In Oregon, Washington, California and elsewhere, we have structured a good number of deals involving cannabis investors as of late. Several of these deals have stretched into the seven figures. In some deals we represent the investor(s); in others we represent the business. This blog post will cover five important considerations for cannabis businesses looking to raise money for such deals.
Before we dive in, it is worth noting that there are three primary reasons for the recent influx in cannabis investment. First, the market for state legal marijuana is expected to reach $7.1 billion this year. Second, there are only a limited number of jurisdictions with viable cannabis markets, and fewer still that allow for out of state investment. And third, due to the very recent emergence of the cannabis industry, nearly all pot businesses can be classified as start-ups. As a rule, start-ups are always looking for money.
Marijuana businesses have a limited opportunity to impress investors, especially when the investor is a perfect stranger. For that reason alone, it is critical for a cannabis business to consider and refine its approach before making a pitch, and for the business to remain flexible and responsive throughout the courtship process. Here are five things every cannabis business should consider when it comes to raising money.
- Do your research.
Because marijuana markets are highly regulated, states funnel cannabis businesses into fixed classes of licensure. This means that unless you are a vendor or ancillary service provider to the industry, it is highly unlikely your business idea is unique. Still, you need to distinguish yourself from whatever else is out there. If an investor asks how your marijuana production or processing company, for example, is different than anyone else, you should be able to explain exactly why. Be ready to discuss the competition objectively, and explain how you plan to dust them (realistically).
- Be utterly transparent and have all your material ready.
Investors are always looking for ways to buy into companies on the cheap, or simply not to invest. Still, you will gain credibility by addressing your weaknesses when asked. (Yes, you have them.) You should also develop a plan to fill gaps and to acquire necessary knowledge and resources. Pretending to know an answer when you don’t will never serve you, and failing to disclose key information will only create headaches (and maybe even lawsuits) down the line.
As far as written materials go, do not approach investors until your business information is organized into a pitch deck you have vetted and proofed, and until you have appropriate legal disclosures in hand. Those documents must be prepared by professionals and they should include, at a minimum, disclaimers, risk factors and a high level term sheet.
- Believe in yourself, but listen to ideas.
From an investor perspective, many people pitching start-up businesses, particularly in cannabis, appear starry-eyed and unrealistic. Over the past few years, we have seen claims ranging from the conservative to the wildly irresponsible. Make no mistake: it is important to believe in your vision. However, it is also important not to appear so oversubscribed that you would resist input or coaching. Very few investors will be content to sit idly by while a business dispatches their hard-earned capital on a “trust me” basis. Instead, investors want assurance that a prominent feature of your start-up is creative, flexible leadership that will ensure success, even when outside forces interfere.
- Keep your eyes on the prize.
The successful pot businesses we work with have the ability to raise money while not losing focus on their core business – producing or selling cannabis. In the very big picture, this means remembering that the more capital you raise, the more diluted your ownership portion becomes (and the less control you have). On a day-to-day level, if all you do is work on raising money, business lines will dry up. Every start-up business needs constant attention – especially in the cannabis industry where the rules are always in flux. Fundraising can devolve into a distraction if not approached thoughtfully.
- Follow up and be realistic.
Most deals we structure happen pretty quickly, and most of our clients who have acquired investors find that interest will be apparent, at least to some degree, from the outset. Still, investors often apply leverage to acquire better terms, and we encourage clients to follow up on good leads. Walking the line between following up and becoming a nag is often a delicate exercise, but feeding potential investors news and exciting business developments is always a good idea. Most importantly, it may help you close the deal.