5 common pitfalls that have crushed small startups

Learn from the mistakes of others when seeking financing

As an advocate for small business owners and a veteran of the finance industry, I have listened to hundreds of requests for capital from both cannabis-based businesses and business owners in other sectors.

There are a few key mistakes I have seen business owners make time and time again that yield poor results.

Here are the top five pitfalls to avoid to increase your chances of success and set you on the path for a fruitful financing endeavor for your new or existing marijuana business.

 

  1. Asking the wrong questions before starting your presentation.

Every funding source has a set of criteria they adhere to when looking to invest or lend.

Lenders look at things very differently than investors. Lenders, by nature, want to receive their money over a certain period of time through regular payments at a set rate. Investors are looking for an exit event, typically within a few years, to receive a return on their investment. Generally speaking, equity investors seek anywhere from 10 to 50 times the return on their investment, which is often much larger than a lender seeks. Think dating: a quick meet and greet for coffee or a drink to see if your interests are aligned and if there is any chemistry.

There are two different mentalities at play and knowing which one you are dealing with is key in order to correctly tailor your pitch. The best game plan is to ask for a pre-meeting before you present to either a lender or investor.

Here are a few questions to ask at your pre-meeting:

– Are you a lender or an equity investor?

– What have you previously invested in or loaned on?

– What kind of return and timeline are you anticipating?

– How much do you have allocated for investment in the marijuana space?

– Can you offer any other benefits to the business?

– Do you have any contacts that would be valuable?

– What sort of involvement do you want in the day-to-day business?

– What sort of reporting are you looking for?

 

  1. Selling your product or idea before establishing any rapport or common ground.

If you’ve ever watched the TV show “Shark Tank,” you will notice how most openings are alike. The entrepreneurs start with how much money they are seeking, what problem their product or service solves and how much equity they are willing to give up. It’s wise to avoid getting mired in details about yourself; instead, focus on engaging the other person to get a sense of what they may be looking for in a match.

Do some initial research on the funding sources you are interested in, including visiting their website or LinkedIn profile to see what connections or interests you may have in common before jumping into a sales pitch. Just like a job interview, it’s important to establish some common ground — ranging from school, mutual acquaintances or something not related to business — and connect on another level before presenting.

 

  1. Telling an investor you have the best product (without proof or independent research) and that there is no competition.

If I have heard this once, I’ve heard it a thousand times. Everyone says they have the best, highest quality or most innovative product or service. Instead of superlatives, show me why yours is different or exceptional and what niche it will serve. Have samples available for review and be prepared, if possible, with independent results or data. Rarely will a product have no competition and it may actually work to your advantage to have competitors that prove there is market demand for your product.

 

  1. Not understanding the investors’ criteria and what they are looking for.

Do your best to uncover any additional information that will reveal information about their criteria or past fundings. Search or ask about what investments or loans they have made in the past in this industry, how those have worked out and what else they are looking for in future investments. Some investors are looking for a network of companies that serve a specific niche, such as a grow facility, extraction lab, edibles company and/or a dispensary, so they can present to someone else who may be looking to purchase a turn-key, fully integrated company.

When working with an equity-based funding source, understand their exit strategy and how your company would fit into that plan. This will help you tailor your presentation and confirm that your interests are aligned.

Typically, funding sources have specific underwriting criteria. If yours doesn’t fit, cut your losses. Smart presenters should then ask, “Since this does not look like a fit for us, do you have any other sources that might be a better match for funding my business?”

 

  1. Telling a lender you will not personally guarantee a loan.

Never tell a debt-based lender that you will not personally guarantee a loan. This says to a lender: “I don’t really believe I will be able to repay the money you are giving me, and if things get too difficult, I am going to cut my losses and move on without repaying the debt.” An equity investor will look at things differently since they are seeking a much larger return on their investment.

Lenders expect challenges, but they also expect the business owner to work as hard as possible to repay the loan since they do not receive any of the upside if and when there is a large exit event.

 

Scott Jordan is the director of business development for Dynamic Alternative Finance. He has arranged more than $28 million in loans and equipment leases for cannabis business owners in the past two years. He has been interviewed by local TV and radio stations, authored numerous articles and has been a featured speaker at national conferences. He can be reached at s.jordan@dynaltfinance.com.

Comment

Comments are closed.

Latest News

More

The Marijuana Venture Interview: Cy Scott

One of the biggest changes in cannabis as it has…

Read More >

Strategies for employers to succeed in a candidate’s market

When I turned 21 years old, I was a junior…

Read More >

Does the OLCC have unlimited rights to inspect premises?

As Oregon’s adult-use cannabis industry matures and licensed cannabis businesses…

Read More >
Website Design