounted during a recent call with CBE. “That group grew to be known as a large MSO called Grassroots Cannabis (GR Companies Inc.), which eventually got sold to the largest of the MSOs internationally, Curaleaf. But I’m also the owner of another technology company that does B2B software, mostly in the restaurant space and then eventually it expanded to healthcare and other industries. I’m not day-to-day in that company anymore, but I’m still on the Board and involved. I started that company before Leaf Trade, and in fact that’s why in the early days a couple of groups in Illinois reached out to me to get started on figuring out how to implement technology solutions to streamline the business.”

They needed help not just with wholesale technology solutions, he said, but also in “setting up their entire architecture. It’s very true today but more so back then that the technology solutions they were looking for just didn’t exist. It was early on in the industry, and any of the technology players that normally serve other industries were not having it – they were risk-averse to service the industry. But by that point, I was already very hooked and fascinated with the opportunities in this industry and ended up sticking around for the next 18 months or so, consulting for the industry and wearing a lot of hats; anything from overlooking construction to hiring and really knowing the nuances of the regulations like the back of my hand – how thick did the steel need to be in the vaults, how many cameras need to be placed.”

Even his original experience provided invaluable experience that would lead directly to Leaf Trade. “I started off sort of as a technologist consultant and then ended up officially wearing a VP of business development hat, because I was building relationships with municipalities and other players in the industry, suppliers and stuff like that, and helping to hire and set up stores. It was in that process where my technology brain was keeping a lookout for the biggest problems.”

It did not take long for him to identify them. “If you were a retail dispensary looking to stock your shelves with products, you were texting and calling and emailing all of the wholesale suppliers that market the cultivators, and there was so much inefficiency and it was such a fragmented process that a single delivery would take over two weeks to arrive at the store, and both parties were spending half their time just managing the back-and-forth [communications] for the orders when everyone was just trying to scale their business,” he recalled. “I saw there was already sort of a saturation with retail POS because I think normally people look at that [as] the low hanging fruit, and something that you can try to build quickly and go to market with. I was much more interested in solving these really complex problems, and while it was a lot more complex on the B2B wholesale side, that’s the route that we took.”

Of course, track-and-trace remains a reality for the industry and for Leaf Trade. “Because of how regulated this particular industry is – the compliance component and how nuanced it is from state to state – the fact that it’s not a unified program nationally is really where the difficulty lies,” he said. “You need to be able to account for that whenever your transactions are being made and when products are being moved down the supply chain. So, there are these state-mandated seed-to-sale traceability systems that are being used, and there are the top three or so that dominate the market. Each is utilized differently in the different states, and you need to be able to work hand-in-hand with each system and understand how differently they work, what the different product architectures are, how they match up the batches and stuff like that. It’s really important to be able to integrate with those, and I think one of the key differentiators and winning components of our platform is our emphasis on integrations that not only work great but are very user friendly, thereby streamlining operations and decreasing the number of hours that multiple technology systems have to talk to each other.”

I had assumed that Leaf Trade had tweaked a preexisting technology, but in fact they built it from scratch, said Yi. “Step one for us was just streamlining that basic concept of, if you are a dispensary and you need to place orders, it’s submitting your purchase order and then digitally communicating that to the supplier, and then going from there,” he explained. “After launching in January 2017, by the end of that month, [we were] getting 30 percent of the Illinois market, and just getting really great feedback from everyone; since then, we’ve grown the platform to include a lot more robust built-in features like the integrations so that we are helping users streamline every step of the fulfillment process.

“On the one hand,” he added, “retailers can log into one place to access all of the sellers in their respective markets and have a unified buying experience and paper trail and accountability to track their orders and stuff like that. That’s the value on the on the buyer side.

“On the seller side,” he continued, “I would argue that the value is much more robust, because the front line for the seller is their sales team, and having the sophisticated tools to manage all the users in their customer organization with those relationship tools, and then the dynamic rules and pricing, because everyone’s got their standard base prices, but you’ve got to be able to give sales teams the tools to automatically generate certain discounts so that they’re not manually touching these orders 1000 times before it actually goes through. And then, once an order is finalized, having that information instantly translate to a packing slip for the fulfillment and operations team to use to package those orders. And then finally, once those are done and an order is finalized and the delivery team takes that information and [the order] is successfully delivered to the dispensary, that information is automatically exported to their accounting software, and then the accounting and financial teams are leveraging Leaf Trade to do what they need to do. So, it’s really allowing all of the sellers’ departments to not only streamline what they do, saving countless hours in their workflow, but to work together in a way where they’re all talking to each other coherently.”

