How to Raise Cannabis Venture Capital
Raising capital is one of the most complex, frustrating, and time-consuming challenges facing founders in any industry. It is also one of the most critical functions of a high-performing leadership team made even more challenging given the complicated and dynamic regulatory considerations in the cannabis industry. There is no one guaranteed way to succeed in soliciting investment, but after doing private transactions for more than a decade, I’ve found that success is in part a result of a cohesive strategy and a sustained, multifaceted approach that can be summarized with the following five principles.
Investing in private companies comes down to the people involved, and the ideal situation would be that you have a group of investors with whom you are a known person with a track record of success. Although this is one of the things that takes time to develop, we all have to start somewhere. Expanding your network should be a constant activity, and you should always be ready to ask anyone you meet if they are an investor or know an investor to whom they can introduce you.
Cultivating these key relationships on a sustained basis will have a direct correlation to your success in raising capital. And remember, it is not always about the “ask,” so seek authentic ways to deepen your relationships over time. As the saying goes, “Ask for money and you get advice; ask for advice and you get money.”
You should be activating your entire network of business relationships from the moment you start planning your pitch. Ask your attorneys, accountants, and other service providers if they know any cannabis investors who may be interested in your story. Many law firms and accountants are making early inroads in cannabis and are developing a lot of strategic relationships. There are contact lists that you can access of lists of investors, and most venture capital investors will be easily searchable online. Seeking out the emerging group of accelerators and incubators is a good way to find investors in your region.
If you are making a new relationship and reaching out to an investor for the first time, you may be sending an email as the first point of contact. When doing this, it’s best to spend a lot of time drafting your standard email. Are you being concise and clear? Are you giving enough information so the recipient can take action? Don’t send an email that says something to the effect of “Please let me know how to apply or submit for funding.” It’s redundant to say you are looking for funding, and that approach does nothing more than create more work for the investor. Any time you are asking someone to do something for you, that’s adding items to their to-do list -- not advancing your cause. Remember that investors are by default looking to find a way to say no as quickly as possible. Asking them to do the work for you is the quickest way to get passed over.
If you are using references or other contacts, you must get their permission first. It is nice to have mutual contacts, but the other side of that strategy is that my first call after receiving an email like this is to call the person to get some background on you before responding. If they say they don’t know you at all, or it becomes clear they aren’t actually endorsing your candidacy for an investment, that is an easy decline. So keep your facts straight and assume, as with anything in due diligence, if an investor can confirm the information for themselves independently, they will. Relationships are built on reputations over a long period of time. Raising capital always has a sense of urgency, so there are ways to accelerate your credibility: networking and connecting with the key people you want to do business with, having a quality reputation that precedes you, and dealing in facts and truths. You might be surprised how much this straightforward approach can help you stand out.
From the investor’s perspective, are you presenting something that is relevant to their worldview? In other words, do you know what types of companies they invest in, how much they invest, and what other portfolio investments they have? All too often, investors are presented deals that are clearly not a fit. You wouldn’t present a healthcare investment to a real estate fund, so you must do your homework and know that your opportunity fits the investment parameters of the investor. The only way to learn this is to research and have a targeted, thoughtful approach to your investor outreach.
For a company to be a relevant investment opportunity, all the proverbial stars need to be in alignment. If any of the parameters are misaligned, the potential for securing an investment decreases exponentially. There is another element to this “R,” which is the “right time.” This can mean industry timing, the stage of the company (the right time to raise capital), or the right time (relevance) for the investor. This might be the most difficult data point to ascertain outside of a direct discussion with the investor, but you need to find out if they are making investments or have capital to deploy within the time frame you have set out to raise your financing in. Venture funds will often put out press releases announcing that they have secured sufficient commitments to make investments through their fund. Venture funds will raise multiple funds, so if you are contacting them either before they have the commitments or at the end of the most recent fund, they may not be investing at that time. Once you are in early discussions, it is also advisable to ask to clarify your understanding of their investment parameters to ensure alignment.
Raising capital requires a thick skin, a balance between adapting and learning, and the ability to stay committed to your core principles and strategy. For example, I heard of an entrepreneur who celebrated each decline she received because she knew she could move on to the next investor who may say yes. Resilience was a core value for her, as it should be for you. Always listen and take into consideration how an investor explains why they won’t invest. There is much to learn from that kind of feedback. After each decline, you should debrief with your team to help you improve on the process you are running and the offering and presentation materials. If there are core business deficiencies, you may need to stop raising capital and revisit your business plan. On the other hand, success also requires being able to take an almost unlimited amount of rejection and not waver from your core business thesis. Be prepared for a lot of rejection and resilience in this process. It is as much about learning and adaptation as it is committing to keep on raising capital until you succeed.
