What Makes a Good Cannabis SPAC?
Special Purpose Acquisition Companies are having a moment in the cannabis industry. Here's what you need to know.
With large fundraises and splashy acquisitions, Special Purpose Acquisition Companies or SPACs have become a trendy way to raise large amounts of capital and bring an operator public.
Like previous trends in cannabis, like the RTOs of yesteryear, some cannabis SPACs are better positioned for success than others.
The formula for that success includes:
- A strong shareholder base.
- Strong management with operational experience.
- A clear objective to the M&A that supports a vision of what the operating company will ultimately look like.
With those building blocks in place, a cannabis SPAC can position itself for sustained success.
Good money vs. Bad money
Starting with the shareholder base, a cannabis SPAC has to focus on the idea of "good money" versus "bad money." Typical SPAC investors usually fall under the "bad money" category, as they generally have no intention of keeping their money in once the SPAC makes its acquisition and begins its journey as an operating company. When that money gets pulled, the company needs to replace it with new investors, increasing its capital cost, and ultimately creating more volatility.
On the other hand, what does good money look like? From a SPAC perspective, the investors in the good money category generally come in once the SPAC has made its acquisition(s) and the investors know what exactly the company is. Generally, investors have experience with cannabis companies. They will typically be in it for the long haul, providing the company with a stable investor base that it doesn't need to constantly replace.
For companies to have a successful cannabis SPAC, it is essential to bring these good money investors earlier in the process. Accomplishing that is where strong management and vision come into play.'
Management with operational experience
SPAC founders are generally financial professionals with backgrounds raising a lot of capital but limited operational experience. For this reason, SPAC founders often disappear once the company makes the acquisition, and the SPAC becomes an operating company.
If a cannabis SPAC aims to bring in a strong investor base that sticks in it for the long haul, you might want to take a different approach. The SPAC founder should be a seasoned executive with operational experience, preferably experience operating in the complicated minefield that is the cannabis space.
This operational experience is crucial because the founder has already been there and knows what it takes to build a cannabis operating company. Just as important, investors know what to expect. This is an important factor in bringing those "good money" investors earlier in the process.
Additionally, we have seen many examples now that cannabis companies need operations executives at the top. Companies led by financial professionals can succeed, but the path to doing so is more difficult given the countless operational and regulatory challenges faced by cannabis companies.
Smart M&A Strategy with a vision for the future
The most successful cannabis operators have deployed smart M&A that results in assets that complement one another. On the other hand, the companies that are merely trying to fill in more states on a map find themselves with an unwieldy collection of assets that make no functional sense when put together.
With a SPAC, having a smart acquisition strategy supporting a vision for the future operating company is crucial because it is built entirely through M&A.
Do you want to build a vertically integrated Multi-State Operator? Or maybe a CPG product company? Whichever direction you go, it is important to know what kind of company you want to build and then execute a clearly defined M&A strategy against that vision.
This is another area where smart management with operational experience comes into play. Seasoned cannabis operators know what a functional cannabis operation looks like and can determine a good deal versus what is too good to be true. They won't get caught up in the minutiae but will instead get deals done at a fair valuation and build a collection of assets that functions greater than the sum of its parts.
Having a solid M&A strategy with an eye towards the future is also helpful for bringing on "good money" during the SPAC's initial funding process. As stated earlier, these investors typically wait until a SPAC has made its acquisition before diving in. Still, by clearly articulating an M&A strategy and painting a picture of what the company will look like as an operator, the SPAC has a legitimate chance to have that stable investment base from Day 1.
Like all other companies in the cannabis space, cannabis SPACs need a solid foundation if they want to create sustained success. A jolt of capital and a disappearing act will not cut it in this space. Building a foundation of strong management, a substantial investment base, and a clear and articulate vision can set up a company to be a significant player in the future of the cannabis space.