Preparing your cannabis company for investments and financing

Be ready to present investors with financial information that includes past performance and future projections

Warren Buffett once said, “the investor of today does not profit from yesterday’s growth.” This is as true in the cannabis industry as in any other industry. What you and your company have done is certainly interesting, but investors want to know what you’re going to do. The future is more important than the past.

The cannabis market heats up more every day. From more states legalizing marijuana for medicinal and/or recreational purposes to the recent action in the United States to remove hemp from Schedule I of the Controlled Substances Act, we see the market for legal cannabis growing constantly. And the growth is certainly not limited to the U.S. Countries across the globe are changing their views on cannabis, and the market for cannabis and cannabis-based products seems to get larger every day.

The opportunities available to cannabis entrepreneurs seem limitless. Often this potential is not limited by how innovative your product is or by how brilliant you are at marketing it. The limiting factor is often simply a matter of money. If the age-old adage “you have to spend money to make money” is true, it is equally true to say, “you have to have money to spend money.”

So what options do entrepreneurs have when it comes to getting the funding necessary to launch and grow the next big cannabis company?

On one end of the spectrum are the people who have family, friends and other angel investors willing and able to fund their cannabis ventures. If you’re fortunate enough to be in this category, you may be off and running in no time. This often requires less in terms of business plans, growth forecasts, financials and the like, as Mom and Dad may be willing to help out without the need to disclose everything under the sun about the company.

On the other end of the spectrum are initial public offerings on a stock exchange. These require disclosure of volumes of information about the company, the market, the projected financials and many other details.

Institutional investors fall in between angel investments and being listed on a stock exchange.

As you prepare your company for the next phase of growth, you may be faced with the reality that you simply can’t fund that growth organically. While different financing options will come with different requirements related to due diligence about you and your company, there are some basics that you can count on, and that you are well served to be ready to provide ahead of time.

– First, you will need to explain why your company is poised for great things in an increasingly crowded market. While the market for legal cannabis continues to grow rapidly, the pool of players in that market has also grown quickly and shows no sign of letting up. This ranges from the guy who has smoked pot most of his life (and therefore feels fully qualified to run a cannabis business) to companies like Coca-Cola and tobacco giant Altria, both of whom recently announced their interest in moving into the cannabis space. So be ready to answer the question about what is different about your company that makes it worth someone risking their money on you. This can be an elevator pitch in which you explain in 30 seconds or less what your company does and why it does that better than your competitors, or a full business plan that explains the market, your competition and what’s different about you.

– Second, you will need financials. While Warren Buffet and every other investor want to know about your future success and profits, one of the best indicators of future performance is past performance. If you can show that your revenues have increased 10% in each of the previous eight quarters, it is a credible statement to say you foresee that growth rate continuing. However, if you try to say that you predict revenues will suddenly start growing at 20%, a savvy investor is going to want you to justify that prediction given a pattern of 10% growth. Perhaps this is due to a new product you are launching, the bankruptcy of a significant competitor or some other market factor that would make this a reasonable prediction. But be prepared to present financials to an investor, both detailing the past performance of your company as well as projections for future performance with the reasoning behind those predictions.

– Third, you will need to show the intrinsic value of your company. This is tied to the first point above, but goes a step further. This is where you show the long-term viability and profitability of your company. Do you own patents on valuable inventions, or the relevant trademarks to protect your brand? What steps have you taken to protect valuable assets, such as confidentiality agreements and protection of your trade secrets? Are your key partners and employees likely to stay rather than defect to a competitor, leaving your company in a difficult position? Have you created meaningful relationships with industry players that will assist you with future growth, including suppliers, manufacturers, transportation and logistics companies, retailers and others who are vital to the creation, distribution and sale of your product? Have you taken the right steps to keep your company from being shut down by regulators or having its existence threatened by litigation? Do you have a social media presence to get news and announcements out to your target consumers and keep your company and its products relevant?

Knowledge is power when it comes to investing, and investors will want to know as much they can about your business before signing a check. As Peter Lynch, the former head of Fidelity’s Magellan Fund, once said about researching companies before investing in them: “If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” Just as poker players don’t bet without looking at their cards, investors don’t invest without looking under the covers. They want to know what they are investing in and why it is a good investment. Make sure you have your house in order when it comes time for you to try to attract investors. Getting the right investment at the right time can make all the difference in the world to your cannabis company, allowing you to fully reap the benefits of this amazing industry.

– Finally, investment offerings require disclosures, disclaimers and other information to ensure fairness to everyone involved. This can be a highly technical area with specific steps required based on factors like the number of investors, the sophistication of those investors and a number of other factors. Given the complexity of this area, it’s important to bring in legal counsel who are very familiar with these types of deals and can guide you through the process to keep the dream of your cannabis company from becoming a nightmare of angry investors, lawsuits and future financing challenges. The time to bring in legal help is before you start pitching your business to investors, making sure that each required step is followed and investors get access to all the information they need to make an informed decision about you and your company before they write that first check.

 

Tom Zuber is the managing partner of Zuber Lawler, which represents clients throughout the world from offices in Los Angeles, Silicon Valley, Chicago and New York. He holds a law degree from Columbia Law School, a master’s degree in public policy from Harvard University and a biomedical engineering degree from Rutgers University, where he graduated with highest honors. He can be reached at tzuber@zuberlaw.com.

 

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