How to Raise Capital for Your Cannabusiness
All businesses will benefit from investment at some point in their journey. A capital injection enables expansion and fuels growth, allowing operators to capitalize on opportunities as they arise.
The trouble is that cannabis businesses don’t have access to traditional business lending routes due to their illegal status in the fed’s eyes. But despite the challenges, there are viable avenues to obtaining the funding you need. Today’s post offers a few expert tips to boost capital investment and improve the chances of landing the financing you need.
The Importance of Good Accounting Practices
Whether you’re a new cannabis licensee or an established operator, having cannabis accounting expertise on your side is essential. A qualified cannabis accountant can help you stay compliant and profitable and may be able to identify areas ripe for expansion and development.
Another benefit of having a niche cannabis accountant in your corner is that it boosts investor confidence, as they’ll know you are doing everything possible to reduce financial risk.
Cannabis accountants can help to prevent loss due to fraud, theft, reporting, or bookkeeping errors. When speaking to an investor, you’ll also have concrete data that proves compliance and financial responsibility, and that speaks volumes about your creditworthiness—and indicates your business has the structures in place to support long-term success.
Pitch Deck or Business Plan?
Before you start pitching investors, you’ll need to develop a presentation. If you’ve been working with a business plan, we advise you to chuck it in favor of a pitch deck. Here’s why.
A business plan is a static document that, unless updated frequently to reflect market changes and shifts in direction, will quickly become obsolete.
Pitch decks, on the other hand, are more concise and get straight to all the salient points, helping you highlight what’s important to them. Most will not read your 80-page business plan, so don’t waste your time.
So, what do you include in a pitch deck? Formatting and themes aside, here are the key elements to include:
Management team profiles: Experience and track records matter. Keep it brief, but highlight what makes each person qualified to help you succeed. Be sure to include your cannabis accountant, controller, or CFO, as they are pivotal to your success.
Board and advisors: The more expertise your team has, the more attractive it appears to investors.
Tell your story: Stories are more memorable than CVs. Inject some personality into it and focus on the why and the problem you’re solving.
Market analysis: You don’t need detailed financials, but it’s helpful to demonstrate that you understand the market at the moment and where you envision it going over the next five to ten years.
The competition: Knowing what and who you’re up against shows you have a realistic view of the landscape and how you differ from others.
Challenges: Identify barriers to growth and how you’re solving the problem. Project how the landscape will change after rescheduling and where that will take you.
Go-to-market plan: Talk about how you’re going to market your business. Include key details on distribution and sales. Be sure to do your homework so you understand cost-affecting decisions.
Pricing strategy: Margins will always be critical for investors, as will revenue drivers and pricing strategies now and in the future.
Summarize financial projections: There’s no need to provide deep financials in your deck, but you should outline basic assumptions, growth projections, and a five-year revenue outlook.
Investor-specific data: Include your company valuation, what you intend to use the money for, equity structures, time to pay back the loan, and ROI.
Owner (and other) capital: Detail how much capital has already been invested, how it was allocated, and the outcomes.
Milestones and successes: Outline what you or the company has accomplished thus far, including any hurdles you’ve scaled.
What you’re offering: Detail what you’re offering in exchange for the investment. Many decks neglect this aspect, but it’s a good hook, and you should include it.
Lastly, have an attorney review the deck before sending. It’s better to ensure your language is not misleading, or you might land yourself in a legal snafu.
Create a Solid Five-Year Financial Model
A good financial model is comprehensive, accurate, and faithful to the data presented in the pitch deck. If the numbers don’t correspond, it can easily deter a potentially good investor. Avoid complex Excel spreadsheets and focus on having good summaries.
Here’s what to include (typically for the past five years if you have it):
Balance sheet
P&L statement
Key assumptions (yields, pricing, etc.)
Best-case and worst-case scenarios (to show potential fluctuations)
Summary with all metrics, assumptions, ratios, etc.
Analyze Your Capital and Entity Structure
Before raising any capital, thoroughly examine your business entity structures. Investors will be more interested in low-risk entities, such as C-corps, especially at the startup stage.
Conversely, flow-through entities can result in tax liability for investors, so consider this before you start pitching.
Cannabis businesses that have created multiple entities to avoid the impact of IRC 280E might also be suspect. However, it might make sense from a certain standpoint, so be prepared to support your decisions. Just be aware that it can be a big red flag.
Your prospective investor will also want to know about the type of equity you’re offering, whether it’s convertible or direct equity, SAFE, etc. Outline any employee stock option plans, as they may also be relevant.
Determining Your Company Valuation
Valuations based on fabricated financial models do not interest investors. Work with your accountant to establish a realistic valuation that accurately reflects your business model; otherwise, you risk losing the deal. Investors know how much your company is worth; don’t insult their intelligence.
Establish Your Unique Value Proposition
A unique value proposition (UVP) articulates why your company, product, or business model is unique from others in the market. A good UVP indicated sustainability and commercial viability over time. Weave your UVP into your pitchbook storytelling as it’s a strong selling point (or should be).
Finding Investors
Now that you have a kick-ass pitch deck, it’s time to find people to pitch it to. Research the possibilities, including angel investors, cannabis-specific investment funds, and think about friends and family who might be interested.
Create different versions of your pitch deck to speak directly to the groups or people you’re pitching to, using their motivations as your guide.
Practice your pitch with people you know who will give you honest feedback. Then, when you’ve sharpened your presentation down to the finest detail, go forth with confidence.
The Bottom Line
Finding investment can be challenging for cannabis operators. But with the right plan, presentation, approach, and solid financial data in your back pocket, you’ve got an excellent chance of getting what you want.
Speak to the experts at Growise today; we’d love to show you how we can help.
