Underweight Deal: The Amazon.com of Hemp and CBD

Key Stats:

Summary

Hempazon has been selected as an “Underweight Deal” by KingsCrowd. This distinction is reserved for deals not selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com. 

Problem

The 2018 Farm Bill made huge strides toward the full legalization of cannabis (marijuana) when it legalized the production and sale of hemp and its extracts (including CBD). Overnight, the hemp and CBD market was created, and it has grown massively over the last two years. The hemp-derived CBD market is projected to grow to $23.7 billion in the US alone by 2023. 

CBD is most popular among 26-35 year old consumers, and a full 80% of those who purchase CBD products use them at least once per week. The average consumer spends between $20 and $80 per month on CBD products, a $600 year-long value for just one customer. 

While some argue that proliferation of hemp and CBD products are one step short of widespread marijuana use, many agree that CBD benefits those who struggle with a number of chronic health conditions. While formal research studying the effects of CBD on anxiety and depression is ongoing, many CBD users report that CBD reduces their symptoms. Furthermore, CBD’s effectiveness in treating epilepsy and seizures has been proven, and some studies have indicated that CBD is also an effective sleep aid.  

Despite the large opportunity in hemp and CBD sales, companies have struggled to capitalize on it at a large scale. The CBD market is fractured, and many manufacturers struggle to distribute their products. Though not for lack of trying, the U.S. still lacks a market-leading hemp and CBD platform.   

Solution

Hempazon aims to become the leading hemp and CBD platform for managing online sales of hemp and CBD products, as well as product repackaging into subscription services, distribution, delivery, in-house product development, partnerships, and more. Ultimately, Hempazon seeks to become the household name in hemp and CBD sales such that returning to Hempazon for one’s latest order is as natural as returning to Amazon. 

At this time, Hempazon is a bare-bones e-commerce site for hemp and CBD products hosted on Shopify. Hempazon also owns a large number of domain names related to marijuana, hemp, and CBD sales and distribution (420SameDay.com, WeedWaiter.com, and BudsandBeyond.com for example). The company intends to activate those hundreds of domain names to drive search engine optimization and capture market share from casual internet searchers across the U.S. 

Hempazon also boasts that it has collected more than two million followers across social media pages, groups, and profiles. It plans to leverage this audience to spur the growth of Hempazon and the Hempazon Shopping Network. 

Team

Hempazon’s Founder and President is Eli Tobias, who describes himself as a serial entrepreneur, branding fanatic, and social media guru. Eli has more than 25 years of experience in branding, marketing, and promotion for night clubs and events, tattoos, and cannabis. Eli has spent almost ten years collecting hemp- and cannabis-related domain names toward the eventual launch of Hempazon. 

Peter Nagy is Hempazon’s Project Manager and simultaneously serves as the President of Create SFN, a marketing and media publishing company. David Tobias, founder of several hemp- and cannabis-related companies, serves as an advisor to Hempazon. 

It seems that none of the Hempazon team members currently work full-time on this business. 

Growth Plan

Hempazon plans to grow via intensive marketing efforts primarily focused on social media and community management, search engine optimization and display ads via the network of owned domain names, trade shows and expos, influencer/partner marketing, and more. 

Hempazon acknowledges that many digital marketing platforms (paid advertisements, for example) do not currently accept cannabis-related ad placements and indicates that hands-on community-building efforts on social media platforms will replace more scalable paid ad spend.

Hempazon projects to garner $425,000 in revenues in 2020, growing to $1.2 million in 2021 and $2.3 million in 2022. The company still expects to be operating at a loss for these introductory years (losing $330k, $326k, and $251k per respective year) but plans to achieve profitability in 2024 with revenue of $3 million and net profit of $212k. 

The Rating: Underweight

After careful consideration of the company’s areas of opportunity and seeming weaknesses, Hempazon has been ranked as an Underweight deal. Investors should consider several key risks when evaluating this deal: 

• Unclear position within the market: Hempazon argues that no current market leaders exist in e-commerce, distribution, and delivery of hemp and CBD products, but that statement is easily contested. While Hempazon’s founders are correct that hemp and CBD manufacturers have faced a challenging legal environment when attempting to sell their products online, it’s likely that legality issues will be resolved in the next several years. As soon as it is fully legal to sell hemp and CBD products online, there’s no reason why an e-commerce behemoth like Amazon wouldn’t immediately begin selling hemp and CBD products, which would seriously handicap any e-commerce competitor. On the distribution and delivery side, companies like Eaze, Weedmaps, and several more have been working (and struggling) in this space for some time. It simply isn’t accurate to argue that there are no current competitors in hemp and CBD distribution and delivery.   

• Inherent risks of a pre-revenue business: Hempazon was incorporated in 2019 and has not yet reported revenue. While Hempazon’s leaders report that the business has been in the works for almost 10 years, they seem to be referring to the collection of domain names that Hempazon has purchased, not to any concrete company-building. It is inherently risky to invest in a startup that has not yet demonstrated product-market fit through revenue generation, and perhaps riskier for a startup operating in a legally tricky space with incumbent competitors.  

• Limited potential for scale: Hempazon acknowledges the difficulties of traditional marketing tactics in spreading the word about Hempazon, including the fact that traditional paid social advertisements typically limit mention of hemp or CBD. Hempazon states that its solution to this issue is to conduct social media marketing in a hands-on way, and it expects that it will be necessary to “aggressively expand offices, computers, and workforce” to conduct adequate social media and other marketing activities. Unfortunately, a hands-on approach is the antithesis of a scalable approach. That Hempazon projects making substantial investments in human capital in order to grow revenue doesn’t bode well for profit margin or ultimate return to investors. 

Hempazon is a pre-revenue company that faces significant challenges in overtaking existing market incumbents to operate in an industry fraught with changing regulations. While Hempazon/the Hempazon Shopping Network managers are ambitious in envisioning a hemp and CBD competitor to Amazon and the Home Shopping Network, at this time those goals seem distant. Therefore, this deal is Underweight.