5 Reasons Why Cannabis Investors Refuse To Fund Your Business
Here at Renaissance Consulting, we strive to provide you with the best consulting regarding your cannabis business. Are you wondering why cannabis investors are refusing to fund your business? Read these short 5 reasons why could be effected. If you’re having trouble getting your cannabis business started, Renaissance Consulting is here to help.
1) You don’t have enough years of operational experience in a legally regulated, commercial cannabis market. Many think that their years of experience in an unregulated, underground grow with a few lights will translate into the instant experience at a full-scale operation with many employees and hundreds of lights. It doesn’t & this hubris is the downfall of many otherwise talented cultivators. The deals we’ve seen funded include multiple layers of checks and balances including an operational consultant to not only initially train but to provide long-term, experienced-based support.
2) Your team is not experienced enough for the investor to be confident they will get the ROI they desire. People invest in teams, not ideas. They want to know how well rounded your team is and why each is necessary to the success of the business. What is most common is a lack of balance and years of proven success. There is no substitute for cannabis specific experience combined with business acumen developed in industries that complement what you’re trying to accomplish in the cannabis space.
3) You’re not willing to give up control of your company in exchange for the multiple rounds of funding you actually need. You can expect to give up at least 20% of your company per round of capital you receive. In many cases, you’re going to be asked to receive your funding in 3 rounds. This means by the time you have made it through the time for your first harvest and all the expenses associated with licensing, real estate acquisition, design and build out of the facilities, and operational expenses until you are actually generating revenue, you will have given up control of the company. It’s better to own 40% of a multi-million dollar company than 100% of nothing.
4) You’re not creative enough or flexible about a deal structure that the investor asks you for. Investors are more receptive to deal structure they have experience with. Through your due diligence and investor conference calls that should be taking place, pay attention to their backgrounds. Also, listen to what they are asking for and give it to them. They could be real estate investors who aren’t comfortable with unsecured loans. Structure the transaction in a way that mimics a real estate deal and provide an escalator in it so they can share in the profit increases of a well-run cannabis company. They may want to provide you funding in a multitude of ways including some initial debt, an installment loan, a line of credit, an interest-only loan with a balloon payment or maybe even something convertible down the road.
5) You have an incomplete business plan with no defend-able numbers. While there are many good services that offer historical data, most investors can see through a cookie-cutter approach to presenting a business plan that doesn’t spell out what’s actually possible in your specific area, with the targeted demographic, supported by numbers that are realistic for the exact size and scope of your operation. The person seeking the capital is most often hurt the most by giving up too much to an investor based on projections taken from an outside area or state that don’t apply and aren’t defend-able. Few things erode trust faster than having to ask your investor for more capital because you’ve overstated the opportunity, the timeline associated with paying back what you owe, or a lack of adequate reserves to carry you through the construction process and/or the operational gap before revenue is received.