Raising a round of financing can be a struggle for entrepreneurs in any vertical. It’s an exhausting, emotional, time sink, that requires the entrepreneur to make decisions that will undoubtedly impact their business going forward. Given the regulatory environment and the stigmas still surrounding the cannabis market, raising capital in that industry can be all the more grueling. The list below is meant to share thoughts, feelings, and learnings I’ve experienced along the way.
1. Choose The Right Partner (Not The Firm)
It’s easy for entrepreneurs to get overly excited about big-name firms. The firm name might help with recruiting down the road, but the reality is the partner/people at the firm are far more valuable than the firm itself. Your partner’s short- and long-term strategy and goals should align with yours.
2. Value Your Company Appropriately
The sudden rise of the legal cannabis space has resulted in substantial demand from investors, which has led to astronomically high valuations. These lofty numbers exhilarate most entrepreneurs, but raising capital at an inflated valuation can put your business at significant risk. It’s most important to think of each round of financing as a stepping stone. The investor’s logic is simple; they want to see the valuation substantially increase with each subsequent round of financing. Businesses with inflated costs, that aren’t supported by the underlying fundamentals, can deter future investors. From an investor’s perspective, these companies offer more risk at a lower return. Avoid a flat round or down round at all costs.
3. Understand Immediately If The Firm Can Invest In Cannabis
Many funds will show a lot of excitement over the cannabis space and are keen to learn more and find the “winners.” Remember that VC’s are also in the business of research, not just funding. Most entrepreneurs in the Cannabis space will tell you that, at some point, they’ve had a deal blocked by an LP unwilling to allow the firm to invest in cannabis. These situations often happen at the very last minute, resulting in a lot of time wasted. Make sure when engaging in conversations with a firm, that you get out in front of this potential issue. Request transparency by asking if the firm, or any of its LP’s, would have any problems investing in cannabis companies.
4. Have Your “Ask” Well Defined
An investment should not be a negotiation. The entrepreneur should have a well-defined investment amount and valuation before entering into conversations with investors. Investors respect this approach more than being approached by an entrepreneur who wants to “feel out” the investor for a valuation or investment size.
5. Be Prepared With A Clean And Concise Deck And Data
Businesses with a clean, well-designed, and concise deck will already be at an advantage with investors. This is your first impression. Entrepreneurs who know their data well, can quickly answer most questions from seasoned investors. Know that your deck will most likely get passed around to other investors, so get comfortable with that and invest time in putting your best foot forward here.
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