In recent years, raising funds for a cannabis business has gotten easier. However, many entrepreneurs still face significant obstacles. If you are a business owner looking to raise funds for your business, you have to be able to demonstrate to lenders and investors that your business is worth investing in. Here are a few things to consider as you seek out capital for your business from third-party sources.
Account for the Risk Factors in Your Business Plan
Every business has inherent risks. As a result, you'll need to figure out how to best assess the risks associated with doing business so that investors are aware of them. Here’s how to account for the risk factors of your company in your business plan.
Establish a Compliance Program
Due to the unchanged regulatory environment on the federal level, along with evolving California cannabis laws, the industry is very risky. Include a section in your business plan that will establish a compliance program for your company. A compliance program helps your company to stay on top of changing priorities and developments with regard to federal and state policies.
Risk Mitigation and Contingency Plans
Although these are just a few of the risks that come along with a new cannabis business, the bottom line is that your business plan should identify all of the risks that affect your business, including financial, political, legal, organizational, environmental, and organization. Then you should assess these risks based on the likelihood that they may occur and define the potential impact of each risk if it were to occur. Finally, your business should include a fully developed mitigation strategy, as well as, contingency plans for highly probable risks.
Different Types of Funds You Can Raise
Many cannabis companies start by bootstrapping their operations. However, savings, credit cards, and loans from friends and family investors can only take you so far. After that you will likely look into raising funds through angel investors, venture capital (VC) or private equity (PE) firms. You may want to even initiate an initial public offering (IPO) for your company in order to raise funds.
Here some are the different types of funds that you can raise for your cannabis startup:
Equity simply means that investors receive a stake in your company and its future performance in exchange for the money that they invest in your business. At the beginning of the fundraising process, you set a specific valuation for your company. This valuation is a estimation of what you think that your company is worth. Based on this valuation, along with the amount that the investor chooses to invest in your cannabis startup, the investor will receive a percentage of stock in your company.
Convertible notes are basically a mix of debt and equity. When you raise funds through convertible debt, you borrow money from investors with the agreement that your startup will either repay the loans or that the debt will be turned into a stake in your company at some later date. This date may occur after additional rounds of fundraising take place or it could occur after your cannabis startup has achieved a specific business valuation.
The specifics of the agreement will be determined at the time that the initial loans are made to your company. However, it typically involves an incentive for investors to convert their debt into equity in your startup by offering them a discount during the next round of fundraising or warrant, which means that the investor gets additional securities during the next round of funding. The main advantage of issuing convertible notes is that they allow investors to worry less about the value of your company, especially if your company is only an idea and is not yet established.
What Investors Look for in Cannabis Startups
Despite the array of opportunities available to investors in the marijuana industry, not all projects get funded. That's because investors have specific criteria that they look for when selecting startups to invest in. Here are some of the top things that investors look for.
Investors aren't just interested in new and innovative business concepts. They want to invest in startups that have the potential to gain commercial traction quickly. Demonstrating that your business has the potential to deliver long-term growth while also achieving significant market share is what investors want to see.
A Solid Team
In addition to proof of concept, investors also want to make sure that your team has the expertise to execute your business plan. Investors look for experience, market understanding, founder credibility, among other factors that prove that your cannabis startup is worth investing in.
Avoid Inflating the Value of Your Business
One critical mistake that startups often make while trying to obtain funding for their businesses is inflating the value of their businesses. While your startup may potentially offer huge returns to investors, the cannabis industry comes along with huge risks that businesses in other industries simply do not face.
This is why you should hire a certified public accountant to help you draw up realistic financial projections for your business so that you have an independent party available to realistically assess the future growth potential of your business. If your company is already in business, audited financial statements prepared by an independent financial auditor go a long way in convincing investors that your business plan is a viable one.
Preparation Greatly Improves Your Chances of Obtaining Funding
As you seek out new funding opportunities for your business, you should keep in mind that you are competing with other businesses in an industry where there are many investment opportunities. By doing your homework and making sure that you are prepared, you can improve your chances at successfully raising capital for your cannabis business.