Raising capital for any business is never easy. Now, try raising capital for a highly regulated business that federal law currently prohibits. And, as a recently awarded licensee, you are seeking capital before you have any operations or revenue. With these many headwinds, you may want to assess your capital raising readiness and likelihood of success against the following criteria – the more you can check off, the more likely you will achieve your capital raising in a timely manner and get to your first craft grow harvest.
Don’t underestimate how important speed to market is – and how quickly it can provide a significant return on investment for craft growers, especially in new emerging markets. Large multi-state operators have pounced on first-to-market operators via acquisition as evidenced by recent acquisitions in MA, MO, VA, PA, MI, and MD, among others. Early market entry not only will position you for increased profits, but it also positions you as a key acquisition target for highly profitable early exits.
Craft Growers Can Improve Their Chances of Attracting the Right Investors
Follow some of these tried-and-true steps for improving your capital raise efforts. They work not only for your capital raise, but will assist you in building a firm foundational plan for your business to move forward quickly once you have the needed capital in hand.
Establish a Qualified and Professional Management Team
Positioning Statement. Develop a positioning statement (i.e., your core message), embraced by your entire management team, that can be delivered in every medium to influence the perception you desire for your business. At a minimum, you should succinctly and descriptively address the following questions:
- Who are you and what are your qualifications?
- What business are you in (i.e. cultivation, extraction, processing, infusion, etc.)?
- What people and markets do you intend to serve?
- What are the special needs of the people or markets you want to serve?
- With whom are you competing?
- What makes you and your products different from those competitors?
- What’s the benefit: What unique benefit does a customer derive from your business offering?
- Multi-talented Team. Bring together a management/leadership team that blends cannabis expertise with mainstream business mindset and acumen – this industry requires a multi-talented management team that can multi-task.
- Use of Industry Consultants. Involve qualified cannabis-specific consultants as part of your start-up management team (experts who have learned from the past mistakes of others) and commit to hiring the right people to fill any management team holes after you complete your raise.
- Team Commitment. Especially in pre-revenue stage investing, it is all about the entrepreneur/founders and their relevant professional experience, their passion for the business, their ability to clearly articulate a strong vision, and their willingness/ability to be flexible and change in this dynamic industry. Best evidence of management commitment is how much of their own money they have they invested in business.
Clearly Articulate Your Strategic Advantage
- Market Research. It is important that your business and operating plan be supported by thorough market research, where you carve out your niche in market and differentiate yourself against the competition.
- Differentiation. Know the importance of your moat – the protection you have based on your differentiation and strategic advantage:
- Proprietary formulations and genetics
- Operational efficiencies
- Product quality
- Off-take arrangements
- Possible vertical integration
- Scalability. Demonstrate that you have solid standard operating procedures and redundancies to reduce risk and have a foundation to scale the business.
- Premium Product. Focus on top-shelf, premium flower, pre-rolls and vape oils at a reasonable price and stay away from commoditized low-end flower and extracted products. Be ready to answer the following – can your business survive in a full post-federal legalization market and why.
Develop a Realistic Capital Raising Game Plan
- Targeting Right Investor. Understand the type of cannabis investor you are targeting (friends and family, high net worth individuals, angel investors, family offices, strategic, vendor financing, cannabis-specific investment funds) and how their investing philosophies differ including their expectations on exit strategy and timing.
- Finding Investors. Develop a strategy for finding cannabis investors (online networking, social media, cannabis directories, industry events and associations, crowdfunding, cannabis newsletters). Talk to your peers.
- Professional Referrals. Leverage your professional relationships with well-connected, cannabis-focused attorneys, consultants and accountants to get introductions to cannabis investors.
- Completed Data Room. Be due diligence-ready with a well-organized, cloud-based data room (governance, legal, regulatory, technology systems, internal controls, standard operating procedures, financial)
- Investor Package. Make sure you have a complete investor package before you start the capital raising process (business and operating plan, executive summary, financial model, use of proceeds, proposed term sheet).
- Investor Presentation. Focus your 15-20 slide PowerPoint presentation on the investment highlights, management team, strategic differentiation, regulatory compliance, operating capabilities and financial. Make sure your investor presentation answers the following question – why should investor should fund your business as opposed to another licensed craft grower.