The software is optimized for all sorts of sales dynamics. “What is fortunate for us is that we started off in these highly regulated markets where the sellers were oftentimes mandated to be the distributors, so we built the platform to be optimized for standalone distribution licenses as well,” added Yi. “So, you could be a distributor in a market like California and set up an account where you are in-taking products and inventory from the brands that are in your account, and then turning it around and selling it downstream. Our ethos has been to be a tech-enablement tool, so we’re purely software; we don’t have ambitions to be the ones that touch the plant and transport it or grow it and store it and warehouse it, but we want to offer those folks that do that the tools to fill in any of those gaps. So, our platform is the point of transaction where all of the order data gets generated just by virtue of the orders being placed amongst the two parties. Then we’ll take that, and we’ll translate it into what’s known as shipping manifests, which are required by the state, so that they don’t have to take ordered information and manually create those. We’ll create those automatically, export it out into whatever seed-to-sale traceability systems that they need to help them to manage their vehicles and their fleets and their drivers and their routes in their delivery schedule. So that’s what we mean by technology enabled.”

Operational Value

Currently in 21 states, with 1.5 billion orders annually on the platform, 73 percent of all orders organically placed by retails, and 31 percent of all cannabis wholesale orders nationwide made through the platform, according to the company, Leaf Trade is obviously a formidable product for existing wholesale relationships between buyers and sellers. I wanted to know if it also helps create new relationships, and whether it can facilitate lead generation.

“Yes, to all of the above,” replied Yi. “Often, in the highly regulated states, it’s a pretty finite market. Illinois as an example started off with about 20 sellers and 60 dispensaries, so all of the players essentially knew each other and do business with each other. But as we enter the more established recreational markets out West, which I call supply-saturated, the platform works just as effectively for product discovery, brand discovery, and seller discovery, because it’s designed to be a marketplace, not like a standalone Shopify, but as a true marketplace experience.”

Yi created his model with a creative and somewhat counter-intuitive touch. “We kind of did it the opposite way,” he explained. “We didn’t start off as this marketplace relationship discovery. We started at the other end by creating more efficient operational efficiency, and I think that’s really the key component, because especially with B2B dynamics like the wholesale relationship and the transaction, it’s so much more nuanced and complex than you or me going to Amazon, placing a couple things in my cart, clicking it, and then getting a shipment in two days. There is a lot of back and forth, a lot of up-selling of the cart, and relationships that are involved with what the cart will look like later. So, it was really important for us to help operators with translating their manual processes into a digital way, and in the early days, it was a lot about synthesizing all of those processes across all of the best players in the industry and highlighting the best practices and building the technology to accentuate those best practices, and then bringing that value to other players in the market. It’s creating better processes for everyone, but you also have to recognize that not everybody is cookie-cutter, so we do a really careful job of synthesizing that information, and if there is value in the way we build something where it’s going to be valuable for not just one organization but the whole market, we will build it with enough configuration and flexibility to accommodate those different processes. That’s really important for B2B, and that’s how you win the sellers, and I think the resistance that you get, especially in the West with a lot of platforms is with these operators saying, ‘Hey, we do things a certain way, and your cookie-cutter platform doesn’t accommodate that,’ and I think the reason why we’re ramping up so quickly out West is our ability to configure to each operators’ processes.”

Unlike many of the POS systems, Leaf Trade also has managed to make its platform unusually sticky. “My thesis was always that the retail POS – because there would be so much saturation and so many different players – that it [was always] going to be a bloodbath trying to take market share from each other, and there’s so much less defensibility to it,” said Yi. “I’ve seen so many of our clients that have switched among the POS systems, but one of the proud facts of our business today, knock on wood, is that we have experienced zero churn, and that’s because so much of our clients’ processes are embedded into the platform that it’s just very, very difficult. And we provide so much value in terms of time and resources and savings, and now with our business intelligence and analytics to help these clients to optimize revenue, it’s really difficult [for them] to pull out. And that’s really what we’re optimizing for – to create so much value that you need us.”

