Drizly and Eaze are growing fast in highly regulated markets

In the last decade, we’ve seen “on-demand” extend into nearly every facet of our lives. First, it was Uber and Postmates and Grubhub, allowing us to order rides, groceries, and takeout anytime we wanted. Now, you can hire a dog walker, find local movers, and get an IV drip for your hangover—all from the comfort of your own home. We’ve really reached peak on-demand.

You can even get your favorite alcohol and cannabis products delivered straight to your door. Alcohol and cannabis are two of the most regulated products on the market, and pairing that with on-demand—itself a new category facing potential regulation—may seem like a crazy idea for a startup.

Cannabis delivery company Eaze and alcohol eCommerce platform Drizly are entering these markets anyway, with lots of success. Eaze is dominating the emerging California cannabis market with over 120,000 deliveries per month, and Drizly has expanded into more than 40 markets across 25 different states, all while navigating complicated regulations.

By using technology to facilitate an existing market, partnering with strong and knowledgeable people, and building a business model that makes it easy for everyone to be successful, Eaze and Drizly have been able to grow their brands into some of the most popular platforms in each space.

Any business that faces strict laws, whether on the import and process of regulated products like food, or distribution of controlled goods like vaping pens or hunting supplies, can learn from how these two eCommerce companies found success.

Starting up

Founded in 2014 in San Francisco, Eaze is fast becoming one of the go-to cannabis technology companies in the state of California. With funding from venture capital firms like DCM Ventures and Snoop Dogg’s Casa Verde Capital, Eaze has raised $51.5 million dollars in six funding rounds.

Their latest funding comes from Bailey Venture Partners in September 2017 and will likely go to their marketing spend, which Eaze has focused a lot of their capital on in the past.

Example products from the Eaze marketplace.

Starting out as EazeMD, with a focus on facilitating the safe delivery of cannabis products for eligible patients, Eaze uses their technology to ensure that everyone involved is compliant with current regulations. Their plan was to bring the on-demand economy to the cannabis market.

The medical and recreational cannabis market is  one of the fastest growing in the United States with revenue projected to hit $57 billion dollars in the next ten years, and Eaze is making sure they’re a part of it.

Alcohol eCommerce platform Drizly, founded in Boston in 2012, has thrown their hat into another highly regulated but fast-growing market. Acting as an intermediary in over 70 cities in the US and Canada, Drizly is partnering with retail stores to make alcohol delivery easy. 

After raising $35 million dollars over six rounds of funding, Drizly used their most recent $17 million from Polaris Partners to boost their hiring and expand its service from 23 to 30 metropolitan areas. They’ll also be focusing a large amount of capital on their marketing spend.

Example products from the Drizly marketplace.

Drizly is going after an existing billion-dollar market with long-standing regulations and laws that define how alcohol can be purchased.

There are currently three separate entities involved in the distribution of alcohol, the producer or importer, the distributor, and the retailer. The producers can only sell their products wholesale  to distributors and distributors will then sell these products to retailers. Retailers, in turn, sell directly to the customer. Drizly’s platform bridges those gaps and make a space for a delivery service in that existing three-tier system.

The laws surrounding each tier of the system vary from state to state and across municipalities (e.g., in some states, producers are allowed to sell only a limited amount of alcohol directly to consumers). Drizly has to navigate a labyrinthine set of laws and existing regulations  on the federal, state, and local level.

Support the business with data and technology

Both Eaze and Drizly are growing in their respective markets by using technology and data to support their decisions. In the flourishing cannabis market, Eaze is leading the charge by collecting data about their customers and using it to make informed decisions. Data collection is also built into Eaze and Drizly’s mobile apps, which use sophisticated technology to help identify customers.

Developing technology that helps their business navigate the legal hurdles associated with the cannabis and alcohol markets is another way that Eaze and Drizly help themselves become more successful. As the products that are being sold through each app are highly regulated and require ID and payment verification, both companies have this function built into their apps directly.

Eaze’s ID verification system makes it easier for dispensaries and delivery drivers to conduct legitimate transactions. Drivers are able to access customer information directly through the app on any delivery and ensure that the individual receiving the product is the same as the one who purchased it.

Technological solutions to regulatory hurdles and requirements are common in what CB Insights calls the Vice Tech Market. As regulations change, and companies can start entering into previously taboo markets, we’ll continue to see growth in technology that supports these markets.

Vice Tech Market map via CB Insights.

Drizly uses a proprietary ID verification mobile app called Mident to scan the ID of every customer they deliver to. This not only makes it easier for Drizly’s retail providers to maintain compliance, it also gives drivers an easy-to-use verification method while out for delivery.

The technology and data these companies use ensures the safety of their partners and their customers. Eaze drivers go through a strict identity check on every delivery and have the right to refuse delivery if the ID verification does not match up. Whenever a delivery is made, the customer’s identity and location are saved within the app as well. Dispensary managers  know the GPS location of their drivers at all times during their shifts.

Data can also be used to help shape local laws to benefit both the company and the industry as a whole. As Eaze’s Chief Law Officer, Michael Brandis, told Law.com, “We have the benefit of a lot of data, so we’ve taken that [anonymized customer] data and we’ve informed lawmakers and regulators about consumer use of cannabis. And so we’ve been able to inform global decision makers as to what smart regulations should look like in order to have a safe cannabis industry in California.”

