On the eve of potential marijuana legalization in multiple states, it’s time to revisit what marijuana businesses should know when approaching investors. My firm has structured a number of deals involving cannabis investors, some where we represent the investor(s), others where we represent the cannabis business. This column will cover four important considerations for cannabis businesses looking to raise money for such deals.
It is worth noting that there are three primary reasons for the recent influx in cannabis investment. First, the market for state legal marijuana is expected to reach $7.1 billion this year. Second, there are only a limited number of jurisdictions with viable cannabis markets, and fewer still that allow for out-of-state investment. And third, due to the recent emergence of the cannabis industry, nearly all pot businesses can be classified as startups, and startups are nearly always looking for money.
Marijuana businesses have a limited opportunity to impress investors, especially when the investor is a perfect stranger. For that reason alone, it is critical for a cannabis business seeking funding to consider and refine its approach before making a pitch, and for the business to remain flexible and responsive throughout the courtship process. Here are four things every cannabis business should consider when it comes to raising money, including in those states with legalization looming:
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1. Do your research.
Because marijuana markets are highly regulated, states funnel cannabis businesses into fixed classes of licensure. This means that unless you are a vendor or ancillary service provider to the industry, it is unlikely your business idea is unique. Still, you need to distinguish yourself from whatever else is out there. If an investor asks how your marijuana production or processing company, for example, is different than anyone else’s, you should be able to explain exactly how. Be ready to discuss the competition objectively, and explain how you plan to dust them (realistically).
2. Be utterly transparent and have your material ready.
Investors are always looking for ways to buy into companies on the cheap, or simply not to invest. Still, you will gain credibility by addressing your weaknesses when asked. (Yes, you have them.) You should also develop a plan to fill gaps and to acquire necessary knowledge and resources. Pretending to know an answer when you don’t will never serve you, and failing to disclose key information will only create headaches (and maybe even lawsuits) down the line.
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Do not approach investors until your business information is organized into a pitch deck you have vetted and proofed, and until you have appropriate legal disclosures in hand. Those documents must be prepared by professionals and they should include, at minimum, disclaimers, risk factors, and a high-level term sheet.
3. Have confidence, but listen to others’ ideas.
From an investor perspective, many people pitching startup businesses, particularly in cannabis, appear starry-eyed and unrealistic. Over the past few years, I have seen claims ranging from the conservative to the wildly irresponsible. Make no mistake: it is important to believe in your vision. However, it is also important not to appear so oversubscribed that you would resist input or coaching. Very few investors will be content to sit idly by while a business dispatches their hard-earned capital on a “trust me” basis. Investors want assurance that a prominent feature of your startup is creative, flexible leadership that will ensure success, even when outside forces interfere.
4. Keep your eyes on the prize.
The successful pot businesses have the ability to raise money while not losing focus on their core business — producing or selling cannabis. This means remembering that the more capital you raise, the more diluted your ownership portion becomes (and the less control you have). If all you do is work on raising money, business lines will dry up. Every startup business needs constant attention — especially in the cannabis industry where the rules are always in flux. Fundraising can devolve into a distraction if not approached thoughtfully.
Hilary Bricken is an attorney at Harris Moure, PLLC in Seattle and she chairs the firm’s Canna Law Group. Her practice consists of representing marijuana businesses of all sizes in multiple states on matters relating to licensing, corporate formation and contracts, commercial litigation, and intellectual property. Named one of the 100 most influential people in the cannabis industry in 2014, Hilary is also lead editor of the Canna Law Blog. You can reach her by email at [email protected].