John L. and Helen Kellogg Professor of Managerial Economics & Decision Sciences; Director of the Center for Mathematical Studies in Economics & Management; Professor of Weinberg Department of Economics (courtesy)
As more and more states move toward varying levels of cannabis legalization, the industry has grown by leaps and bounds. One particular area of focus for both companies in the industry and regulators is ensuring that everyone throughout the supply chain—from growers to distributors to retailers—is following oversight and compliance laws.
This is no small task: such laws differ by location and are often evolving as states and municipalities contend with incremental legalization rollouts. Complicating this new landscape is the fact that many of the regulators are themselves new to the game.
So what do companies and regulators have to consider in this burgeoning industry? Nicola Persico, a professor of managerial economics and decision sciences at the Kellogg School, recently sat down with Jessica Billingsley to discuss.
Billingsley’s tech firm, Akerna, has become the cannabis industry’s largest software company by positioning itself to serve both cannabis businesses and state regulators with two distinct services.
Billingsley developed MJ Platform—a cloud-based, seed-to-sale cannabis compliance software for marijuana and hemp businesses, including retail, delivery, wholesale, cultivation, and manufacturing—in Colorado in 2010 when she was unable to find suitable software to run the first licensed medical-cannabis operation in the state. Over the last decade, MJ Platform has grown into a monitoring and product-tracking system for businesses, offering product-quality control, supply-chain monitoring, and inventory-support technology. Akerna also operates Leaf Data Systems, a technology solution for government agencies charged with finding an efficient and effective way to monitor compliance in the cannabis industry.
Here, Persico and Billingsley discuss the state of play in cannabis, how her company is navigating the patchwork of state regulations, and the importance of trust in scaling the industry.
This conversation has been edited for length and clarity.
Persico: Your business is uniquely situated in the industry, catering to both regulators and cannabis operators, including growers, distributors, and dispensaries. Do you find that there is a tension between serving both groups? How do you ensure that you are giving regulators what they need, while still protecting the privacy of growers?
Billingsley: I think our efforts to ensure these are separate product lines help to diffuse any potential tension. So, for instance, for our operator clients who are contracted with us through MJ Platform, we only transmit compliance information to the state agency program. So, all of their business information is not also viewable by the state.
But there is also an advantage. Some states really love that we have both of these products and can serve the entire supply chain. And we have a couple of state regulatory customers, both Pennsylvania and Utah, that mandate that all of the operators use MJ Platform, so that they can ensure the integrity of the supply chain in their states.
Persico: Is an important part of the novelty of your business tools the ability to trace products?
Billingsley: Yes, we track more data points than anyone else across the supply chain. We invented the concept of seed-to-sale tracking.
For instance, if you were holding a product, say a piece of candy, that was cannabis-infused and tracked with our technology, you would be able to know the farm in which the plants were grown, when to the day they were harvested, at what location, when they were sent to a processing facility and extracted into the essential extract, when that was infused into your product, when that product was shipped to a retail facility, and on what day, at what time, at what location, and to whom it was sold.
It’s a level of granularity and visibility that is applicable to anything we put on, or into, our bodies. There is a movement among consumers for greater transparency in our products, and with the software that we developed—initially for the regulated industry of cannabis—we’re already beginning to see much broader applications.
Persico: How do you even track the product? How do you have so many touch points? How do you manage that across different businesses as a supply chain?
While Akerna has built its business on developing ongoing B2G relationships with cannabis regulators, other companies in fledgling industries have taken different approaches to regulation, with varying success. Nicola Persico recently discussed one such company’s attempt to outpace Boston’s public parking regulators. Read about it here.
Billingsley: That’s core to our technology and why we were able to file patents on it. Architecturally, we built and designed something with which, through use of different tagging and scanning devices, we can track and keep a chain of custody attached to the products as they move through the system. And we can do so without a ton of lift or effort on the operators’ side.
And what’s great is, in cannabis, that’s actually a compliance requirement.
Persico: Being able to supply state governments is a feather in your company’s cap, because it indicates that governments view your company as a trustworthy and credible partner. What made these states comfortable with you as a compliance agent?
Billingsley: We started with the B2B product first. But our commitment, in that product, was to lay the groundwork for B2G, building the backbone upon which the regulated industry runs: enabling regulation, enabling compliance, enabling taxation. It was a natural evolution for us in our business to then offer an aggregate oversight product to regulators.
That has allowed us to have a seat at the table with regulators in new states.
Persico: So you saw the opportunity to shape regulation in an industry in which states were still figuring out how to effectively implement compliance.
