How To Convince Cannabis Investors to Give You Money
Starting any business is hard, but starting a cannabis business is its own beast. Entrepreneurs have to operate in a nascent industry pierced by all kinds of economic and societal issues, and they have to deal with myriad complexities, legal tensions, and unexpected situations that don't even exist in other industries.
Seeking to provide some guidance for budding cannabis entrepreneurs, Entrepreneur and I came up with a How to Start a Cannabis Business series. Our ultimate goal is to promote financial inclusion through marijuana. In previous articles, we’ve looked into numerous aspects of getting into the marijuana industry, including questions you should ask yourself before jumping in, factors that could determine your success, and where to find funding, among many others.
During the presentation tour of our book, Start Your Own Cannabis Business, I had the fortune to meet up with some of the top investment managers in the cannabis industry. I asked them to name the qualities they look for in an entrepreneur.
“The number one advice I have for entrepreneurs seeking funding is: Don’t BS us because we’re going to find out," warns Morgan Paxhia, co-founder and managing director of Poseidon Asset Management, a San Francisco-based cannabis-focused long/short hedge fund with more than $40 million in assets under management. I"f you are not honest with us, it’s way worse."
Al Foreman, partner and CIO at Tuatara Capital shared a similar thought with me three days earlier at a conference in New Jersey, saying, “Trying to navigate an emerging industry brings forth challenging situations that require trust and honesty amongst partners to be able to successfully address, and overcome, these inherent pitfalls of any new industry.”
He also stressed the importance of integrity. “How entrepreneurs convey integrity during the evaluation process and their perspective of things ‘on the margin,’ tend to give me an indication of what to expect if you’re to face a challenging situation in your investment partnership in the future.”
Tahira Rehmatullah, the managing director at cannabis-focused investment fund Hypur Ventures, and the person responsible for launching and managing one of the best-known cannabis brands in the world, Marley Natural, confesses that she actually likes hearing what entrepreneurs are struggling with. “It proves to me that: 1) They aren’t operating with their head in the clouds; 2) They understand that this is a complex industry to start any kind of business in, regardless of who you are and how much experience or money you have; and 3) They acknowledge that they may hit roadblocks and need to pivot or come up with solutions that they can't foresee right now, and that's part of being a leader in this space.”
Related: 3 Honest Ways to Raise Startup Money
Another big issue for fund managers is their ability to focus their pitch. Many entrepreneurs in cannabis want to do everything and try everything, but as Paxhia says, “If you have something good going; keep going. Don’t lose focus.” The same could be said for cannabis plant, in general. Yes, it’s a great plant with lots of medicinal properties, but it does not do all or cure all.
Along the same lines, Emily Paxhia, co-founder and managing director at Poseidon Asset Management recommends you "make a real, honest, good assessment of your strengths and weaknesses and find partners or advisors who can help you fill some of those gaps and help you grow.”
Another important piece of advice: always be closing. “Even if you are not fundraising right now, you always need to be thinking about your next round,” Morgan says.
“All founders and entrepreneurs need to realize that starting a business in the cannabis industry is more expensive than usual,” Emily Paxhia adds. “It takes more money and more resources than any other space because of the taxes, because of the complicated scaling issues, the insurance costs, the banking fees… Everything.”
Having money in hand is never a bad thing in cannabis. But beware of overcapitalizing your business. This is a very common problem many marijuana businesses face today.
The manager also looked for responsible and trust-worthy leaders. To this end, if you don't know how to do something yourself, I advise to always get professional help. Never save on a CPA or a lawyer—it’s never too early to hire pros.
Paxhia concurs, advising entrepreneurs to select lawyers who have experience in tech startups, craft beer, or another business that is very regulated yet fragmented. Also look for lawyers who have some familiarity with the cannabis industry in terms of entity formation and investments.
“Bad legal advice is way more expensive than getting a lawyer from the start. It will cost you and your investors money, and deter future investors," Paxhia says. "It’s a critical issue.”
From a structuring perspective, it's essential to vet who you work with, ask for referrals, and find who’s doing things right. Getting your business set up correctly will save you time and money, Morgan stresses.
Finally, pay attention to entity formation, which can also be problematic because of a lack of a clear division of roles, responsibilities, and obligations.
“I advise everyone who will listen to hire a lawyer as early as possible,” Rehmatullah adds “It can be expensive, but at the same time, there are more and more lawyers who operate in smaller firms or independently who are willing to negotiate rates or take equity as compensation.”
Rehmatullah stresses that you should make sure your product or service is actually needed by the industry. “You can be a smart professional who has succeeded in other industries and still have blinders on when it comes to the wants and needs of the ever-changing cannabis industry," he says. "Test your product or service before going out and trying to raise money for it. Prove it's potential longevity as much as possible and show investors the gap that you're filling. Even rough data is better than no data.”
And last but not least, be careful to respect the industry and its roots. Says Paxhia, "Sometimes it bugs me when a founder comes in and disrespects the so-called ‘stoners,’ arguing he or she will take over the industry because old-schoolers are not very smart. I haven’t seen that work and don’t think it will,” She adds "you’d never see Anheuser Busch calling its customers ‘drunks’ and then try to sell beer to them.”
Rehmatullah agrees, saying that "we need to respect all the advocates, consumers, and patients who have been fighting for fair access and equality in cannabis for decades, long before this new market came to be. There are people sitting in jail for doing exactly what many people are doing now and profiting from, yet those who came before are felons who are precluded from participating in this industry. Those people suffering in jail are also largely minority populations. I encourage everyone to help us build a safe and impactful cannabis industry, but help those who came before and make sure that everyone has a fair shot.