I asked how much the platform costs to use, how clients derive ROI from it, and how Leaf Trade collects its revenue. “The best part about our platform is that it’s a consumption model,” replied Yi, “so we charge per order and there is no upfront barrier to entry or massive fees or anything like that. We place a high importance on getting your entire team and your entire organization to know this platform in and out, its full capabilities, and getting your process translated over to it early on. And then once you’re on it, you’re literally paying only for the orders that you complete on the platform, not a canceled order or some cart that’s just kind of sitting in limbo, but only the orders that you have successfully delivered to your customers. And the reason why that model is so successful is because at any given time, if our platform is not providing you the value that you expect, you can just stop putting orders in it and you don’t get charged, so it’s truly a win-win dynamic. Even with the most massive MSOs, when these multi-state operators are launching in a brand-new market, they’re operating like they are startups. Sometimes, in a new market that they just launched in, they’ll only process 10 or 12 orders per month. Now, would it be fair for them to [have to] pay the same subscription amount as another operator who’s processing 1000 orders a month? I don’t think so, so [Leaf Trade is] built in a win-win way where we’re incentivized to help our clients to grow, and for us to grow along with them.”

The goal, he added, is “to make sure that there is full transparency and visibility, and to create that fit in the marketplace between the buyer and the seller. As an example, we enable buyers by capturing what their actual demand is on products, so they’ll browse through all the catalogs that are on our site, and any type of actual demand that they put in – they can’t recapture that data – but if we are able to provide that kind of information to any seller, whether they’re a large MSO or a smaller mom-and-pop shop, that’s information that’s really valuable for them to create that fit for their buyers.”

I asked about the copious amounts of data moving through Leaf Trade’s networks, and what they do with it. “I’d be lying to you if I told you I had all the answers in regard to data, but what I can tell you is that what we try to optimize for is creating operational value with it,” said Yi. “So, to give you an example, the cannabis data companies will publish quarterly reports, and they’re like, ‘The highest selling item was 80 percent flower, and then 15 percent vape,’ but that’s information that most people already know. What we’re trying to provide is data that will create operational efficiency and value. For instance, the example that I talked about earlier where buyers can input their actual demand for things, and then, as soon as their in-store inventory dips below a certain threshold, our platform can read that and do an auto replenishment to the quantities they want in their store. That’s leveraging data to create and provide operational value for folks as opposed to just aggregating a bunch of data and publishing it and telling everybody what they already know, especially in such a young market. There’s not enough nuance for that right now.”

East to West

Leaf Trade has employed a growth strategy that by definition led it to establishing its initial footprints in the newer limited-license states. “I took a really big gamble early on to be hyper-focused on the highly regulated newly emerging markets,” said Yi. “Remember, when I was buying from the cultivators here, a lot of times it was the CEO of these massive companies that in the early days was sometimes the one to drive the delivery van and meet with the dispensary, and we’d go to bars and speculate on how the industry was going to evolve, and our big gamble was on these highly regulated states; the only question was timing, but it would eventually be at least half of the entire U.S. market, a massive part of the market.

“And so, our focus was to stay concentrated in these states. dominate all of them, which I think we’ve more or less successfully accomplished,” he continued. “We were able to get in on the ground floor in these states and capture the majority of the market in a very capital-efficient way, and then go into the more established recreational markets out West, which we’re doing now in a very focused way. Arizona, Nevada, and Michigan are markets that we really like, and I tell you that whole story because we’re relatively smart, but you get a bunch of smart people in a room together – I’m talking about all of the MSOs and such – and they have targets on states too, and what they think are going to be strongest.

