How Flowhub Reached Just Under 500 Customers with $8K Average Contract Value in the Cannabis POS Market (Interview with Founder and CEO Kyle Sherman)

Introduction to Kyle Sherman and Flowhub

Nathan Latka

00:01Hello, everybody. My guest today is Kyle Sherman. He's the founder and CEO of Flowhub and serves on the board of... And director... Directors as chairman. A legalization advocate and entrepreneur, Kyle is finding ways to use technology to help drive cannabis legalization forward responsibly in The United States. Kyle, are you ready to take us to the top?

Kyle Sherman

00:18I'm ready to do it. Let's go.

Company Culture and Cannabis Brainstorming

Nathan Latka

00:20So I have to start with something that's gonna make you cringe. Know, everyone thinks when you're doing like a cannabis interview or something, everyone's probably high on the interview. I just wanna say no smoking on my end. We're good to go. We're gonna talk a lot about the industry and what you're doing to legalize.

Kyle Sherman

00:33Hey, you know what? I'm loaded on caffeine this morning.

Nathan Latka

00:35Do people always make that assumption? They just assume you're always smoking or high?

Kyle Sherman

00:39You know what's funny? Early on, CNN Money did a story that talked about us consuming edibles during brainstorming sessions. And you know what, as a team, sometimes we do. We'll responsibly consume as a group and certain departments will sit down and talk and brainstorm things at five o'clock. It's kind of our version of the bar carts. But no, during the day, we're productive professionals right now. I mean, if I was stoned, I think I'd probably be on

01:04a couch.

Nathan Latka

01:04I was just saying, I have two kinds of friends, the kinds of friends that, they get tired and they pass out. Other kind of friends, they are most creative with a responsible kind of edible in their system or something like that. So let's jump into Flowhub. What do you guys do and how do you make money?

What Flowhub Does and How It Makes Money

Kyle Sherman

01:21Yeah, sure. So we created basically a point of sale compliance platform for cannabis dispensaries, and we're a SaaS platform. That means we charge monthly for our services. And yeah, that's pretty much how we make money today. We're getting into payments too, which is really exciting. So when you really look at us holistically, we're a point of sale service that offers payment solutions for this industry.

Average Contract Value and Pricing

Nathan Latka

01:41What's the customer pay on average per month?

Kyle Sherman

01:45Know, look, our ACV a year is around $8,000 today. Some go as high as $45,000 It kind of depends on the size of the dispensary, but you could break that down. We typically do a minimum of a twelve month contract. So we look at these contracts in kind of a twelve month view.

Nathan Latka

02:01But $8,000 ACV is a fair average?

Kyle Sherman

02:04Yeah, I would say for our single locations, it's probably around $8,000 today. It grows every year, obviously.

HP Hardware Partnership

Nathan Latka

02:10Are you, do you have a partner for the, it sounds like there's a point to point of sale system. Are you building the hardware yourself or you have a partner for that?

Kyle Sherman

02:16No. So we partnered with HP earlier this year to provide an all in one solution. So these systems ship from HP over to our customers with our platform installed on it. However, you can install Flowhub on a Mac, a PC, a tablet, any type of hardware, hardware agnostic truly. But for those who just want an all in one out of the box solution, they're opening their dispensary, you can get that from HP and it works really

02:41well. It's a very cool system.

Nathan Latka

02:42You're subsidizing that for them? You're paying for it for them, or they're having to pay extra for that?

Kyle Sherman

02:46No, no, they're buying that.

Nathan Latka

02:48Okay. And what's that cost, the all in one HP solution?

Kyle Sherman

02:51All in one HP solution, I think they get the... It kind of depends on all of the hardware options they buy in what state they're in, because various states need various hardware packages. Some states have to print labels, others you don't. So I wanna say it's anywhere between like $2,000 and $3,500 for an entire setup that includes all your printers and everything, something along those lines.

Company Timeline and Total Funding Raised

Nathan Latka

03:09And how many customers, well, actually put this on a timeline for me first. So when did you launch the company? What year?

Kyle Sherman

03:14January 2015, we founded the company, we raised some money, and then really started cranking in April.

Nathan Latka

03:19Okay, and so how much have you raised to date?

Kyle Sherman

03:22About $8,000,000

Investors and Fundraising in the Cannabis Space

Nathan Latka

03:238,000,000. And was this through like traditional VCs, or did you have to get creative considering the industry?

