The Dutch tulip crash of February 1637 was an economic awakening that colorfully illustrated the risks of euphoric over-investment. When bulb prices for some varieties reached more than 10 times a skilled crafts-worker’s annual income, the reckoning was not far off, and the collapse in prices impoverished many a speculator in a country enjoying the mid-17th century’s highest per-capita income.

Economic analysts recalled the Tulipmania phenomenon during the Dotcom Boom that began around 1995 and went bust in 2001, when mass layoffs and company failures prompted an exodus from the Bay Area. Less than a decade later, housing prices rose steeply until the subprime mortgage crash sparked bank failures and a full blown recession beginning in 2007.

The cannabis industry has enjoyed heady times since Colorado and Washington legalized recreational use in 2012 and California joined the party three years ago. The entrepreneurial days of hippie farmers and medical dispensaries quickly turned into huge warehouse grows with celebrity investors and venture-backed firms trading on Canadian stock markets. There are signs that not all of the massive investments are paying off as envisioned.

The past year was a rough one for California’s cannabis industry. Comparisons to the internet boom were made with increasing frequency through 2019, as each new piece of bad news—layoffs, companies going under, stocks plummeting—was announced.

Here in Silicon Valley, the nexus of recreational cannabis and technology, signs of industry strain are certainly showing. On Feb. 4, San Jose-based Caliva gave notice to more than 200 of its full- and part-time drivers delivering the dispensary’s products through the app Eaze—a San Francisco-founded mobile platform that connects consumers to dispensaries and cannabis delivery drivers.

“Over 200 Caliva employees who worked on Eaze directly were given 60-days notice of the partnership non-renewal,” the statement reads. “Interested candidates will have the opportunity to apply for the dozens of new jobs that will be created as the company continues to expand … throughout California.”

Caliva CEO Dennis O’Malley says that once the company’s contract with Eaze ends, the cannabis firm—which boasts former 49er Joe Montana as an investor and rapper Jay-Z as chief brand strategist—will pivot to fulfilling all deliveries in-house, rather than using the third-party app.

“We are focusing on what we call omni-channel,” O’Malley says. “We’ve seen we are best when we can control our own destiny and we can control our own platforms.”

Still, the fact remains that 200 drivers—all of whom were technically Caliva employees, working somewhere between 20 to 40 hours per week—will be out of a job come the end of March, when Caliva’s contract with Eaze ends.

Elizabeth Ashford, senior director of corporate communications at Eaze, says that the two companies will continue to have a relationship, at least when it comes to other dispensaries that carry Caliva-branded products. However, she sought to clarify that Caliva’s decision to drop Eaze should not be interpreted as some sign of her company’s overall health. “Caliva is going through a contraction,” Ashford says. “That’s something that is happening across the industry.”

In mid-January, TechCrunch reported that the San Francisco-founded Eaze “has seen unannounced layoffs, and its depleted cash reserves threaten its ability to make payroll or settle its AWS bill.”

Asked about the TechCrunch story, Ashford was blunt. “We’re in the same space that the entire industry is in.”

In a statement disputing Ashford’s assertion that his company is currently contracting, Caliva’s CEO O'Malley, wrote: “Caliva is growing, not contracting. We are on the back end of a successful Series B Funding round that has already raised more capital than our Series A Funding, which was announced last January.”

For his part, O’Malley prefers to refer to the challenges that Caliva and the rest of the industry are facing as a “metamorphosis,” and described the condition of the industry using terminology that will be familiar to Silicon Valley denizens. “Cannabis 1.0”—the emergence of the legal market, which came with very lofty market conditions and easy access to capital—is over.

“It’s a tough road ahead,” O’Malley says. Demand for cannabis is not going anywhere. However, companies that succeed will have to work harder to build relationships with their customers and maintain those relationships over time.

Taking Stock

There are, of course, big differences between the first internet boom and the current legal cannabis craze.

For starters, cannabis is an actual commodity for which there is a known level of demand. During the Dotcom Boom, nobody knew how many “eyeballs” a website might attract or what, if anything, that might be worth. And nobody knew how many people might want their groceries or pet-care products delivered to their door. (It turned out, for the short term at least, to have been not nearly as many as the stock touts and marketing types had promised.) Year after year, investors poured money into companies they knew weren’t making any money, and in some cases—as with Pets.com and the online grocer Webvan—when they knew the companies were losing money on every sale.

Cannabis isn’t like that. Margins are often thin, but they’re still margins—customers pay more for their pot than the retailer paid to obtain it. And the size of the market was more-or-less known before the first legal sale took place, thanks to estimates of the already-existing illicit market, as well as the legal medical market.

Pot is a real business, not the mere wish of one.

Companies that made real products to serve the Dotcom Boom—makers of microchips and routers, for example—mostly came out of the bust intact, and many continue to thrive. This is much like what happened during the Gold Rush, the original California boom-and-bust event, during which a few people made money by finding gold, but many more made money selling food, beer, equipment or blue jeans.