I asked about growth and whether Leaf Trade could be piling up states but not increasing its market share overall. “There is a lot of organic growth in these newly emerging markets,” said Yi. “I think what’s important is how big a piece of the pie we have in each state, and it’s very large because we’re focused on these limited-supply, newly emerging markets, where it’s often 60 to over 80 percent. That’s pretty big. If you were a technology company that started in 2015, and said, hey, the gold rush is in California, which is what it looked like if you weren’t sitting here in Chicago, and if you were to go out there and capture a sliver of that market, one, five, ten percent, that’s a really good job. But I think in getting 60 to 80 percent here early on, we’re going to be able to ride that growth, and there’s a lot of organic growth happening. Illinois, for example, went from $200 million in sales before it went recreational to a billion dollars in sales last year, and by the end of this year it’s projected to be over $2 billion. And that is not even scratching the surface on the amount of growth here in Illinois, so we’re capturing all that.”

That level of domination is self-supporting. “When new players enter the market in these states, they look at where all the transactions are happening, and they’re like, oh, it’s happening on Leaf Trade, so they’re the ones calling us when they’re setting up a new business,” said Yi, who added that the company’s entry into new states, like Nevada and Arizona, is frequently smoother.

“A lot of times, it’s our MSO clients that are entering those markets by way of acquisition, and that’s definitely a huge competitive advantage for us, because they’re usually not buying a small operation, but a well-run operation that’s got meaningful market share,” he said. “And typically, that’s how we start, and we’ll talk to the folks that have the best and most recognized brands and market share in those states. And that’s actually got a dual-edged benefit for us, because the more we have a really comprehensive KYC (know your customer) process to ensure there’s no gray market activity going on, and when you’re working with the best, those odds are higher. So, that’s really our approach, and partnerships with distribution operations that handle the transactions for a lot of the brands in each market is an important part of what we do too.”

I comment that because Leaf Trade is a SaaS product, it’s really the second “S” that matters, because in that business, where you’re building what needs to be a constantly functional web of communication, every minute of every day something either goes right or it goes wrong. And so, at the end of the day isn’t the business model one of customer service, period?

“Absolutely, because we succeed when our customers succeed, and the more orders they do, the more we succeed,” replied Yi. “And so, every one of our team members and our departments is aligned on that fact. We care, and at any given opportunity we are there to help our clients succeed. And to just wrap up on a point in terms of fulfillment, the last leg in that fulfillment cycle for us was [when] all of the sellers in our platform were like, ‘Gosh, you guys do such a good job helping us to streamline our sales and packaging and accounting and finance; how can you help close the loop on the fulfillment cycle with payments at the end?’ So, we’ve built a fully integrated payment solution where they can utilize different payment gateways, and where, at the point of transaction, they can set up the rules, payment terms customized for each buyer, and on the due date payments will flow from buyer to seller automatically. You can create positive and negative reinforcements based on payment behavior, so if somebody’s not paying you time and time again, you can create rules to block them from certain inventory and stuff like that. So, it’s truly an integrated solution, which I think is really important. Again, we’re technology centered, and that just helps our customers save that much more time, and you can’t do that if you are not enabling your users to use your system as a source of record. If, for example, the invoice was off by a penny, they’re not going to trust the platform to automate payment transactions. So, every step of the way, they need to trust our platform fully, and that’s the value we give our clients.”

As we ended, I had to ask about Leaf Trade’s ultimate destiny, and whether he thinks a company like Amazon is the type that would come for him? “What I’d say is, if the market conditions and the regulatory conditions are right, we certainly want to make it easier for folks to buy versus build, because who wants to come in here and learn all the regulatory stuff I had to figure out,” he replied. He added that it’s just as likely that a payments or logistics company like FedEx would try to “gobble up the vertical.”

“We’re just hyper-focused on creating a lot of value for our customers, and all that stuff will work itself out,” he concluded, noting that the general trends are only positive for Leaf Trade. “What we’re seeing with market participants is a focus on optimizing processes for scale and for revenue. I think when you see a lot of M&A activity happening, what they want is operational consistency across all their states, so you’re seeing a consolidation of the platforms that they use, kind of trimming the fat on technologies that kind of serve a single purpose instead of a broader multipurpose, and really just tightening that up as they grow. And I’m happy to see that Leaf Trade is a big part of that.”

The post Leaf Trade Founder and CEO James Yi on Designing a “True Marketplace Experience” appeared first on Cannabis Business Executive - Cannabis and Marijuana industry news.


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