Kyle Sherman

03:29No, great question. Interestingly, there's actually some VCs that are specific to the space. And so early on, our seed round was led by a group called Poseidon out of San Francisco, and they're kind of one of the premier early stage hedge funds. I guess I would consider more of a VC actually rather than a hedge fund, but they were early stage kind of first to market in the space. And so they've been very supportive. After that,

03:51Phyto Partners, Green Lion Partners, folks like that JM10, Altitude. These are kind of groups that are really focused on the space, West Coast and East Coast. And then of course, filling it with angels, mentors of mine, folks like that, friends

Nathan Latka

03:51Did and

04:05you pitch Brad and David Cullen?

Kyle Sherman

04:07No.

Nathan Latka

04:08You didn't beat him?

04:09They're big, obviously, there in Denver. I was curious if they got in with you.

Kyle Sherman

04:14Yeah. What group are they with?

Nathan Latka

04:16Brad Feld and David Cohen. David Cohen founded Techstars.

Kyle Sherman

04:19Know what's funny? Oh, no. Of course. No, no, no. Actually, I talked to Ryan McIntyre, who really are... So Ryan's Brad's partner, but-

Nathan Latka

04:19At Foundry. Interesting.

Kyle Sherman

04:19At that time, at Foundry, early on at Foundry, I think they were really curious in the space, but you know, they were looking at it going, Well, we can't invest as a fund. Maybe we can do it individually. But that's kind of the problem with our industry, right? People are kind

04:41of on the fringe. Can we do it as a fund? Do we have do it individually?

04:43But I

04:44think they were kind of debating that internally early on.

Nathan Latka

04:46Got it. Okay, so launch 2015, got cranking. You got cranking in April this year or April 2015?

Kyle Sherman

04:52April 2015.

Customer Count and Geographic Reach

Nathan Latka

04:53Okay, yeah, okay, I was about to say. And then how many customers have you scaled to over the past three years?

Kyle Sherman

04:57Gosh, we're probably about just under 500 at this point.

Nathan Latka

05:03And all across, it's only US based or all around the world?

Kyle Sherman

05:06All US based. So we're in 10 states today.

Revenue Growth Year Over Year

Nathan Latka

05:09Okay, very good. Now, if I take 500 times that ACV you gave me earlier, it puts you at about $300,000 per month in revenue. Is that fairly accurate?

Kyle Sherman

05:16Yeah, we're right around 300 ks.

Nathan Latka

05:17And what's growth look like? So taking me back a year, what were you doing in August 2017?

Kyle Sherman

05:22August 2017, we were at about $1,600,000 run rate, I wanna

Nathan Latka

05:30Okay, so that's about $120,000 a month. So healthy, more than three X year over year, that's pretty healthy.

Kyle Sherman

05:36Oh, it's great. I mean, in the year before that, were doing 180 ks. We're growing quick.

Customer Segments: Consolidators vs. Boutiques

Nathan Latka

05:41Is the growth coming from? Is it literally just adding new dispensaries, or is it expanding the revenue from dispensaries you already had?

Kyle Sherman

05:48Both, you know? So what we did early on is we kind of started at the top down. We said, Hey, let's go serve these consolidators, the folks who are growing really rapidly, maybe they have six plus locations. Now they're over 20, for example, right, a lot of these customers of ours. And so those guys are kind of our expansion opportunities, right? But when you look at the industry holistically, there's a lot of boutique stores popping up

06:08everywhere. We can serve that part of the market as well. So we've kind of worked our way down, right? We started at the top, served the big guys, built our system so that it can support kind of that scalability, and then worked our way down to the boutiques who are also probably looking to scale over time, but maybe not as aggressively as the bigger folks.

Nathan Latka

06:24What do mean when you say boutiques? And just to be clear, what are they actually selling? Like the tools around the industry or the actual, I mean, like the actual edibles, the actual things you consume?

Kyle Sherman

06:34These are cannabis infused products, flower products, you know, vape pens. These are CC infused goods.

Nathan Latka

06:40Okay.

Kyle Sherman

06:41And when I say boutique, I really mean this is a, considered like a microbrewery, right? It's a small store, maybe owner operated, maybe only a couple terminals, right? This is a small boutique store. Maybe they're a little more pricey than your chain store, but you're getting really high quality goods typically, you get a lot more personalized service. The bigger you go, right, if you have a lot more standards, so you kind of know what to expect,

07:05right? Some of these stores like the Green Dragons, the Native Roots, you're gonna find these guys all over the mountain range, down here in the Foothills, you know, expanding nationwide, and that retail experience is similar across the board. So, you know, it's akin to a Starbucks experience versus maybe your local coffee shop.

Retention Metrics: Logo and Net Revenue Retention

Nathan Latka

07:24And talk to me about retention. What's net revenue retention annually at today?