Bad news about the so-called “Green Rush” rolled in slowly at first, picking up steam around the end of last summer. Stocks started to dive. Layoffs were announced. Executives who just months earlier were forecasting great riches suddenly acknowledged—mostly in whispers—the deepening gloom. Since last August, the North American Marijuana Index, which tracks cannabis stocks, has fallen by half. The problem with pot stocks isn’t limited to California. It’s continental: too many investors looking for a quick buck creates a bubble, as with internet stocks in 1999, or housing in 2007.

That bubble has now burst.

Some of the biggest pot companies in the world, including many whose underlying business is still growing, have lost enormous amounts of assumed value. From last spring to now, Curaleaf, a Massachusetts-based company with a $3 billion-plus market cap, lost half its value; the stock price of Canopy Growth, based in Canada, fell 76 percent last year and 27 percent so far this year; Aurora Cannabis, also based in Canada, lost 82 percent of its value and is running out of money to continue operations.

Oakland-based Harborside, which went public in Canada via a so-called reverse takeover, was valued at $3.80 a share last June. As of Monday, the stock shares sold for 61 cents. Edibles-maker Plus Products, based in San Mateo, saw its stock hit $5.67 last February. Just short of a year later, its shares trade at 90 cents.

The Culver City-based MedMen, which runs dispensaries in several states and purchased the San Jose-based Buddy’s Cannabis in 2018, lost about 85 percent of its value over the past year. In November, it announced it would lay off nearly 200 employees—about a fifth of its workforce—and restructure the company.

It’s not just public companies. Right around the same time MedMen broke the bad news, many private California cannabis businesses—including Pax Labs, Grupo Flor, Flow Kana and CannaCraft—announced layoffs. The reasons differ somewhat for each of them. Pax Labs, a maker of vape cartridges, was hit hard after a spate of serious lung illnesses and some deaths were tied to vaping across the country. The fact that most, if not all, of the illnesses were connected to illicit vaping products didn’t matter: people became scared to vape at all, and that hurt big swaths of the industry, including dispensaries.

Etienne Fontan, co-owner of the Berkeley Patients Group and a board member of the National Cannabis Industry Association, thinks things will get worse before they get better. “Medium-to-small distributors are going to be this year’s fallout,” he predicts, citing the recent closure of Pacific Expeditors, a distribution operation in Sonoma County. “These collapses fall all along the supply chain but especially impact small farmers and producers,” Fontan says. “They feel this and it will cost companies their business permanently.”

We’ll know things are getting really bad when we see huge implosions that go beyond companies that rushed to the public markets or otherwise overextended themselves. DionyMed Brands, based in the South Bay, formed in 2017 as a “multi-state cannabis platform” and immediately went on an acquisition tear, borrowing millions of dollars and snapping up companies across the supply chain, from cultivators to manufactures to delivery services, including, among the latter, Berkeley-based Hometown Heart. In the meantime, it went public in Canada, through a reverse takeover.

DionyMed, like Caliva, partnered with Eaze for a time, before terminating its relationship and filing a lawsuit against the mobile platform, alleging that it was committing fraud by masking cannabis sales in order to retain credit-card services. Eaze denies the allegations and notes that, as a platform, it doesn’t itself handle payments, leaving that up to its storefront customers.

To replace Eaze, DionyMed launched its own platform, Chill, to handle cannabis deliveries in the Bay Area. But just months after that operation was launched, DionyMed announced it was in receivership and that its CEO, Edward Fields, had left the company. All operations ceased Jan. 27; the last workers laid off. It was a spectacular flameout reminiscent of some of the insane business failures of the Dotcom era.

High Hopes

At the same time, the entire cannabis industry isn’t imploding. But parts of it are, and the industry as a whole is falling far short of what the forecasts indicated.

Those predictions, however, were made by legalization advocates and politicians intent on selling skeptics on legalization and the tax bonanza it supposedly would yield. Legalization proponents insisted that pot would put $1 billion a year into state coffers, starting Year One. That number turned out to be just $288 million for the first fiscal year. For the second fiscal year, which we are still in, the estimated tax take will be just $359 million. Meanwhile, there are only about 800 dispensaries operating in the state, a far cry from the anticipated 6,000.

But whatever the proximate reason for the cutbacks, the underlying causes are the same industrywide: taxes, regulation, over-investment, lack of access to markets and bad decisions. Most of the industry’s problems trace to government action or inaction.

There are two major problems: First, a state excise tax of 15 percent, which is added to regular sales taxes and often-high local cannabis taxes. On top of that is the tax pot growers pay at harvest time. In some cities, consumers pay an effective tax rate of more than 40 percent on pot that’s already more expensive than what they can get from their local, law-breaking weed dealer—who has not gone away.

Second, and probably worse for the industry, most local governments remain hesitant to allow legal operators to set up shop. Nearly four-fifths of California jurisdictions have yet to issue a single license, leaving residents who want to abide by the law to either grow their own pot or, if delivery is available to them, have it brought to their door. Efforts are afoot in the legislature to address both of these problems—to get taxes lowered and, perhaps, to force local governments to allow cannabis in. But the prospects for both efforts are uncertain at best.

