9 Things You Probably Didn’t Know About Raising Money in the Cannabis Industry
Insights from CanopyBoulder’s Spring Class Funding
By Patrick Rea, Co-founder and Managing Director of CanopyBoulder
As of early August, CanopyBoulder Spring Class companies have raised nearly $3 million in seed financing, and more is on the way. But don’t think that raising money or investing money is easy—it is not. The cannabis industry is amid a prolonged inflection point of investor interest, but that doesn’t mean you will be given a free pass. It is important to understand you are competing for capital in a strong economy and investment opportunities abound. Do your work, be prepared and manage your expectations when raising capital in the cannabis industry.
To help, we have formulated a list of nine things that entrepreneurs and investors should understand about raising capital in the cannabis industry.
1. Cannabis money does not grow on trees.
The cannabis industry is amidst a media honeymoon. However, the amount of capital being invested is not in direct relationship to the number of headlines the industry receives. So manage your expectations and understand that raising money will be harder than you expect, unless you have pre-committed friends and family.
2. Investors need help too.
Not every angel investor is sophisticated, and this isn’t unique to cannabis industry angels, but it is more pronounced. Understand that it is not rude to perform due diligence on your investors as they perform due diligence on you. Ask to speak with the CEOs of past investments, look at their track record for returns and understand their exit preferences, especially their desire for exit timing. Make sure your interests align here, the terms are clear, and you will save yourself time down the road.
3. Know your venture finance Ps & Qs.
So let’s say an investor says he will invest $500k at a $2M valuation. Is this a pre-money valuation, preferable to the entrepreneur, or post-money valuation, preferable to the investor? Will you be offering 1x preferred non-participating or common stock? By knowing how the economics and control of your company vary in the negotiations, you will save money and time. We recommend the book “Venture Deals: Be Smarter Than Your Lawyer and Venture Capitalist” to all of our CanopyBoulder companies, mentors and investors.
4. It’s all about the founder(s).
Do you present well? Inspire others? Have a good understanding of venture finance? Can you sell? These are all things investors look for. When they find this combination of skills, their chances of investing in early stage companies increases. Be honest with yourself and look to surround yourself with people who will only add value to the business.
5. Momentum is your friend.
Many entrepreneurs raising money have no problem generating interest in investing, but transitioning from interest to actual investing, signing subscription docs and wiring funds, is much more difficult. Utilize non-binding term sheets and “closings” to bring investors to the table. And if you have an investor that will “seed” the round, don’t be afraid to reward them in creative ways.
6. Legal costs can get out of control.
Are you an LLC or a C-corp? Taking on convertible debt or selling equity? Bringing in foreign investors or just domestic, and are they in-state or out-of-state? These are all critical questions a cannabis entrepreneur should have answered with clear contextual understanding when raising capital. Get the answers to these questions and understand why they are important from a documentation, cost and tax perspective before you register your business and start talking to investors. Legal costs add up quickly, so try and do it right the first time. And be wary of the small investor who wants to negotiate every term. After the legal costs, is such an investor worth bringing on? And as an investor, be realistic regarding your term requirements and you will win favor with the entrepreneur.
7. Software vs. hardware
Software scales and hardware fails. This adage is an overstatement, but there is some truth here. Software is scalable and adjustable. Hardware is not. If you’re designing a truly innovative vaporizer, grow box, light or storage container, it may not take much to come up with a design prototype. And the money needed for an engineering prototype and functional prototype will be a bit more. But going into production is expensive. Think about this when you are planning and be honest with prospective investors.
8. Be ready when you are ready.
The last thing you want to do is find yourself caught off guard by a key question posed by an investor. Do your homework and practice your pitch and Q&A skills with friends and partners. Talk about your business to everyone and understand that this is how you will refine your story. We like to say that you need to be able to explain your business to your grandma and Warren Buffett.
9. Remember the law of 3s.
No matter what you think, it will take you three-times longer, cost three-times as much and be three-times harder to launch your business than you originally imagined. So plan for this. Be realistic about how many people you will need on your team and how much capital will be required to go to market. But hey, if it were so easy, everybody would be doing it!
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