Businesses and individuals will begin applying for Oregon Health Authority (OHA) psilocybin licenses in two short months. We have been helping people form businesses and raise funds in anticipation of the new program. In some deals we represent the investors; in others we represent the business. This blog post will cover five important considerations for psilocybin businesses looking to raise money for such deals.
Before we dive in, it is worth noting that there are three primary reasons for the influx in psilocybin investment. First, Oregon is the only state building a psilocybin market. Second, although there is a “majority ownership” residency requirement for psilocybin businesses, the state will not preclude nonresident investment. And third, because the psilocybin industry is new, all of these businesses can be classified as start-ups. As a rule, start-ups are always looking for money.
Psilocybin businesses will have limited opportunities to impress investors, especially when the investor is a perfect stranger. For that reason alone, it is critical for an organizer or promoter to consider and refine their approach before making a pitch, and for the business to remain flexible and responsive throughout the courtship process. Here are five things every psilocybin business should consider when it comes to raising money.
Do your research
The psilocybin market will be highly regulated, and OHA funnels these 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 psilocybin manufacturing concept, 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 or materials 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. Also, pro tip: no one is going to sign your non-disclosure agreement.
Believe in yourself, but listen to ideas
From an investor perspective, many people pitching start-up businesses, particularly in controlled substances, appear starry-eyed and unrealistic. Having raised money in cannabis for many years, we’ve 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 psilocybin businesses we work with have the ability to raise money while not losing focus on their core business– manufacturing cubensis mushrooms or running a successful service center or testing lab. 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 psilocybin industry where the OHA rules will evolve unpredictably. 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.