Eaze and Wayv founder explains how to raise money for cannabis startups

Keith McCarty could have retired after Microsoft bought Yammer. Instead, he founded Eaze to address cannabis delivery.

He lead the company through its B round and then stepped back, but last year, he founded Wayv, a new cannabis startup to address an even more significant challenge for the industry: supply chain logistics. So far, it’s raised $5 million and is currently seeking its Series A. Fundraising is hard for any entrepreneur, but McCarty’s experience sets him apart from most cannabis industry founders.

The company is now the first complete payment solution in the cannabis industry, allowing money to travel throughout the ecosystem in the fastest, safest way while remaining compliant with all of California’s regulations.

We spoke at length about this ability and along the way, chatted about the cannabis startup landscape.

McCarty has been in the industry for about five years, founding Eaze in 2014 and later leaving after raising a $13 million B round. At the time, startups generally didn’t seek venture funding and McCarty helped the company become one of the first to do so. Now founder and CEO of a new cannabis startup, he’s at it again.

Recreational cannabis is legal in 11 states and medical use is permitted in 33 states, but fundraising is particularly difficult because the substance remains illegal at the federal level, said McCarty. Prohibition restricts the number of investors along with the type of investment vehicles available, which means investors who are able to participate must abide by different regulations.

“You’re not going to be able to walk into your bank and get a small business loan from your bank for a cannabis [company],” McCarty said, and venture capital isn’t more accessible, as restrictions prevent some VCs in participating in funding rounds. Some LPs — including funds secured by universities — prevent VC funds from investing in cannabis startups.

“Choose your investors wisely,” McCarty said a few months back at TechCrunch Disrupt SF. He advised entrepreneurs to look at founder-centric investors as, in his view, those are the investors that understand what it’s like to run a company. They need to be able to relate to the pressures of dealing with the regulation and friction in the cannabis space.

McCarty did just this when raising Wayv’s $5 million seed round, turning to former PayPayl executive and Yammer founder and CEO, David Sacks. The two worked together before. McCarty was Sack’s third employee hired at Yammer and stayed with the company through its exit to Microsoft, leaving a year later. Wayv’s seed round was the first investment by Sack’s Craft Venture’s in the cannabis technology sector.

Recent market corrections have added pressure to cannabis companies, too.

McCarty points to Canada as an example. Before recreational use was legal there, there was pent-up demand for cannabis investments, but not a lot of opportunities for typical investors. When companies went public in Canada, he said he feels valuations became inflated until due diligence started correcting the values.

Now that the public markets are correcting, investors throughout are looking at cannabis startups with even more scrutiny. Uncertainty remains, though McCarty says he doesn’t look at this as a bad thing, noting that startup entrepreneurs usually have to weed out investors who aren’t a good fit. I’m not sure if that pun was intended.

In McCarty’s view, Eaze, Wayv and others continue to raise in this climate for several reasons — investors have confidence in established teams, proven methods, and distribution avenues. Taken together, as in other industries, these core tenets identify which companies are worth the trouble.

To scale a cannabis startup, he advises other founders to keep a pulse on the market opportunities and their company’s infrastructure. A cannabis company has to remain focused on doing things exceptionally well, he says, but it must also keep an eye on what’s happening in other states where regulations could be changing. At Wayv they’re building the company in a way that allows them to operate in California and “flip a switch” when opportunities open in other states, McCarty said.

Cannabis aside, he advises founders to build the best solution they can by addressing market fit and keeping tabs on when expansion makes sense. Even though other markets might help with revenue, expanding too fast could slow a company down, as added complexities can cause backstopping.

Instead, McCarty said he prefers to go deep into a market to ensure they’re the dominant player while simultaneously building a framework for activating new geographies. This is what he did at Eaze and what he says they’re doing inside Wayv, too.