Survival Strategies For Cannabis Companies On The Ropes
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With the party over for cannabis, many companies large and small are beginning to feel the squeeze. The current state of affairs is a natural contraction to any industry going through a bubble such as the one cannabis has experienced for the past few years, but compounding the misery are a number of factors unique to the cannabis industry, including stricter regulation, higher taxes, a vibrant illicit market, and the lack of access to banks, courtesy of cannabis's Schedule 1 status. Even the federally legal CBD business is suffering as hundreds, possibly thousands, of American growers are stuck with hemp that they can’t sell.
So what's a company to do to survive? We spoke to a few industry leaders to get their perspective.
Find good partners
As Rob Base says, "It takes two to make a thing go right." Now more than ever you need to align yourself with partners that you can trust and that help you move product off the shelves. "This downturn or this dip has shown us that we need to be more meticulous in how companies create partnerships," says Ryan Ansin, Co-founder of Revolutionary Farms and an investor. "Depending on which parts of the supply chain your company captures, it's important we all evolve our metrics for what makes a productive and healthy long-term partnership.
For Ansin, it "starts with transparency about strengths and weaknesses. During volatile times in an industry, we must operate within business models that enable, not harm, our partners," he says. "Having visibility to a distributor's finances to understand their accounts payable and receivable can be critical to my level of comfort in offering payment terms, for example. If I know someone owns their property outright, put in sweat and cash to build their dispensary, and has not experienced accounts receivable aging problems, I'm going to be proactive in making sure that group has priority on our most desired products. Even further, if groups offer visibility and show openness to being supported, we go as far as helping analyze turnover ratios to ensure they never run out, and even help reorganize vaults to maximize storage and accessibility, and minimize the number of deliveries disrupting their staff during sales hours."
Rather than worry about doom and gloom, you should realize that there will be light at the end of this rather dark tunnel, says Ross O'Brien, Founder of Bonaventure Equity. "This now one of the best times ever to be patiently building great businesses that are going to be around for the long term. And it doesn't mean going and raising as much money as you possibly can and getting enamored with your valuation. It means raising the money you need in order to hit real milestones and building a team and a market presence that is going to be able to withstand any volatility."
Prepare to work harder
If you need a locker room pep talk, listen to O'Brien's take on the current state of cannabis."For every reason that you can say it's a bad time for cannabis, that's just an indication that people think it should be easy. And it's never easy. Just because it's hard, doesn't mean it isn't a worthwhile endeavor,' he says.
He points to people complaining about the strict regulations. "If that was a non-starter for entrepreneurs, we'd never have biotech companies, the pharmaceutical industry, or new medical devices invented." And to those who are frustrated by the lack of capital, he points to the tech giants. "If access to capital was an inhibitor then Facebook wouldn't have been built, or eBay and Google would never have survived 2008."
He says the investment opportunities are still present, but there's just more scrutiny. "If you're willing to do the hard work, prove to investors why your business is a good opportunity, why it's the right time to invest, why you have the right team, and how you're going to execute, there's a ton of money out there... In cannabis, you've actually got a very small landscape in order to go dominate right now."
"The most important item that will determine your ability to succeed is: Do you have the capital to outlast your peers and, even better, to go on the offensive while everyone else is on the defensive?" says Codie Sanchez, Managing Director and Partner at Entourage Effect Capital, a private equity firm focused specifically on investing in the legalized cannabis industry. "Raise, get a line of credit, sell a non-core asset, but get your balance sheet ready to massively market. The market is down 80 percent but consumer adoption is up!"
Stick to your strengths
Now is not the time to expand, but rather double down and dig into your core competencies, says Jigar Patel, President, of NorCal Cannabis, one of the largest vertically integrated cannabis operators in California, "The fiscally prudent move is for companies to be leaner, allocate capital wisely, hire prudently and look for efficiencies in their existing infrastructure. If you can demonstrate that you can run a successful business with real margins, investors will take notice and the capital will be there."
Make some tough cuts
You're going to need to make some very hard decisions, and "will likely need to cut more than you think, faster than you think," says Andrew Roche, VP of Finance at Poseidon Asset Management."But don’t be that guy tossing chairs off the Titanic! The objective is to think in terms of your businesses’ most fundamental value proposition – one, maybe two things – nothing more.
He recommends consulting a labor attorney to understand what your options are for reducing the workforce. And once you make the decision to let people go "be deliberate and direct." Says Roche, "Rip the band-aid off, communicating why it was necessary and being sure to provide clarity to those that remain so that you avoid losing your star players to confusion and frustration."
Roche stresses that while these decisions are painful for all involved, it's essential that you remain "honest and ufront. As Warren Buffett says: 'It takes 20 years to build a reputation and five minutes to ruin it'. If you keep that in mind, you’ll do things differently.”