- Execution. Focus your fund raising on one or two goals to drive execution, capture your key progress/success measures on a visual scoreboard and update regularly, make sure your team knows the score, and create a culture of individual/team accountability for past performance and moving forward.
Raising Capital Is Not Just About the Money
- Regulatory. Know the SEC rules to qualify for exempt private placement offerings before you start raising capital.
- Lead Investor. Don’t underestimate the importance of finding a lead sophisticated investor who shares your vision, sets the basic terms and agrees to make significant investment, provided you can raise a minimum offering amount from other investors.
- Business Valuation. It is critical for pre-revenue business to establish a reasonable valuation – weighing your dilution concerns against the need for immediate capital to launch the business with potential upside if you successfully execute your growth plan. Speed to market is a competitive advantage.
- Achieving Milestones. Be certain that your management team is focused on a set of defined priorities and key milestones that have a specific timetable for completion – show how each milestone achievement generates incremental value for you and your investors.
- Minimum Offering Amount. Make sure to raise the right amount of capital to cover your projected cap ex (real estate, build out costs, HVACD, lights, benches/racks, fertigation), start-up costs, projected working capital (including per-operational hiring and inventory), and a reserve of contingencies/cost overruns. You do not want to raise additional round of capital at prior round valuation (or less) before you are operating and generating revenue.
- Deal Structure and Terms. Understand and be creative in setting mutually beneficial deal structures and term:
- Straight debt vs. convertible debt vs. equity
- Preferred distributions
- Waterfall provisions
- Liquidation preferences
- Guaranteed returns of capital
- Exit Strategy. Understand that most investors are looking to mitigate risk of loss with goal of capital return in 1-3 years. So be able to clearly state an exit strategy, whether to take-out investors or monetize the business (recapitalization, debt financing, strategic sale, etc.). Know any state-imposed license restrictions on exit including change of control provisions.
- Control Provisions. Consult with a qualified attorney to assure you fully understand ownership and board control provisions and how to properly structure your deal to protect you and the investor, including buy-sell provisions, voting agreements, rights of first refusal, management compensation and stock options.
- Investors with Industry Knowledge. Look for investors that can provide value beyond the money they are investing such as cannabis industry experience or contacts. A sophisticated board of directors willing to work and vested in your business’s success can be invaluable.
- Use of Proceeds. Be clear about how the offering proceeds with be used. Proceeds used to pay off past A/P, outstanding debt or early investors is a red flag for investors.
- Capital Expenditures. Seek indicative budgetary pricing for your significant systems and equipment purchases (HVACD, lighting, benches, racks, fertigation). Understand vendor lead times, payment terms and potential vendor financing programs.
- Equipment Financing. Investigate equipment financing from cannabis-specific lenders. While many cannabis-specific real estate/equipment lenders do not lend to pre-revenue companies, these lenders can be source of future funding (expansion or take-out financing) once you have at least a year of operating success behind you.
- Financial Projections. Detailed financial proformas are an absolute must for investors to assess the attractiveness of your opportunity (detailed operating expenses, one-time start-up costs, free cash flow projections, break-even and “home run” case scenarios, taxes). Be ready to explain your numbers and go into details, if asked.
- Revenue Assumptions. Make sure your financial assumptions are clearly stated and reasonable, especially wholesale price, yield per canopy square foot, and numbers of plants per square foot, and product mix (i.e. Grade A flower, Grade B flower, bio mass, pre-rolls, vape oil etc.)
- Bank Relationships. Establish your bank depository relationships before seeking capital. Understand the limitations on banking financing (including SBA loans) due to federal prohibition on cannabis. Evaluate and access state-run social equity financing sources.
You have your license – now the real work begins!
Rick Schweiger and Randy Shipley are co-founders of RSX Enterprises, Inc., a sales and marketing firm that sells and markets equipment for use in controlled environment agriculture on behalf of various lighting, HVACD, benching, processing and building products manufacturers. RSX’s design, build and facility start-up advisory services assists cultivators with facility and floor plan design optimization. .
RSX Enterprises Inc d/b/a Cultivation Design Build