What does a former state attorney general have in common with the ex-president of the Orange County Register’s parent company?
Business.
Bill Lockyer and Eric Spitz are starting a distribution company to cash in on the newly legal recreational marijuana industry.
“We see this industry fundamentally transitioning from backpacks to briefcases,” Spitz said, referring to the industry moving from underground to legitimate.
“What we do is nearly identical to what a liquor distributor does.”
They say their C4 Distro, which is scheduled to start taking orders today, will be the biggest distribution channel for cannabis in California.
They’ve raised almost $10 million, hired 30 employees, opened a headquarters in Costa Mesa’s “green zone,” and thus far have two distribution facilities in Southern California.
Lockyer has more than 40 years’ experience in state politics, including serving as attorney general from 1999 to 2007, when he threw people in jail for violating pot laws. He was also the top legislator in the California Senate and state treasurer from 2007 to 2015.
Why would a politician with a resume like the 76 year old, who didn’t make himself available for an interview, want to be involved in an industry with the reputation of marijuana?
“Bill was aggressively interested in participating in the transition of a giant industry from an illicit market to a legal market,” Spitz said. “It’s a fascinating case study.”
Sixth Startup
Spitz began his first business in 1997, a tech company focused on digital sports data, while attending the Massachusetts Institute of Technology. Later, he relaunched Narragansett Brewing Co., which he said is now the 37th largest craft beer maker in the U.S.
Spitz met Aaron Kushner in 2011, and a year later the two purchased Freedom Communications Inc., parent of the Register and other newspapers. The company, where he also served as chairman, landed in bankruptcy in 2015, and Spitz exited a year later.
Spitz and Lockyer first met in 2013, and a couple of years later began to discuss the emerging cannabis industry, agreeing they wanted to “make a positive impact.”
They decided to form C4 Distro, which stands for commerce, communications, commercialization and compliance. It’s the sixth startup for the 48-year-old Spitz.
The company focuses on distribution rather than farming, manufacturing, retailing or other parts of the industry. While distribution typically has low margins, Spitz said it could be highly profitable because the industry will be handling billions of dollars.
Building the Moat
He said he envisions a moat developing similar to liquor and food distributors’ networks, as requirements for trucks, facilities and other infrastructure will winnow out competitors.
Also, unlike with liquor and food distributors, pot distributors are also obliged to ensure product testing is done correctly and will collect taxes, he said.
“Distributorships eventually become oligarchies,” he said. “My business is always going to be there. We are creating moats that no one else can get around.”
It certainly helps that the partners have an intimate knowledge of the new requirements, Spitz said. Thanks to Lockyer’s inside connections, they spent a couple of years working alongside state policy makers, such as the state Bureau of Cannabis Control, to design a distribution system. Lockyer brought insights, such as how to maneuver in the halls of Sacramento, whom to talk to and whom to stay away from, and who cares about what, Spitz said.
The company’s strategy is to represent only a dozen cannabis brands and operate a “high-touch” model under which sales representatives visit retailers at least once a week. The company plans to focus on Southern California in the first year, then expand elsewhere in the state.
As for the potential return, Spitz compared it to startups through which investors are “looking for home runs.”
Stick ’Em Up?
The risks are significant.
For one thing, banks that accept cannabis-related companies “will have to explain a lot” to regulators and investors and could even face closure, Spitz said. While his company doesn’t yet have a bank, he said he’s negotiating with a few, and he didn’t sound worried.
“The banking issues are going to be solved fairly quickly,” Spitz said without elaborating on changes that may come. “As a distributor, we are assuming we will be able to bank our products.”
A second risk is security due to the necessity for now to deal in cash.
The company plans small storage facilities of about 3,000 square feet each. Its trucks will be discreetly marked and follow various routes to avoid potential robberies.
“There are a whole bunch of security concerns,” Spitz said. If thieves “don’t know where we’re putting our products, it’s very hard to pick us off.”
The Stigma
The Newport Beach resident, the father of three girls who are competitive swimmers, acknowledged marijuana has an unsavory stigma despite its newfound legality.
He said the industry will have a “20-year challenge” to change its image of ne’er-do-wells to an everyday product in the “social-lubrication market,” like beer, whiskey or painkillers.
“We want to change that perception to it being just like beer. It’s something we use to relax. Don’t overuse it. Don’t let the kids use it. As adults, we have the choice to take products that make us relax.”