“I think people think that because we have Prop. 64, we have predictable terrain,” says William Armaline, a professor of sociology at San Jose State University and the director of The SJSU Human Rights Collaborative, which has a particular interest in informing cannabis policy in the state of California. “It is anything but.”

One of the biggest issues with the current legislation, Armaline says, is that the amount of taxation and licensing requirements imposed on legal cannabis makes it difficult for the legal market to compete with the black market. Furthermore, Armaline predicts, those same stringent regulations will ensure that only firms with deep pockets ultimately succeed in the realm of legal pot.

“The entities that don’t have to worry about this are very well financed,” he says. “The more precarious players, the local folks, the equity populations—they get squeezed out.”

It is now widely agreed by industry observers that Proposition 64, through which voters legalized recreational pot in 2016, was deeply flawed. “Hindsight is a great place to live," says Scott Hammon, cannabis practice leader for MGO|Ello, which provides accounting and advisory services to pot companies.

Not every flaw, though, can be pinned on a particular group of people—not even on politicians. “The initiative contained compromise language right from the beginning,” says Debby Goldsberry, executive director of Magnolia Wellness in Oakland and a longtime presence in the Bay Area cannabis industry. “It was designed to assuage the concerns of nervous voters and to make sure that big businesses, like the alcohol industry, did not get upset enough to fight it. Some of these compromises lacked common sense, surely, but more so, there were few models to follow at the time, and the designers of the original laws and regulations knew they would need to stay flexible over a number of years to create rules that would really work.”

Unfortunately, she adds, “the unseen side effect was that the underground market would continue to flourish and that the regulatory complications, and the fees and the taxes, would set the bar higher than most people could reach, other than the biggest and most-experienced companies. Lots of California small businesses are gone because of this.”

Paranoia

Meanwhile, the continued illegality of cannabis at the federal level not only means that agents can swoop in and shut down a cannabis operator at any moment—highly unlikely now, though that could quickly change—but that it’s still difficult for the industry to conduct business. Pot companies don’t have ready access to banking services, because banks run afoul of federal law by providing deposit services or making loans to pot companies. And of course, interstate commerce is a total no-go; any manufacturing company that wants to sell in another state is forced to “white label” its goods—that is, have their gummies or vape cartridges manufactured by someone else, and then slap their own brands on them. If California pot companies could ship products to Nevada or Massachusetts, it would make up in a big way for the fact that so many California jurisdictions won’t let them sell here.

Still, though, the culprit isn’t exclusively government. As happened during the Dotcom Boom, there has been a mad rush of investors and entrepreneurs into the business. They often bring little-to-no industry knowledge with them. In too many cases, Hammon says, entrepreneurs don’t have “real operational skills.” There’s obviously lots of money to be made in the California pot market, but recognizing an opportunity is not the same as exploiting it. Running a pot business—especially a dispensary—is incredibly difficult, complicated work, and profit margins are thin even in the best of circumstances. Even savvy, experienced operators have a hard time with the costs and burdens of complying with strict regulations on things like testing and labeling.

Part of the problem is that many cannabis boosters drank their own Kool-Aid. Banking on rosy forecasts often produced by them or their industry friends, they spent profligately, ignored enormous start-up costs, under-appreciated the burdens of complying with strict regulations, and, in some cases, issued stock to the public too soon, usually by listing on Canadian stock exchanges. (American exchanges still won’t let plant-touching businesses list at home—another outcome of federal prohibition.) “There was a belief among investors," Hammon says “if we get the license, the money will flow.”

Of course, many Dotcommers thought the same thing about domain names in the mid-’90s. It was toward the end of the Dotcom Boom that such hard-to-watch meltdowns began hitting the news on a regular basis. Every week or two, we read a new tale of some company with an iffy business model falling apart. Then came the stories of coke-addled lunatics partying through their workdays while burning through their capital. There hasn’t been a lot of that so far in the cannabis industry. But if it starts happening with any frequency, we’ll know that things are about to get worse.

No matter what form it takes, though, bad news is likely to keep coming for the next few months. And it will likely come fast. Hammon, the cannabis consultant, doesn’t think the speed at which this bubble has popped is in any way endemic to cannabis. So, in the end, it’s not “cannabis time” but, in fact, “internet time,” after all. Technology has sped everything up: the time it takes to set up businesses, secure financing, acquire companies, hire people and set up supply chains has been radically compacted. There’s no reason it won’t fall apart just as fast. “The whole thing has been faster,” he observes. “So the bust has been faster, too."

One thing never changes, however: hubris. “Everyone thinks they have it all, until reality shows up,” says Fontan, a veteran of the cannabis business. “Seen it for decades.”

A version of this story first ran in the East Bay Express. Metro Silicon Valley/San Jose Inside editorial staff contributed to this report.