Raising Private Capital in the Cannabis Industry

Want to open a consumption lounge in Las Vegas? How about a dispensary in Minnesota? Got the idea and the drive, but need money to get it off the ground? Most business owners, new or established, need to raise private capital to open or maintain. This aspect of business is rarely anyone’s favorite, but there are ways to increase your chances of success. Most cannabis investors are actively looking for specific things, while being quickly repelled by other aspects. Read below for genuine information on how to find cannabis investors and how to establish cannabis venture capital. (Please note this content is for informational purposes only, and no one should construe any such information or other material as legal, tax, investment, financial or other advice.)

Challenges Finding Cannabis Investors

Due to federal laws and regulations, traditional sources of financing are not often available to businesses operating within the cannabis industry. Two sets of restrictions dissuade banks from financing cannabis-related businesses:

1. The Anti-Money Laundering Act, which requires banks to report suspicious transactions related to activities that could be considered illegal or unethical.
2. The Bank Secrecy Act, which requires banks to report all transactions more than $10,000 and provides guidelines for proper recordkeeping.

The requirements of both regulations make cannabis too risky for lenders to offer financing to cannabis-related industries. Lenders that do offer options to cannabis-related businesses often limit their services to secondary or ancillary industries, such as labeling and packaging designers, technology companies like cannabis-specific point-of-sale providers, and all-purpose suppliers.

If cannabis venture capital is preferable, here are two ways to achieve funding through investment:

Equity

Some cannabis-related companies turn to the startup world for funding, selling a portion of their shares to investors in exchange for capital. This technique allows cannabis companies to raise funds without incurring debt while providing vital liquidity for operations, expansion, or research and development.

Debt Financing (private loans)

Debt financing involves borrowing money from private lenders, such as cannabis angel investors, with the promise to pay back the principal amount plus predetermined interest within a specified timeframe. This avenue is often without the typical regulatory roadblocks. Special databases exist solely to connect cannabis angel investors with those in the industry.

Cannabis Angel Investors and Venture Capitalists

If going the investor route, preparation will take you a long way. Just like in other industries, investors want their money back plus profit added, therefore they must choose their ventures carefully.

Cannabis investors typically look for:

• According to MJBizDaily, two out of three cannabis investors say the management’s experience, qualifications and strengths are the biggest factors in their decision to invest or not.
• Opportunities to make money.
• Evidence of performance, such as great sales, a large customer base and a wide, underserved market.
• Maintaining high-quality financial forecasts that are well-thought-out, accurate and understandable is imperative.
• If other industry companies are trying to copy you.

Avoid the following when seeking cannabis investors:

• Aligning with disorganized or inexperienced founders. If you fall into these categories, bring in others to balance.
• Having a complicated business plan. Simplicity is always more easily followed, and subsequently, more successful.
• Having only short-term plans. Goalposts are necessary, as are having long-term paths to achieve them.
• Creating share dilution by issuing additional stock, as this reduces the current shareholder’s ownership proportion.
• Indulging in unrealistic or grandiose financial projections or valuation. Understanding reality is essential to risk management.

Diligence is very important when searching for cannabis venture capital, and preparing your business for review by marijuana investors is not all there is to it. You must also be actively considering if an investor is right for you and your business.

• What is the investor’s characteristic investment size?
• What is the size of their fund and when was it raised?
• Do they have experience with cannabis businesses?
• How would the investor describe their risk tolerance?
• How can they advance your business beyond investment?
• What would the relationship look like?
• What in-house services do they offer companies in their portfolio?
• What does support look like to them, and is that adequate to you?

Listings of potential investors are available as starting points; for example, Ganjapreneur has one on their website.

Network at a Cannabis Conference

Connecting and networking are consistently listed as top 10 tips for attracting marijuana investors. As the nation’s leading business-to-business cannabis conference, CannaCon is the best way to follow that advice! Our goal is to grow the cannabis industry by educating cannabis business owners on all things related to cannabis and hemp. CannaCon trade shows feature a large exhibition hall with worldwide exhibitors, as well as seminars delivered by industry experts. Register to attend the next CannaCon!