Cannabis SAAS Startup Flowhub Lands $23 Million as It Eyes Payments Space

Flowhub CEO and founder Kyle Sherman
October 15, 2019

Cannabis retail software startup Flowhub just landed $23 million in funding from big names in the industry, as well as the tech world, as it plans a move into digital payments.

"We will eventually expand into the payments space to further provide secure, safe digital transactions for our customers and for their consumers. This is something that absolutely needs to happen, and we are the right company to lead this movement," Flowhub CEO and founder Kyle Sherman said.

A cannabis point of sale software company, Flowhub provides more than 700 cannabis retail shops and dispensaries in 11 states with software solutions to help manage everything from compliance and inventory to point-of-sale transactions. With its new infusion of cash, the Denver-based company intends to expand its product offerings to more dispensaries nationwide, hire more technical talent, optimize its offerings for mobile, and introduce new additions to its suite of software.

On the heels of its announcement, Flowhub introduced several new updates and enhancements to its platform, including the Stash app to help manage inventory on mobile, the Cashier app for tablet-compatible point of sale transactions, the Specials engine for managing store discounts, and enhanced integrations with partners like Dutchie and Leafly. But, moving forward, the company expects to branch out into payments, as well. Sherman was cryptic when talking about details of the digital payments plan, but said the offering would be rolling out in the "near future."

Since cannabis is still illegal on the federal level, legitimate cannabis businesses in legal states struggle to find reliable banking services. Many banks are federally chartered, meaning they run the risk of incurring fines or even losing their charter if they run afoul of federal law. Credit card processors, like Visa, have also mostly opted out of servicing the cannabis industry, which means that cannabis businesses and even some CBD businesses have historically had to rely on high-risk credit card processors or operate mostly in cash.

Square announced earlier this month it will offer its digital payments services to CBD businesses, but stopped short of extending its services to cannabis businesses until federal regulations change.

There is some indication of softening on the federal level for cannabis banking. In September, the Secure and Fair Enforcement (SAFE) Banking Act passed the U.S. House of Representatives by a wide margin. Although the bill, which would offer safe harbor to banks in cannabis legal states that choose to service the cannabis industry, has had substantial support on both sides of the aisle, it must still pass through the Republican-controlled Senate before it becomes law.

Flowhub's new round of funding, which brings the company's total amount raised to $27 million, was led by software as a service (SAAS)-focused venture capital firm e.ventures, Kraft Heinz-backed Evolv Ventures, and cannabis hedge fund Poseidon with participation from Altitude, Arcadian, 9Yards Capital, and more.

"My mission coming into this space was to help end prohibition responsibility and build tools to help drive legalization forward in the U.S. and then hopefully globally, so to have a big brand like Kraft behind us is really powerful," Sherman said. "Then on the other side you've got e.ventures, which is this global, vertical SAAS firm and really a traditional VC that has been around for a long time, and I think for us it really proves the point that mainstream VCs are ready to get into the space."

For e.ventures, which boasts portfolio companies like Appfolio, GoPuff, Groupon, and Sonos, Flowhub marked its first-ever cannabis investment. Partner Jett Fein said the firm had been eyeing the cannabis space for some time, but decided to take the plunge with Flowhub for a variety of reasons, not the least of which are Flowhub's "sticky" platform and impassioned leader.

"You had this very strong vertical SAAS business, converging with this exciting market, which we think is getting more and more exciting by the day, and then that also converged with this really magnetic, mission-driven founder in Kyle," Fein said.

Flowhub's funding is just the latest example of private capital flowing into the cannabis industry. Year-to-date, cannabis startups have attracted an estimated $2.7 billion in equity across some 340 deals, according to data from CB Insights. That puts 2019 on pace to surpass 2018, which saw a total of $2.7 billion flow into the space. The cannabis sector has also seen a spate of mega deals, including Pax Labs' $420 million series E, and Ginkgo Bioworks' $290 million series E.

"It is clear that this is what Americans want. You have bipartisan support in Congress. You have a lot of momentum in terms of legislation. You have new states," Fein said. "We've been watching all of these things over the past number of years and we haven't made an investment until now, but it just feels like the tipping point has hit. Cannabis is socially acceptable, it's becoming much more part of the mainstream, and it's going to continue to do that."