Marijuana Business Investing: The Basics on Investment Rounds

Marijuana Business InvestingSeed Round, Series A, Series B, etc. For those who haven’t spent much time in the corporate investment world, the vernacular can be somewhat intimidating. Don’t worry, though. To be frank, it’s just not that important. The important thing is to have an idea of where your cannabis business is in its life cycle. You want to have a good reason for raising money, and the names of investment rounds help investors get a quick idea of why you need the money. But the substance, as always, is more important than the label. The real questions you need to answer are the following:

  • Do you have a new idea you are looking to run a pilot project on?
  • Have you demonstrated proof of concept and are now looking to fully implement the concept?
  • Have you already shown the business model works and you are now looking to scale?
  • Do you just need some operating cash to survive a few months?

Being able to answer the above questions clearly is much more valuable than being able to spout the lingo. This is because investor expectations for businesses asking for money has shifted over the years — investors are becoming more and more cautious. In the past, the “Seed Round” was the round where angel investors, friends and family, etc., would fork over money to someone with a pretty good business plan. These days, just having a business plan may not be enough, depending on how much money you are looking to raise. More and more investors are demanding businesses be more established before they hand over any capital. They view a seed round as more of a way to transition from a built prototype to being fully operational.

The idea of having a “prototype” makes more sense when thinking about cannabis ancillary services and new business ideas than it does in dealing with cannabis growers and retailers directly. The thing about cannabis retail, for instance, is that you don’t really have to show proof of concept. The concept is well-known and proven. What you need to show with a cannabis retail business is usually less proof of concept and more that the concept can work in your specific situation. Maybe your cultivation company can grow product much more cheaply than others. Maybe your retailer is getting the only piece of real estate available in a certain population center. Having something that sets you apart is key, which is vitally important in an industry where demand for capital is still outstripping capital availability.

If you are going to follow a traditional “investment round” procedure, here are some rough descriptions of where each round falls in the life of your business:

Seed Round: This round can also merge with a “friends and family” round. The seed round is generally thought of as a capital raise under about $1 million. The goal is to get some money in the door to get things rolling for the business. It allows a business to do things like hire attorneys, pay for architecture and design plans, pay early stage real estate and equipment expenses.

Series A Round: This is the finance round for a business that has demonstrated it is ready to start scaling. This can be a cultivator looking to expand from one greenhouse to five. For ancillary businesses, it often is the round when you have your ideas and your contracts in place, but you need money to actually make good on those contracts. The median amount raised in this round tends to be in the $2 million to $10 million range. Some businesses will never make it this far. In Washington, for instance, we have Tier One Producer licenses. These are licenses for marijuana cultivators that cannot exceed 2,000 square feet of canopy space. For most of them, state law means they likely won’t be able to deploy such a large amount of capital. But for others, especially those that aren’t direct licensees, the Series A Round is a vital step to begin really implementing a business plan.

Series B Round and later: These are the scaling rounds. For a business that’s able to expand by going into another state, buying a new facility, or even buying another business entity, the Series B Round is one way to become a real player. Most businesses in the marijuana space don’t get this far. Even for cannabis businesses with big aspirations, a Series B Round may not be necessary if the owners have enough patience to allow their successful business to build up cash reserves just from operations. But, for those looking to accelerate their quest for global dominance, we have these later rounds.

Your goal, above all, is to make sure you are raising the right amount of money for the right reasons. The more investors you bring into your business, the more people to whom you have to answer and be responsible for. People become entrepreneurs for a lot of reasons, but the big two are to make a lot of money and to be their own bosses. Try not to let the first one completely wipe out the second one.

For more on investing in a cannabis business, check out my post from earlier this week: Marijuana Business Investing: The Basics on Debt vs. Equity