On the road to opening a successful marijuana retail store, three boxes need to be checked: startup capital, a prime location and a state license.
While the order may vary from state to state, starting with a healthy bankroll can alleviate the stresses of the other two milestones. However, in a classic Catch-22, funding woes can often solve themselves if an entrepreneur owns a premium retail space or has won a coveted state permit.
In the first of this three-part series starting a mar, Marijuana Venture takes a deeper look at the process of raising capital through the eyes of several cannabis industry experts.
Financing
For most would-be entrepreneurs, the biggest barrier to entering the marijuana industry is capital. In California, it is the cornerstone of starting a retail operation, says attorney Jasun Molinelli, a partner at Archer Norris.
“It’s no different than with any other business in California in that you have to start with capital,” says Molinelli, who heads up the law firm’s cannabis business department. “That’s the first resource that is needed to obtain a location and then a permit to operate.”
Obviously, applicants can’t get a conventional business loan from a bank, due to the federally illegal nature of the proposed business, Molinelli says. But as states such as California and Massachusetts approach their respective launch dates, he believes there will be an influx of private lenders looking to partner with professionals with attractive business plans.
Scott Jordan, the director of business development at Dynamic Alternative Finance, says starting with personal equity can help kickstart the operation. These options, depending on the risk-tolerance of each entrepreneur, may include a personal loan, home equity line of credit or cashing out a 401k or IRA. Dynamic Alternative Finance also has a startup program that can help raise up to $250,000.
“Show the investor that you’ve got significant skin in the game if you want to get money,” Jordan says.
Jordan says applicants need to decide early on if they are looking for debt or equity. With equity, a business owner gives up part of the control of the business, but in turn, brings on a partner who has a financial stake in the company’s success. With debt-based financing, the business owner maintains complete control of the investment, but may receive less support in the long run.
Jordan compares an equity partnership to a marriage.
“You better be sure that you like this person and that when the chips are down that person is going to be on your side and seeing things the same way that you do,” he explains. “Debt, on the other hand, is like a date. You go out. You get together. You have a good time and it ends. Then you decide if you want to go out on another date or not. But you’re not obligated.”
Lauren Rudick, a partner at the New York-based law firm Hiller, PC, says applicants should make sure to verify that a lender is in accordance with the applicable state’s regulations before getting involved.
“Investors are frequently vetted by the state as owners of the business, and may be disqualified for certain crimes as a ‘bad actor’ or for various infractions involving fraud and securities, among other things,” Rudick says.
Jordan agrees. He suggests that applicants should thoroughly research all investors before signing a contract.
“They should question the investor as much as the investor should question them,” Jordan says. “Ask what have they done in terms of loans and funding so far. They should be able to talk about that. If it’s their first deal, not only run, but run fast.”
The same can be said for investors looking into applicants, Rudick says. Those writing the checks will be on the lookout for past troubles in an applicants’ history, such as disputes over ownership, company infighting or confusion regarding regulatory compliance.
The Ideal Investee
Hadley Ford, a former investment banker for Goldman Sachs and now CEO of iAnthus Capital Holdings, explains the mythic nature of his ideal applicant: “If you had someone who has 20 years of experience running a cannabis business and has knowledge of how to run a commercial business from top to bottom, that would be perfect,” Ford says. “The problem is that person doesn’t exist.”
Above all, be prepared with a business plan
By Patrick Wagner
According to Hadley Ford, CEO of iAnthus Capital, an executive summary should be written in “plain English” and include: a one- to two-page document detailing exactly what the project is and why it’s a good investment; a short summary of the business plan, including what is being asked for and what is being promised; a couple sentences highlighting the résumé of the person applying; and a very conservative summary of the financials.
“You want to under-promise and over-deliver on those,” Ford says of the financial summary. “Or you will lose your credibility instantly and the checkbook closes.”
Ford says entrepreneurs seeking investments should also prepare a detailed business plan and include everything from the financial summary, plus: an introduction to the executive staff; conservative revenue assumptions; and a time line for the proposed business operations.
The business plan should be five to seven pages for something smaller, like a single store. and up to 20 pages for larger investments. Ford says to keep the selling points separate to one point per page.
Following the investment interview, Ford says to have the following documents ready as a way to keep yourself in the investors’ minds: a frequently asked questions document; a formal summary of the applicant’s expertise; a formal summary of the executive staff’s expertise; and any other components of the business operation that could use special attention.
“You always want to have a good reason to contact them after the interview,” Ford says. “That way you are useful while you are asking for money. It’s a subtle point but I have found it to be very successful over time.”
Ford says investors generally want to see either experience in running a business or a cannabis business license before opening their checkbook, but his key determinant to work with anyone is the quality of the person, meaning the background, expertise and other indicators of success in what they have done in other walks of life.
For those without a license, ideal location or history of running successful businesses, Ford says to start by focusing on being ready for meetings with prospective investors (see sidebar). It’s imperative to prepare an executive summary and a formal business plan prior to meeting with investors.
“The reason why a business plan is important is that it shows that you have done the work,” he says. “You’ve been thoughtful and you’ve done the analysis around what you are going to do with this person’s money.”
Ford also says applicants need to physically prepare to be in an interview: look the part and practice the pitch. Even though cannabis is not traditionally a suit-and-tie type of industry, professionalism is crucial — and perhaps even more so when dealing directly with people who do come from the suit-and-tie world.
“Rehearse in front of the mirror,” he suggests. “Learn how to tell a story. Have someone ask you questions. Practice your answers. Don’t just show up in a T-shirt and sandals if someone is going to be writing you a $50,000 check.”
Having a coveted license or a perfect location could be enough to get investors lining up with cash in hand. The same could happen for entrepreneurs with a track record of success. But for everybody else, fundraising efforts should start small — or else they need to win the lottery. Ford and Molinelli both recommend starting with a network of friends and family and expanding from there.
“If you go to someone you don’t know — a stranger who is looking to make some money — with a startup cannabis plan, the chance of raising money from that is quite slim,” Ford says. “From my experience, it’s like a 1% or 2% hit rate. You’d be going out to about 800 people and pitching. That’s about a years’ worth of time to raise the funding.”
Rudick agrees — to an extent. She says approaching friends and family members is the most common route for entrepreneurs without a built-in fundraising edge, though there is risk.
“Those relationships could become strained in the event of a default, putting them in an uncomfortable position,” Rudick cautions. “I would put it out there that I was seeking a loan, network a ton and invite my friends/family to ask around. That way, there are a few degrees of separation.”
The most important aspects of any fundraising campaign are to practice and not get discouraged from hearing “no.”
“If you’re a hard-working person with a track record of success and you’ve got a project that you’ve done the work on and you display it well from both a written and numbers perspective,” Ford says, “then you are going to get the money.”
[contextly_auto_sidebar]