Case Study: Nabis Achieved And Maintained Product-Market Fit In The $16 Billion Cannabis Market Through Customer Obsession

Learn how Nabis became the fastest-growing software-driven cannabis company based in San Francisco.

Oct 19, 2020

Problem: The founders discovered distribution to be their customers’ #1 issue.
Market: Self-distribution is costly and inefficient for cannabis sellers.
Solution: Nabis addressed the distribution problem by offering choice, access, and innovation.
Team: The founders are biased towards action, and equally take responsibility and credit for failure and success, respectively.
Fundraising: Moving from seed to Series A, Nabis had to achieve strong top-line growth with positive unit economics while scaling.
Takeaway: Customers are the best way to source the on-the-ground information that the market is evolving to maintain product-market fit.

I got the chance to speak with Vincent Ning and Jun Lee, co-founders of Nabis, about what they working on at their startup, and any advice they have for emerging entrepreneurs.

Nabis is the leading cannabis distributor today and is scaling to become a global B2B online marketplace for cannabis products.

Founded in 2017, Nabis now ships a quarter billion dollars worth of cannabis products per year from brands to retail dispensaries in the legal cannabis market and is the most reputable distributor in the cannabis space has launched and scaled over a hundred industry-leading brands to nearly 100% of retailers in California.

Nabis is lowering the high barrier to entry to create brands in the regulated cannabis market, eliminating the need for operators to manage logistics fulfillment, compliance, sales analytics, and payment processing.

Founder File: “Flipping the Switch to Profitability as a Startup During COVID-19”

Nabis cofounders (from left to right): Jun Lee and Vincent Ning.

Problem:

What are the fundamental problems you’ve had to solve on your journey to product-market fit?

The critical problems we have had to solve to reach product-market fit are mostly related to understanding the cannabis industry. As entrepreneurs, we saw the opportunity in the space, and we were obsessed with figuring out the most significant pain points of the supply chain. We started as delivery drivers to have a systematic way of meeting as many operators in the industry as possible. Through that experience, we ultimately figured out that distribution was the area that needed the most improvement for this industry to scale truly.

Why are these problems essential to solve for creating the best solution for your customer?

By learning about the industry, we were able to understand the deepest pain points for our customers. It gave us many opportunities to talk to our customers and potential new customers to constantly adapt our product over time to fit the exact needs of the cannabis industry. These concerns range from rapidly changing compliance regulations, infrastructural challenges, and the lack of scalable modern technology.

Early on at Nabis, we didn’t set a particular framework, but more so a culture for engaging with our customers. Since the Founders started as delivery drivers, people who joined the company would all take the time to go on a few delivery runs to see first-hand the job that makes us money. Besides, we encouraged everyone, including our engineering team, to wear a product management hat and conduct customer interviews weekly.

Market:

Once you identified the critical problems to solve, what led you to realize there was a huge market opportunity to be unlocked by doing so?

Once we identified these problems, we realized that quite literally every operator we talked to needed help with distribution. And because the demand was so strong, we knew that not only were there many businesses that wanted to pay for 3rd-party distribution services, but people would pay a lot for it. Our research found that the market will triple from $12B in 2019 cannabis sales to $34 billion in 2024.

We performed weekly customer interviews to walk through how the customer uses our website and support tools for an hour. The strategy was to meet as many people as possible. On a day to day basis, the team would be more than willing to give out personal phone numbers so that customers could reach us quickly.

There are most likely several segments of the market you could choose to attack first. What section of the total customer base did you focus on first to establish a product-market fit, and why?

We ultimately serve both cannabis brands and retail dispensaries. We chose to focus on the brands that were stuck self-distributing their products. This is because they were the ones dumping the largest amounts of their company’s budget into distribution infrastructure and technology. We thought that if we could distribute cannabis products more cheaply than the brands did at the time of self-distributing, we would have delighted customers.

Solution:

How did you build your solution to maximize its relevance with the customer and ensure product-market fit?

We continuously talk to our customers, and some of them have become our great friends. And through these conversations, we quickly realized that our customers always have and always want better service quality, strong support and communication, and cheaper rates. We built Nabis to provide logistics and fulfillment, software and data, and financial services to our customers who struggled with self-distribution.

The distribution lifecycle starts with picking up products from brands (manufacturers/cultivators). Nabis then centralizes all inventory, handles arranging for state-mandated compliance testing, and finally, when orders are placed, Nabis will fulfill the products to retailers across the state of California in 36 hours. To complete the lifecycle, Nabis also handles payment collection from retailers (via cash, check, or electronic wire), forwarding cannabis taxes to the city/state, and remitting the remainder back to the brand that sold the product. Our software handles automating and tracking all of the above. The features are largely bucketed under the categories of order tracking, inventory management, payment processing, sales analytics, and more.