Do you think that the fact that this is a young industry, and one that regulators are still establishing how to approach, has given you a competitive advantage as the company evolved? Did having regulators using your product help with adoption by B2B businesses
Billingsley: I go back and forth on this, to be honest with you.
Certainly compliance—helping our clients to meet all of those different regulations in different markets—is very central, critical, and core to our business. That has been an economic driver for us.
But we are seeing more and more businesses that have no regulatory requirement to use our software choosing to contract with us because the way we handle supply chain, track data, and provide reporting and fundamentals on metrics and accountability are so valuable and appealing to a business. For instance, a very quickly growing segment of our business is hemp and CBD. These products are not regulated in the same way that cannabis is, and yet we’re contracting with many, many hemp and CBD operators because they like the business tools we’ve built.
I think the fact that we are literally built to help the industry be compliant puts us in a unique position with regulators in that we appeal to them, we help them do their jobs.
— Jessica Billingsley
Persico: From a competition standpoint, do you feel like you’re protected from large competitors by the fact that this is an area where regulation is evolving and maybe big players are a little bit uncertain about whether they want to enter that area?
Billingsley: I think that was certainly the case a few years ago as we were inventing and evolving our product. Certainly, there’s some aspect of the federal–state conflict that impacts how, for example, larger software companies offering enterprise-resource-planning services would interact with the market.
But today, it is the 10 years of building our moat in terms of both our tech IP as well as our market share that protects us. Not only do we have the domain and subject-matter expertise, but we have a leading market share and we’ve built a tech platform and ecosystem of real scale and value.
So, what was maybe a bigger risk to us 5 or 6 years ago—that federal legalization might happen overnight and the big companies would swoop in—is less of a threat now. Today, we’re in a position that those companies will choose to partner or work with us in some way.
Persico: I speak with a number of entrepreneurs who have the entrepreneurial spirit, the funding, the energy, and everything, but they struggle to understand how to interface with regulators. And sometimes this mistake can be fatal.
But you did it right. You succeeded. Was that intuitive for you? Was it hard, or did you just understand it instinctively and go for it?
Billingsley: Our initial approach was different. We weren’t solving a problem that regulators then adopted. We quite literally invented our product to help regulators.
I think the fact that we are literally built to help the industry be compliant puts us in a unique position with regulators in that we appeal to them, we help them do their jobs. They can pass legislation knowing that the tech tools exist to ensure that they’re passing legislation so that patients can get medicine that helps them, for instance.
Persico: Usually, regulation aims to serve a social goal. In the cannabis industry, the social goals are transparency and accountability. Complying with regulation actually helps the industry retain a social license to operate. Your company built into its DNA an understanding that it wants to help regulators do their job. But in the process, you’re also creating products that benefit society and help the industry retain its social license to operate.
Billingsley: But it’s definitely beneficial to individual operators as well.
I mean the operators want to provide this level of transparency and accountability to their end customers, as well as to participate in demonstrating to regulators that they are running a compliant and legal operation.
Persico: That makes total sense. As you were speaking about this, what came to my mind was the recent problems with e-cigarettes, and the fact that some of the substances in them are harmful to people. The issue with these is that, if you are a consumer—or even a retailer—you may not have a reliable way of knowing what is in the product, who made it, or where it originated.
I imagine that something like your product could help ameliorate this problem.
Billingsley: I’m delighted you made that connection, because we do. We offer a direct solution to the vaping issue, the vaping crisis, by being able to use our technology to track those additives natively. So, rather than banning the products and pushing people back to the black market, the regulators should just require that the additives be tracked, which we can do, and which provides visibility to the end consumer. So, what additives or ingredients are in this product, and is this a legitimate product from the regulated industry rather than the illicit market?
Persico: So, to me as a consumer, the goal would be that when I buy one of these e-liquid containers, it would have a little label that I could use my smartphone to check, and then this would connect to your website and say, “Yeah, that’s a legitimate product.”
You’re positioning your company to be a stabilizing influence on the industry and a compliance service that is trusted by state governments. And that puts you in a unique position that’s maybe a little bit similar to an auditing company like Ernst and Young, where you’re providing services that are, in a certain sense, legally recognized. How do you build this trust with regulators and maintain the trust with the operators?
Billingsley: Again, it comes down to transparency and accountability. If suppliers are all endeavoring to do the right thing and produce products for which they’re not afraid to say what’s in them or how they’re produced, and they make that information visible both to the regulators and to the consumers, then we’re building a better industry together.
What’s really wonderful and remarkable about the cannabis industry in particular, unlike maybe some traditional industries that are set in their ways—meaning the transparency and accountability lift might be a little bit heavier for them—the cannabis industry is over here saying, “Hey, please expose everything because product safety and compliance are a priority.”