One fact about venture capital investors is that it is almost impossible to turn a no into a yes once they have formally declined your investment. Even angel investors have informal committees around them to help them make investment decisions. This is more often than not a spouse and family members along with close attorneys and advisers. For venture funds, they are required to have a formal investment committee. To get any answer, there will be some additional people involved in the decision. If an investor tells you no, that is likely an informed decision that was made with others participating. So, if you go back and try to convince them that they are wrong in their decision, you are essentially asking the investor to go back and disagree with the other people involved. With all the deals they are likely looking at, there is little upside in them taking on this fight.
Resilience in this situation does not mean that you should try to convert a no to a yes but, rather, that you are courteous of the investor’s time and you try to glean as much information as you can from your discussions with them. Asking for feedback is not unusual, but it is not always something the investor will have the time or inclination to do. If you did, however, strike up a great rapport with the investor, they may know other investors who might be a better fit for your investment. It’s common that cannabis investors will take a stand if they invest in plant-touching businesses. An investor who has decided to not invest in cultivation may know other investors who do and might be able to refer you to them.
Being rejected day in and day out when you are raising capital can be demoralizing and exhausting, and seem like a constant uphill battle. The best advice for developing resilience is far more nuanced than not taking no for an answer. This is the one time when taking no for an answer is the only option you may have. It’s what you do with those rejections that matters. What can you learn from each pitch meeting and each interaction with investors? Are you actually listening to the feedback and using it to get better? The last thing you want to do is harass an investor to try to convert them to your cause if they are not the right fit. But what you can do is accept the feedback and build such a rock-solid foundation for your investment proposal that it becomes the best use of your time to quickly move on to engaging with an investor who still has an opportunity to say yes.
Many times, entrepreneurs spend an unnecessary amount of effort negotiating with themselves to concoct a transaction structure or investment terms. In the spirit of selling an investment into the market, many entrepreneurs will try to come up with creative structures and think they are preempting key hurdles that investors need to overcome.
This also goes for the amount of capital that you are raising. It should be based on the needs of the business, and if that need is $5 million but the investor you are pitching only invests a minimum of $10 million in any transaction, you, unfortunately, don’t fit their criteria. If the investor you are pitching only invests in control, or majority ownership, and you are only willing to sell a minority stake in your company, then the probability that there is an investment between the two of you is very unlikely. With a well-thought-out ask and research on the investor you are contacting, you can identify for yourself whether the ask is aligned.
Investors have the ability to allocate capital that they have influence or control over and are making investments for the sole purpose of generating a return on that investment. Capital is a resource, and investors are in the business of allocating that resource to generate a desired profit. Just like any resource, capital can be allocated in all kinds of strategies, so the decision investors make is based on comparing the probability of generating a return, how much risk is involved, and how great the return will be. Your exit strategy and the structure you are prepared to present should align with their investment approach. You should know that because you have done your homework and researched each investor before you present to them.
When you are presenting to an investor, have you identified their opportunity to generate a return? Let’s take, for example, the desire to structure an investment as debt. This might seem like a good way to ensure that the investor gets repaid, but if you take into consideration how risk and value are correlated, and that investors are looking for a risk-adjusted rate of return to accept that risk, simply structuring some theory on how an investor gets repaid will not excite equity investors. They are not looking to simply be repaid but to achieve a multiplier effect on the investment. Going to an equity investor with a debt offering isn’t going to present them with a return profile they are seeking.
Do you know the desired ownership parameters of the investors you are talking with? And what is your expectation for how much equity in your business you are willing to sell? A deal can be negotiated if those terms are within a reasonable range to start with. If you are only willing to sell a small minority interest in your company, you don’t want to find yourself presenting to an investor who only wants to own companies outright or in a super majority.
Get familiar with the investors to whom you are pitching, their place in the cannabis economy, and what drives their decision-making process. Then, think about where your company intersects with those values and relationships. If you can check off the five R’s, you’ll be closer to the biggest R of all: raising money.
Excerpted from Cannabis Capital: How to Get Your Business Funded in the Cannabis Economy (Entrepreneur Media, 2020). Learn more at entm.ag/cannabiscapital. Ross O’Brien is the founder and CEO of Bonaventure Equity, a leading cannabis venture capital firm.