As the cannabis space grows, so do the opportunities for new companies to come in and make a splash.
While many startups want to get venture capital financing, they need to make sure that they have their house in order first.
If you’re thinking about launching a cannabis startup, or already have one and are looking to raise investment capital to boost your growth, here are seven recommendations that will help you on your journey.
- Be honest with yourself
The journey starts with you, and let’s face it, most people aren’t cut out to be founders. Most people just don’t enjoy the long and difficult path of entrepreneurship.
We’re currently in an environment where little capital is being put into the industry, and yet there are too many people wasting time on competitive ventures with little strategy or plans for future success. So, if you want to throw your hat in the cannabis ring, you better be honest with yourself from the get-go.
- Have the mindset that success is inevitable
If you are a founder, you need to believe that challenges can be overcome, and that you’re capable of finding success. If you’re not the kind of person who thinks this way, if you don’t have the utmost confidence in yourself and your team, then you won’t make it. People talk about balance, but there will be periods of time when your business consumes your life. It can be easy to succumb to the gyrations in the startup world, so founders must have the inherent strength to power through.
- Make sure you want the pressure of venture capital
There are two types of businesses in this world: high growth potential businesses and lifestyle businesses. Venture capitalists only invest in the former. Lifestyle businesses have their strengths, but founders need to know that only high growth potential businesses are suitable for venture capital. VCs have high return targets, and the moment that a VC invests in your company, their return target turns into your return target.
VC funds target an internal rate of return of 30% or greater, which means that VCs target projects that show potential for expected, risk-adjusted internal rate of returns of 70% or greater. That’s a hard path to climb if your business doesn’t allow for it. Don’t forget that part of the return calculation — and typically one of the biggest disconnects — is time. VC funds have investment terms of 10 years or less and expect shorter holding periods.
- Capital intensive vs. labor intensive
It’s important to understand the difference between capital-intensive and labor-intensive companies. Poseidon, for example, invests in both technology companies and consumer and health companies. Tech companies are labor intensive, but consumer and health companies are capital intensive. Capital-intensive companies require more investment in capital expenditures, such as property, plant and equipment, also known as PP&E, to turn on or increase revenues and profits. Labor-intensive companies require investment in operating expenses, such as wages, to increase service and efficiency.
From the beginning, you need to know what kind of company you’re building and have a commensurate financial plan; then determine the amount of financing that needs to be raised to reach your goals.
Some questions to consider are:
– How much financing will you need in aggregate?
– What will be the use of funds for each financing?
– What is the financing timeline?
Having thought-out answers to these questions will be valuable on your journey and will save you meaningful time.
- Know your customer
If you’re trying to raise venture capital, your customers are your prospective investors. Research your prospective investors. Know their focus, such as sector, geography, strategy, stage, target criteria, investment criteria, etc. Know their investment process, including leads, owners, stages, required materials for each stage, timeline, etc. Research their portfolios and talk to other founders who know them, especially those who have raised money from them. Try to get a warm introduction from a colleague if you can. Cannabis VCs get thousands of cold emails, so it may be hard to break through. If you are reaching out cold, come with a concise message that clearly conveys your company, its value proposition and your ask.
- Come ready to listen
Some people say that luck is when opportunity meets preparation, and I would agree. If you score a meeting with a VC, it’s extremely important to prepare ahead of time and have an agenda. A lot of our productive time is spent in meetings, so drafting a tentative agenda is the ultimate preparation for meeting with a VC. Present your information and always reserve time to answer questions. Don’t forget to be mindful, present and respectful. If you spend the whole time talking, your prospective investor may lose interest and walk away disappointed.
Remember, fundraising is a sales process; you want to persuade your prospective investor to want to move to the next step voluntarily.
- Always be reflective of excellence
Despite any preconceptions you may have about cannabis, the cannabis industry is not lax. Always be reflective of excellence. Invest your time, your resources and your own money. Always be professional, formal and high quality right off the bat, even if you’re not 100% sure that it will work out. Lastly, always be over-respectful, mindful and thoughtful. These tiny details will go a long way in building the relationships that you will need to have to succeed.+
Andres Navia is a portfolio manager at Poseidon, a dedicated cannabis investment firm. Navia joined Poseidon in 2019, bringing 12 years of professional experience in venture capital, entrepreneurship and management consulting with Accenture and Ernst & Young.