What are the things you did that don’t scale to better shape your product development?

As Founders of Nabis, we started as humble delivery drivers ourselves, delivering products out of our cars’ back in the medical market. This allowed us to learn all the ins and outs of the cannabis supply chain and build relationships in the industry that still serve us today.

As an operations company, technically speaking, we can perform every function of cannabis distribution without software. To build the product that we have today, we would typically agree to a customer’s request and complete the physical world action. If this type of behavior continued to occur frequently, we would automate it to scale.

Team:

How did you handle conflicts between you and your cofounder when making decisions at critical junctures to arrive at product-market fit?

There are two cofounders of Nabis, and we are childhood best friends. We trust each other like brothers and know that we can’t just walk away from problems but face them head-on. Whenever we have conflicts, we try to come to a compromise, which typically works. Other times, we test both solutions, and we each take full accountability for both their successes and failures. In business, you have to take bets, so there’s nothing better than to have a bias for action.

What essential qualities did you look for in crucial early hires to increase your chances of discovering product-market fit, and how did you prioritize what types of hires you needed to make first?

Nabis has been successful at bringing together top talent who can balance their extensive experience from mature industries with the ability to adapt to the rapidly changing dynamics of the cannabis industry. Despite having the cannabis supply chain exhibiting similar characteristics of other supply chains (CPG, food and beverage, alcohol, etc.), cannabis is its regulated market. It’s difficult to import rigid best practices from other industries to the cannabis industry. To that end, the team has to be flexible to adapt to the cannabis industry’s culture, mainly since it just crawled out of the illicit/medical market. These combined have allowed Nabis to continuously think about building products in this industry the right way and ultimately providing the best customer experience.

Initially, we just did anything and everything, which effectively built morale through leading by example. And over time, we made sure to hire a top-notch Leadership Team to manage the day today, and as Founders, we primarily work with these executives to guide them in their decision-making process. We are still reasonably hands-on on the most significant projects, particularly ones that require stakeholder buy-in from a multitude of directions (customers, legal, investors, other departments).

Fundraising:

How did you set expectations with investors at seed and Series A? What is the main difference in those expectations as your company grows from one stage to another?

For the most part, between seed and Series A, expectations were mainly set around top-line growth. The main difference is more nuanced, where at Series A, investors want to see larger growth figures and strong unit economic margins that can scale.

The core investor expectations of a seed round are largely the same as a Series A, except that seed-stage companies are typically smaller in size and scale. In order to raise a successful round at any stage, companies will need a top-notch team, idea/business model with a large market opportunity, and traction. Major new expectations for Series A include having significant traction with strong unit economic margins, which essentially means a proven business model that has a large enough market to scale into a larger amount of capital.

How does dilution work as you go from seed to Series A?

Dilution is roughly the same. In venture, companies typically give up anywhere from 10-20% of their company each round. However, in later rounds, it can be advantageous to take on venture debt or a line of credit and save on dilution.

As we grew the company, we narrowly focused on growing our top-line revenue while improving our unit economic margins. On top of that, we wanted to constantly refine our product/service offerings to fit the largest segment of the market as possible. And the key to success there is ensuring that customers are happy and constantly keeping an open dialogue with them to help feed our product development. Once we were ready to raise our next round, we left at least 12 months of runway and went out to raise our Series A.

Takeaway:

What are the key lessons you have learned so far from your journey to achieve product-market fit?

The biggest lesson that I’ve learned so far from my journey building Nabis has always been to obsess over our customers. Even after reaching product-market fit, you’re not safe. The market can change, and it can change remarkably quickly in rapidly growing industries. As a result, the product needs to continually adapt to fit new market evolutions. Customers are the best way to source the on-the-ground information that the market is evolving.

What’s the most challenging problem you’re facing now after solving the prior one(s)?

Nabis, and the industry as a whole, has struggled with regulatory constraints that disallow traditional banking and investment to be widely available for the space. Cannabis is a federally illegal controlled substance still, and the majority of financial institutions and institutional funds are still cautious around the regulatory risks that exist. As a result, most of the cannabis industry still operates on cold hard cash since most operators don’t have banks to store their money. This creates significant compliance and security risks/costs for operators in the industry.

Who are three cool founders I should talk to next?

Here are three founders you should check out next!

Jonathan Goldsmith, Founder of Local Food Group: Local Food Group helps local restaurants expand.
Arif Bhanji, Founder of Lazer Technologies: Lazer is a digital product studio designed to help successful enterprises bring ideas to market faster and more successfully.
Luciano Arango, Founder of PersistIQ: PersistIQ is a free email automation platform to send a small batch of personalized emails.

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