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The big moneymaker in legal pot might have more to do with data than drugs

Harriet Taylor | CNBC

Eaze fulfills a simple function: Push button, get pot.

The average order is around $10 and cannabis can be delivered in as little as 15 minutes, said Eaze CEO Keith McCarty.

But unlike its customers — marijuana dispensaries — Eaze is a tech company and one of a growing number of cannabis tech start-ups using data to offer products and services to the pot industry.

According to polls, recreational marijuana legalization measures are likely to pass, albeit narrowly, in all five states where they are on the ballot Tuesday: Arizona, California, Maine, Massachusetts and Nevada. Four other states — Montana, North Dakota, Arkansas and Florida — have ballots proposing at least some form of medical marijuana legalization.

Tuesday's vote is set to open up giant new market opportunities over the next several years. Nationally, legal sales of marijuana will reach $7.4 billion this year and surpass $20.6 billion by 2020, with recreational marijuana sales making up about 53 percent of the market, according to Arcview Market Research.

"A lot of the fastest growing cannabis companies are data driven, said McCarty, who helped start workplace social network Yammer, bought by Microsoft in 2012 for $1.2 billion. "There are not very many of them, but as the industry continues to evolve, the data-driven companies will be most successful."

Eaze technology powers on-demand deliveries to 200,000 medical marijuana patients in 100 California cities. Its Uber-like app connects patients with dispensaries and powers deliveries. The company provides data to help retailers predict supply and demand so they know how many delivery drivers they will need at any given time and what products those drivers should carry, said McCarty.

Eaze does not employ the drivers directly — that is left to the dispensaries — but does conduct driver background checks before passing along applicants. A separate app can connect California residents with a doctor for an evaluation.

The start-up launched in California in 2014 to serve medical marijuana patients and can easily adapt its software for so-called adult or recreational use, said McCarty. Because it is a tech platform, it is an easy business to scale up with demand, he said. The company has raised $25 million in venture funding and is among the most well-funded cannabis tech companies.

Eaze has amassed a vast trove of sales data and is putting it to use for its dispensary customers. For example, the most popular product is still dried marijuana plants, though marijuana oil cartridges for vaporizers have taken off this year — growing three fold as a proportion of sales — and are almost as popular as traditional weed in the San Francisco Bay Area, Eaze has found.

Northern Californians prefer the sativa strain (57 percent) and generally buy cannabis at night. Southern Californians prefer the indica strain (61 percent) and spread their buying throughout the day. Insights like these will help Eaze scale its business as the marijuana industry grows.

Women make up a growing share of medical marijuana consumers, and accounted for 27 percent of sales in October, up from 25 percent in January. Over that same time period, sales of medical marijuana to patients ages 25 to 55 have increased, sales to younger users 18 to 25 have declined, and sales to seniors have held steady, Eaze has found.

Data-driven cannabis start-ups are attracting a ton of funding in areas such as subscription e-commerce, compliance, tracking, payments, banking, data analytics, order management and social networking, CB Insights found.

"Cannabis technology will soar, but the federal government will decline to solve the problems around banking, transportation and interstate commerce," said Bradley Tusk, who leads Tusk Ventures, which specializes in advising and investing in start-ups facing tough regulatory environments. Tusk has invested in Eaze.

Eaze is far from alone. The Denver-based MJ Freeway has developed patented seed-to-sale agricultural tracking products that enable marijuana license holders to manage their businesses and comply with regulation. Its clients include cultivators, manufacturers, retailers and state and local government agencies.

The company will unveil a new product at the Marijuana Business Conference & Expo next week. Since launching in 2010, MJ Freeway has amassed 500 billion lines of data on marijuana retail and cultivation — the industry's largest data set.

Clients range from small growers to big multistate, multilocation retail and cultivation operations in the U.S. and Canada.

They also have some government clients. Last year, the company launched Leaf Data Systems, a product the helps the government track and monitor the cannabis industry. Licensed businesses use the software to comply with state and local laws.

In 2015, MJ Freeway had revenues of $3.9 million, and its business has grown 340 percent over the past three years.

The market for MJ Freeway's products could double if marijuana legislation passes in every state where it is on the ballot and states implement robust, well-funded programs, said Jessica Billingsley, chief operating officer.

"Every time a new state or a new market implements a successful program, that has a direct tie and benefit to our company as a technology provider to those operators," said Billingsley.

The California vote on adult use marijuana is particularly important, said Chief Executive Officer Amy Poinsett. It will put a regulatory framework around a very large, unregulated market, she said.

The Golden State is already the nation's largest marijuana producer and consumer and if California goes legal, the rest of the country may follow.

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Hypur is a financial services company that provides software to help companies in cash-intensive businesses manage money and comply with government regulations. It also helps customers find banks that will accept their cash, a huge problem for many marijuana businesses given that federal law still prohibits selling marijuana and banking is federally regulated.

The company works with a couple of banks in each state that are willing to accept marijuana money, and ensures that all transactions are compliant with state laws.

About half of Hypur's business comes from the marijuana industry — other clients are payday lenders, off-track betting and guns sellers — and with the expected growth of marijuana legalization, this could grow to make up 80 percent of its business, said Michael J. Sinnwell Jr., chief operating officer at Hypur.

"You are going to need systems to monitor everything that is going on to make sure that these transactions are permissible, and that is where technology starts to come into play, to make sure it is being handled correctly," said Sinnwell.

Regardless of how America votes, the new programs could take months, even years to roll out. Don't expect change to happen overnight, all of these business owners said.

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