Kyle Sherman

07:29We're retaining about 98% of our customers year on year. So really great retention. We have very little churn. Really excited about that. Look, it's a sticky platform by nature, right? Because you're running their business. So, I mean, once you're on the system, why are you gonna switch?

Nathan Latka

07:46Just to be clear though, it's that 98%, that's 98% logo retention annually?

Kyle Sherman

07:52Yes.

Nathan Latka

07:52Okay, If you look at it on a money basis, on a revenue basis, so obviously you churn some revenue, but then you expand revenue as well. Are you above 100% in Yes, revenue

Kyle Sherman

08:03we're right around 100%.

Nathan Latka

08:04Oh, right at 100%. Okay, that's great. That's really great. Now if people churn, why do they churn?

Kyle Sherman

08:09You know, typically it's a small mom and pop store that maybe hasn't figured out how to optimize their margins, and so they close. So that's a big one. Another one is, look, a lot of these kind of business owners,

08:25they don't fully know what they want to do. It's kind of like maybe they don't understand what software really means to them, so they're going to switch software providers every year. You know, they're constantly trying to grow their business. Maybe ownership has changed, right? There's kind of variables that kind of go into why customers would churn. The majority is truly because they shut down though. Just think they can't maintain the license and the streaming

Nathan Latka

08:48Yeah, mean, look, 80, 90% of SMBs fail in the first year. So I mean, I get that. That churn's actually good considering that space. So walk me through how you're acquiring these customers. What's your CAC? How are you getting them?

Customer Acquisition and Word-of-Mouth Growth

Kyle Sherman

09:00Yeah. So the big one, actually, it's just word-of-mouth. Because we were first to market in Colorado in this newly regulated environment, we basically connected our software to the state regulators so we could push data to and from the state, right? We could push data and pull data down from the state on behalf of our customers, which is required by law. Back then it was being done manually. So we kind of came out and said, Look, we're

09:23gonna automate all of this. And so literally all word-of-mouth, that's how we were gaining logos early on. We just started building our sales organization this year, if you can believe it. So it's really, at this point now, it's just about scaling out the sales. We're gonna do more outbound rather than just kind of relying on our inbound leads.

Team Size and Office Locations

Nathan Latka

09:41So what's your team size today?

Kyle Sherman

09:44We're about 40.

Nathan Latka

09:4540 people, all based there in Denver?

Kyle Sherman

09:47No, so we have an office in San Francisco and Los Angeles, and then our headquarters is in Denver.

Nathan Latka

09:52Okay, so 40 people. And of those 40, how many of them are focused on like content or marketing or onboarding or sales?

Kyle Sherman

10:00We've got to see about six at this point between marketing and our sales org.

LTV, CAC Ratio, and Capital Deployment

Nathan Latka

10:05Okay, so about six people, but you feel like you haven't yet been able to kind of successfully forecast CAC?

Kyle Sherman

10:13You know, it's tough, right? Like, I think we're figuring that out. I'll have a good answer for you in about a month and half.

Nathan Latka

10:18No, I mean, the reason I ask, well, let me ask you, you've raised capital, you said 8,000,000 to date. When was the last round?

Kyle Sherman

10:25It was earlier this year. It was right at the beginning of the year we closed another small round.

Nathan Latka

10:30Okay, whether it's a good question or not, I'm sure it came up. I mean, when you were raising, I'm sure the CAC question and LTV, like your typical SaaS metrics came up. What did you tell these investors when they said, what's your CAC? How can you spend money to get more customers?

Kyle Sherman

10:43So our LTV is five years, about $44,000

Nathan Latka

10:46Okay. So same question though, right? If they ask you like, Okay, we're gonna give you a million bucks. How are gonna use that to go essentially buy more customers? Where would you spend that money? How do you answer that question?

Kyle Sherman

10:59Yeah, I mean, look, I think, you know, I don't even, I have no idea.

Nathan Latka

11:05Wait, wait, Did ask you that question?

Kyle Sherman

11:09No, mean, we talked about ratios. Like we're about a three to one.

Nathan Latka

11:12In terms of LTV to CAC ratio?

Kyle Sherman

11:15Right, yeah.

Nathan Latka

11:15Okay. Well, the only way you can get a ratio though still is to figure out what... So if your lifetime value is $44,000 and you know your ratio is three to one, then you take $44,000 divided by three. So you to still have CAC to do that ratio about four...

Kyle Sherman

11:26Oh, of course. I'm just like off the top of my head right now, I guess I'm sorry, off the top of my head right now, I don't know that exact number. I'm like, I'm dealing with a ton of other things at the moment. So I like, I just don't know it off the

11:35top my

Nathan Latka

11:35I'm more just interested in trying to understand how you're thinking about customer acquisition with the capital that you've raised.

