$8.1 billion of capital was raised by Cannabis companies in 2019 alone and, as more states move toward full legalization, that amount will only continue to grow. Additionally, industry experts are seeing that these niches appear to be recession-resistant (even “virus-resistant”) with many states experiencing recent record sales, mainly since Cannabis and hemp/CBD markets have been deemed essential during the pandemic.
However, even recession-resistant companies can experience challenges when finding capital for funding or seeking investors. Many Cannabis companies have been looking to debt and creditor solutions for capital growth, but that’s not the only solution business owners should take into consideration.
Beyond putting a company further in debt just to raise capital, Cannabis CEOs need solid, non-resource-draining solutions to build capital. From startups to founders of established companies, the following nine tips can help you significantly boost capital if you are a CEO or accountant helping businesses in these industries.
Many early investors and founders in the Cannabis space ignored securing a niche-specific accountant -- and are now regretting this decision as they find their investments turning sour. Learn from past Cannabis investors’ and CEOs’ errors, especially the ones who failed and didn’t recover. By adding a world-class accountant to a Cannabis operation, investors can rest easy knowing that they have a pulse on the overall health of the business. This is super important, as most investors are not involved with day-to-day operations.. When a highly-trained accountant is hired, the value of a company increases by 10% or more over time and, most importantly, helps prevent downside loss from theft, fraud, and severe bookkeeping error penalties.
The best way to attract an investor is to provide concrete and visible data that proves that the business you represent is a tight, compliant ship. This proof can only be acquired through complete and correct cost accounting, documented internal controls, accounting policies and procedures, chart of accounts, and other tools tailored to Cannabis.
The Cannabis and hemp/CBD niches have highly complex accounting requirements (i.e. cost accounting) and span several unrelated verticals: farming, chemical manufacture, product manufacture, delivery, labs, and retail.
To leverage full 360-degree accounting services and raise capital, you need a dream team in place of community experts that understand these multiple niche-specific layers and regulations. Not only should your team possess the required tools, processes, and knowledge, but it should also consist of a team of executives with a successful track record of supporting successful companies. Amassing attorneys, COOs, subject matter experts, and CFOs helps ensure that all of the higher-level tasks are accounted for and that the business is protected and set up for success.
A great pitch deck is essential to landing an investor and raising capital. Throw out your 100-page Word doc business plans and ill-prepared pitch decks. Investors don’t have time to comb through a long business plan; they need to be able to quickly review key information.
Improve your chances of landing the attention of an investor on the first try by integrating these vital pitch deck components:
Your financial model must be complete, accurate, and align with the numbers in the pitch deck. Often a model will get updated, but the numbers remain the same in the pitch deck, which can quickly scare off an investor. A good model will be simple and free from massive Excel files. Look to include the following:
You also need to analyze entity structure prior to capital raise. Is the company a flow-thru entity or a C-corp? Are there many entities or just one? Most smart investors will insist on a C-corp structure for a Cannabis startup because the risk and tax rates are lower (assuming there were no dividends prior to exit, which is the plan for most cannabis startups).
Flow-thru entities can create sizable tax liability to a minority investor and, assuming no dividends, this is not a good situation for an investor to be in. Also, a business creating many entities to “avoid” 280E is a red flag to investors.
Furthermore, consider the type of equity the investor will obtain (convertible, SAFE, or direct equity). You also want to look at which component of capital will be funded through debt, and if there are stock option plans for employees or other options to take into consideration that an investor may inquire about.
Realistic company valuation will be part of your business model and deck, and is an extremely important aspect of raising capital. For example, if you are giving up 20% of the company for $1 million dollars, that means the company is worth $4 million prior to the capital raise (and will be worth $5 million once the investor adds $1 million). Ask yourself these questions: Is this realistic? Is the company pre-revenue? Does it have any real assets other than an idea and a Cannabis license? Company valuations that are based on nothing other than a “made up” financial model will often receive little interest from investors.
UVP stands for Unique Value Proposition and explains clearly why your product or company is unique, valuable, sustainable, and desired by the market. USP (Unique Selling Proposition) explains why your customers will buy from you and not someone else. These aspects are important to know and discuss in-depth with investors.
Sit back and analyze the steps you have taken to raise capital. If you have an idea, deck, and model, what’s next?
The next step is to secure a license, conduct a test market with customers, and then work towards accumulating revenue. Look at the milestones you have hit, or the milestones your client has achieved, and determine next steps to take. The more traction you have on the path towards preparing for raising capital, the higher your valuation can be, meaning the less of your company you need to sacrifice in exchange for the capital you are raising.
Finally, without access to a pool of investors, a great plan, product, and team will go nowhere. Do you plan to use Angel Investors? Friends and family? Cannabis Investor Funds, or other ideas? Develop a strategy surrounding the who, how, and when of getting in front of ideal investors, and then jump in with this new toolkit on your belt.
Many companies are competing for capital in the Cannabis and hemp/CBD space. While many investors have been burned by Cannabis investment deals run amok, you can convince even the most skeptical of investors if you approach them with prepared and compliant records, models, pitch decks, and a competent team of experts.
For accountants and CEOs alike, DOPE CFO provides the tools, community of experts, and proven system for training accounting professionals to help your clients get access to the capital that they need. For more information about our program, or to ask us questions about this ever-changing industry, we encourage accounting professionals to schedule a time to speak with us to learn more about how you can provide support to startup Cannabis companies.