Use strategic partnerships to build a network

Working in a highly regulated space requires forethought and planning to ensure that companies can be successful as well as play by the rules. Both Eaze and Drizly figured out that working with strong, knowledgeable partners was the best way to grow their business network and remain compliant with local laws and regulations.

Any eCommerce company entering a restricted market will need to know how regulations affect their business at the federal, state, and local level.

The cannabis business is growing fast and regulations change often. With California legalizing the recreational use of cannabis in January 2018, new consumers and retail providers are flooding the market. To stay ahead of those changes, Eaze employs a compliance team that includes multiple lawyers. 

The alcohol business is much older but equally as difficult to navigate successfully. Drizly regularly consults with a team of lawyers when expanding into a new state or city. Any new eCommerce company entering these markets will need to know how regulations affect their business at the federal, state, and local level.

Both businesses require a significant amount of specific knowledge to operate effectively.  Eaze and Drizly each seek out the knowledge of their partners to ensure that everyone involved is kept up to date and compliant with any new or changing laws. But the sharing of knowledge is not a one-way street, Eaze and Drizly also publish their own learnings through Eaze Insights and Drizly’s Data Distillery.

Drizly has an exclusive relationship with the Wine & Spirits Wholesalers of America trade group, who were an early investor in their platform. The Wine & Spirits Wholesalers of America are an established part of the distributor arm of the three-tier system and they help Drizly navigate the rules and regulations that are currently in place. Their partnership also gives Drizly access to a large catalog of products that WSWA helps distribute.

That partnership with an existing network, and the availability of different products has helped Drizly see consistent growth over the past five years.

Referring domains via Ahrefs.

The ability to launch their marketplace with a fully stocked catalog helps Drizly get a leg up on other eCommerce platforms, including Amazon, who do not have similar partnerships.

Eaze goes about these kinds of partnerships in a different way, working to educate their dispensary and producer partners on compliance best practices as the market expands. By nurturing an informed network, Eaze is able to offer their service without the fear of backlash. Working with a troublesome or out-of-compliance partner could land everyone involved in hot water.

One way they share their knowledge is through the Eaze Insights series. They collect anonymous data on all app users and publish findings on the Eaze blog. This helps new dispensaries, products–and Eaze–in planning for expansion in the future. 

Market growth insights via the 2017 Cannabis report.

By helping their partners be successful, Eaze is building a strong network of companies that propel the cannabis business forward in the right direction. And as noted above, their data helps inform the creation of new local laws as the industry and its regulations evolve.

Working at the margins of an industry

Eaze and Drizly both act as eCommerce tech companies with a focus on the delivery of highly regulated goods. Neither company interacts with the physical products in any way, instead opting to be conduits between producer and retail location.

They’ve built platforms to facilitate the delivery of either cannabis- or alcohol-related products and make the purchase of these items easier for the customer. Bypassing the production and retail sale of these products helps Eaze and Drizly focus on providing a better customer experience, and informs how each company makes their profit.

Eaze is not alone in this either; they’re part of a large wave of private cannabis companies focusing on this new market.

Investment in private cannabis companies via CBInsights.

These cannabis companies focus on everything from delivery to compliance to agriculture, each one investing lots of capital in a specific corner of the market.

Eaze partners with local dispensaries to handle the delivery of products purchased through their platform. This not only gives them access to a larger network of established retail locations, it helps inform their pricing model, which is based on a service fee added to the purchase of products through their app.

Drizly does the same but at a somewhat higher level. The ID verification platform and marketplace that Drizly has created integrates with over 75 point-of-sale platforms, which is important for their overall business model. As Drizly acts outside the existing three-tier system for alcohol distribution, their ability to integrate with as many platforms as possible makes it easier to expand into different markets. This uniquely positions Drizly as a fourth tier—they’re not a producer, distributor, or retailer of alcohol. They’re a facilitator.

Key takeaways

Eaze and Drizly are both seeing excellent growth in markets that are highly regulated and notoriously difficult to navigate. Here are a few key takeaways that can help your eCommerce business be successful in navigating regulations in your market.

► Know market regulations inside and out

In a highly regulated market, it’s important to understand the laws that affect your business at the federal, state, and local level. Building a successful business model will require rigorous attention to compliance for both your company and any partners involved. Always keep track and reevaluate how these regulations impact the growth of your company.

► Focus on customer experience

Making the purchase of cannabis, alcohol, imported foods, hunting equipment, etc., can be an arduous process. Giving customers an easy and streamlined way to make these purchases will help your business grow and build a community that is more loyal to your brand.

► Work with knowledgeable partners

Being successful in these markets is dependent on your ability to steer a number of complex systems. Whether you’re just getting started, or have an established brand presence, it’s important to work with other companies that know how the market operates. Sharing knowledge with partners helps the entire network be more successful.

► Build compliant technologies

Use technology to help your company maintain best practices and stay compliant. Regulations may change over time and your business model will have to change along with them. Make sure that any technology your company uses helps support both your company and any users who interact with it.

► Make data-driven decisions

Know how regulations affect your business, your customers, and your technology. Collecting information on customer interactions is a great way to grow your company in the right direction. It also keeps your business safe, as all interactions can be referenced, if needed, to maintain compliance.

Sam Hollis
Sam Hollis is a writer at Jilt. When he's not writing about high growth eCommerce startups, he likes to play the piano and cook. See more his writing at his Contently page.

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