11:43So I've heard you say salespeople, any other channels you wanna open up?

Kyle Sherman

11:48Yeah, mean, look, sales and marketing is key, right? So our marketing team exists with one person right now. We're gonna scale that out. Again, really, really investing in outbound and not relying so much on our inbound. We just started doing this literally in the last probably about five months.

Nathan Latka

12:03Yeah, yeah, very good. Okay, let's wrap up here.

Kyle Sherman

12:06A lot of this stuff's new, right? I guess just to be clear, like a lot of this stuff's brand new this year, So like we're just now focusing on a lot of these things.

Famous Five: Books, Tools, and Personal Insights

Nathan Latka

12:13You know, makes good sense, Kyle, I get it. Let's wrap up here with the famous five. Number one, what's your favorite business book?

Kyle Sherman

12:19Oh, The Hard Thing About Hard Things. I love Bold. I think Bold is a great way to think about the future. I don't know if you've read that one. Stealing Fire is another great one by Steve Koller. Zero to One is a good one. One of my favorites is not a business book, but that gives you a really high level way to look at the world as sapiens. I think it's just an amazing look at humanity

12:41and how we got to where we are today and how humans work together, which is helpful in building teams, right?

Nathan Latka

12:45Yeah.

12:46Number two, is there a CEO you're following or studying?

Kyle Sherman

12:49Is, I'm sorry?

Nathan Latka

12:50A CEO you're following or studying?

Kyle Sherman

12:54Am I following or studying? Like somebody, are you asking?

Nathan Latka

12:56Yeah, is there a CEO that you're following or studying?

Kyle Sherman

12:58Oh, is there a CEO that I am? Yeah, look, I think, you know, I have a mentor named Chris Duggan, and I think he absolutely slays it when it comes to leadership. I think he does a great job.

Nathan Latka

13:09Which company is he with?

Kyle Sherman

13:11He's founded a couple of companies, Badgeville, BetterWorks. He just founded a new company called Luna. I think it's getluna.com or tryluna.com, something like that. But it's really neat. He's a savvy, he's awesome at sales and marketing. He's just a very savvy dude.

Nathan Latka

13:27Number three, what's your favorite online tool for building your business, Kyle?

Kyle Sherman

13:32You know, it's a good question. I think something I rely on every day, I mean, is Google Apps, actually. Like it's such a collaborative environment. And then also Slack. I think Slack's incredible for team communication. It allows our remote teams, right? Our team in San Francisco, our team in LA, and our team in Denver to feel like we're in the same office consistently. It's actually the weirdest thing, right? Like these people will fly around and come

13:51into our office here. We have a couple in town right now from San Francisco. And it's like, man, it's like no difference really between being in the office and being remote. And what an amazing thing, the world we live in today, that you can use these tools and make it feel that way. So I don't know, I like it.

Nathan Latka

14:04Number four, how many hours of sleep are you getting every night?

Kyle Sherman

14:08About five. I have three kids, so that contributes

Nathan Latka

14:08Three

Kyle Sherman

14:08to

Nathan Latka

14:11kids and married, I assume?

Kyle Sherman

14:12Married, yep.

Nathan Latka

14:12Okay, married, three kids in.

Kyle Sherman

14:15Four, two, and five months, man. Jeez. It's little crazy right.

Nathan Latka

14:19And how old are you?

Kyle Sherman

14:21Just turned 31 this year.

Nathan Latka

14:2231, wow, you got your hands full. Last question, what do wish your 20 year old self knew?

Kyle Sherman

14:29Oh man, you know, I wish I knew back then that I should probably be reading like a book a week. I think I was probably spending more time on the internet reading Reddit than I was reading books. I'll tell you, I read about a book a week now and it's absolutely changed my life.

Nathan Latka

14:46Guys, read more. There you have it from Kyle. Founded Flowhub in 2015, helping folks in the cannabis industry in a legal compliant and regulatory way. Again, process payments on location. They're working currently right now with about 500 different locations, paying on average, call it $8,000 per year. Doing about $330,000 per month right now, that's up from $120,000 per month back in August 2017. So almost three X growth year over year. They raised about $8,000,000, team of

15:1140 people between Denver, San Fran and LA. Economics healthy, 98% logo retention annually. Net revenue retention annually over a 100%. They're just now starting to figure out and scale their marketing team to get into things like CAC, payback period, lifetime value, super healthy with low churn. Kyle, thank you for taking us to the top.

Kyle Sherman

15:29Thanks Thanks for having me. Really appreciate it, man.