How to Successfully Invest in Cannabis Startups: A Message to Cannabis Investors

We here at DOPE CFO have been speaking at national conferences and to the press, CEOs, and accountants for quite sometime about how to do things correctly in cannabis accounting. But, we’ve been getting questions from investors, as well: from the billionaires (yes plural) who call us asking how to “fix” a bad investment with poor or no corporate governance, to the local millionaire wondering why he’s getting hit with a big cannabis tax bill, but no distribution from the company, to the average “Joe” on the street who wants to know how to win big in cannabis. We’re here to help. Here are some quick thoughts if you are dead-set on investing in this new industry.

First of all, I get it that right now you can make good money…even on the companies with horrible operations (ie without dropping names like “Med Men”). I also get it that you can make insane money on better run companies, even though they are spending (and losing) money faster than you can print it (ie Tillray, which at least doesn’t have employees, former CFO, and investors all suing them, not to mention the mass exodus of key executives).

                                                        Tillray                       MedMen              Apple

2018 Revenues                            $48 Million              $40 Million           $261 Billion

Net (Loss)/Income                    ($67) Million            ($66) Million          $59 Billion

EBITDA                                         ($33) Million            ($56) Million          $79 Billion

Market CAP                                App $5 Billion         App $2 Billion        $967 Billion

Revenue Multiple                            100x                         50x                           3x

Notes: Med Men is involved in non-stop drama, litigation, disputes, and claims of almost every kind and is still valued at very high multiples. Med Men year ends 6/30. I have not examined Tillray or Med Men financials in depth but I expect we will learn more about their accounting, taxes, etc. over the upcoming years and will be surprised if their “books” don’t have major issues as well.

So what does this tell us?

Basically that regardless of astounding losses, poor governance, accounting, tax, banking, software, and legalization issues, investors big and small are still pouring money into these companies (public and private).

What should you do as an Investor?

Whether you are just buying a few shares on a public exchange, investing a few hundred thousand in your best friends “grow,” or making a private equity investment of $10 Million or more, these are some things to look for regarding cannabis businesses:

  • Make sure there is a strong and independent board of directors, corporate controls, and governance procedures in place,
  • A seasoned management team is needed (ie not some young artist CEO that has been growing forever), which includes a knowledgeable cannabis CFO/CPA, Compliance Officer, and COO.
  • The operation needs to be well-funded. The winners will be the survivors who can grow rapidly. Losses will be big while grabbing market share, so make sure there are enough funds to make it to full US legalization.
  • Strong brand: Ultimately the retailers, processors, edible manufacturers, and growers that develop the premier products and experiences will be the most highly valued.
  • Vertical operations: This can add value to the supply chain as well as provide tax advantages.
  • High growth: The market is placing irrational value on revenues and growth so make sure this is part of your plan and a team that can execute on rapid growth (ie they’ve done it before)
  • Location is very important if you going into retail. Make sure the retail site has the potential for high traffic.
  • Don’t waste energy trying to “beat” 280e, with complex entity setups, small non-cannabis divisions, and incorrect/overstated Cost of Goods Sold.  The IRS knows these tricks and is winning almost every case right now (ie Harborside, Altermans).
  • And most of all have a Dope Accountant!  World Class cannabis accounting is extremely rare outside of our network. It’s complex and involves cost accounting, consolidations, banking, cash and merchant service issues, complex and poor software systems, insurance, and state and federal compliance issues.

In the old days we would work as accountants “inside” the company with the CEO as our boss. In the cannabis world, we like to think of the best structure to set up being similar to the “three branches of government” concept. The CEO and management team run the company, the Board and investors oversee and monitor the company, and the CFO/Cannabis accountant acts as an intermediary and reports both to the CEO and Board/Investors as an equal third party to ensure accuracy, compliance, transparency, and solid controls.

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