Legal cannabis commerce is expanding. In 2017, almost $3.5 billion was invested into the booming industry worldwide, more than doubling 2016’s investment figures. Thanks to adult use legalization in California and international trade between Canada and Europe, 2018 is expected to be the industry’s biggest year yet. There are a few billion reasons for Cannabis entrepreneurs to be excited about 2018.
As a cannabis entrepreneur, you’ll face many challenges, like developing a business plan, building a team and acquiring customers, to name a few. Often, one of the most substantial challenges, however, is raising capital for your business. In fact, the two most common coaching inquiries I receive are from cannabis entrepreneurs who need help raising money and from investors who need help discovering and deciphering quality cannabis investment opportunities.
In January, at the Institutional Capital in Cannabis conference, I asked several professional investors how cannabis entrepreneurs can improve their odds of receiving a signed term sheet and matching check. Prior to that, I interviewed multiple cannabis investment fund managers for the upcoming second edition of my book, The Entrepreneur’s Guide to Cannabis. Below is the advice I heard repeated by some of the cannabis industry’s most prominent investors.
1. Know Your Audience
As more institutional money pours into cannabis, entrepreneurs are being held to higher standards of professionalism than ever before. Simultaneously, seasoned entrepreneurs with track records in other industries are waking up and smelling the money trees. Competition is heating up. Investors expect well-thought-out business plans, clean, polished pitches and an understanding of basic venture finance and capital structure.
Most investors, especially those with cannabis industry experience, understand that they’re going to have to sift through a lot of unattractive deals before finding the top 1% that they actually commit capital to. Thus, they’re generally open to looking at opportunities. At a minimum, you, the entrepreneur, must be able to explain with certainty how much capital you are seeking, what specifically the money will be used for and how soon you plan to generate an attractive return for the investor (the sooner the better!). If all of this is not mapped out concisely enough so that a layman can understand, the investor will not take your deal seriously.
Furthermore, not all investors are created equally. To be efficient in your fundraising process, learn to qualify investors quickly. Before you even take the time to pitch someone, find out what kind of structures they do and don’t invest in. Some folks like debt, some like equity, some only do seed stage, etc. Ask before you start the “dating” process.
2. Date Before You Get Married
“Capital raises are as much about finding a great strategic partner as they are about finding capital,” says Steve Ernest, founder of Mazakali, a capital advisory firm focused on the cannabis industry.
The frequency with which multimillion-dollar cannabis fund managers compared the fundraising process to dating struck me as odd at first. However, the comparison made a lot of sense: Most private equity investments have a term of 5-10 years; the average marriage in the U.S. lasts eight years. Every single cannabis investor I spoke with agreed on two things.
First, they’re betting on the jockey and not the horse. Due to the challenges of the cannabis business environment, investors want to place bets on entrepreneurs who are courageous, committed and have a track record for excellent execution. Second, because the jockey is so important, each investor’s diligence process includes taking time to get to know the entrepreneur on a personal level. Entrepreneurs, make sure you do the same. Don’t marry someone just for their money!
3. Have Realistic, Well-Researched Valuations
Most investors, especially those evaluating early stage ventures in an emerging industry, expect the entrepreneur’s financial projections to be wrong. At the same time, investors pay close attention to the assumptions and rationale behind an entrepreneur’s forecast. It provides a glimpse into the entrepreneur’s business acumen. For example, when a cultivation or dispensary startup doesn’t account for the downward price trend for wholesale cannabis, it signals to the prospective investor that the entrepreneur does not truly understand industry dynamics.
I asked my friend Alain Bankier, co-founder of New York Angels and an experienced cannabis investor, for his two cents: “Don’t get too hung up on your valuation as you raise money. The valuation is meaningless if the business doesn’t survive. So if you have to lower your valuation to get the funding necessary to survive, do it. Then thrive and earn the valuation.”
On Patience, Persistence And Process
Aside early adopters like Alain and Steve, the majority of today and tomorrow’s cannabis venture investors don’t have much, if any, cannabis experience. Unless they’ve immersed themselves in the community or are entirely cannabis-focused, investors likely won’t appreciate many nuances of cannabis culture. Thus, as an entrepreneur, you must be prepared to educate and be a good example on behalf of the broader cannabis community.
Similarly, be ready to hear “no” a lot. Never take rejection personally — instead, seize the opportunity to receive constructive feedback and refine your pitch. Understand that not every business model is a good fit for venture capital.
There are plenty of other viable options for fundraising that can help you reach your goals. For example, equity crowdfunding has become a popular alternative for cannabis entrepreneurs. Even High Times, a well-established media and events company, recently issued a preliminary prospectus for a Reg A+ offering.
On Sustainability
Fundraising often becomes a full-time endeavor that can easily take several months. Embrace the challenging fundraising process with creativity and courage. Be sure you have the bandwidth, support and resources to keep your core business running smoothly as you devote your time and energy to wooing investors. Please regularly schedule time for self-care, restoration and wellness. Don’t let raising money cost you your health. Besides, burned-out entrepreneurs don’t exactly inspire much excitement from investors.
