The investor landscape in cannabis keeps evolving. Big-name investors with deep pockets fairly recently caught on to the potential of fast-growing cannabis companies, opening up the possibilities for funding expansions or making changes to the business.
At the same time, high valuations dropped toward the end of 2019 and several companies reported layoffs and course corrections to finish out the year.
With valuations being less speculative in nature and larger and perhaps savvier investors becoming more active in this space, how can your company grab and hold their attention?
Preparation counts. Appearances matter. At the very least, you’ll need a finely-tuned pitch deck that anticipates their scrutiny, but behind that needs to be a company made of substance, discipline, and integrity.
Companies that can show they are viable, smoothly operating entities — and have credible data to prove it — are set up to ace the pitching process and convince investors they are worth funding.
Address the following 10 areas of the business to keep their attention:
1. A smooth-running operation: Cannabis companies experiencing rapid growth can end up sputtering if they lose sight of what’s happening, can’t predict what’s likely to happen, or make hiring mishaps.
Can your financial systems keep up with your growth or are you trying to make sense of things from multiple spreadsheets? Are the right employees in the right positions, or do some people lack the skills and experience they need to do their jobs effectively? Smart investors will wonder.
2. Accurate information: Investors want to see that the company has access to real, reliable data that can be used to inform decision making.
That means having regularly prepared financial statements in addition to relevant data points on key metrics. For example, dispensaries should know how long it takes for a product to sell.
Farmers should know yield per plant. Suppliers should know the percentage of their revenue that comes from each customer and who their biggest customer is. Then, how is this data viewed and analyzed?
3. True understanding of costs: This is where a conversation with a potential investor can fall off the rails.
They want to know not only what goes into each product you sell but that you actually know the information and can knowledgeably talk about your margins.
Have you factored in marketing and sales costs? How much of a drain do slow-moving products have on your storage expenses?
4. Built-in accountability: There’s no way around it — our industry is under heavy scrutiny from all angles, making accountability a top priority.
By adopting a culture that values taking a disciplined approach to the business, including the finances, you can confidently stand by the projections you share with investors.
Budgets and forecasts can be carefully created and then tested out over time. Employees should have key metrics and targets to aim for and be held accountable to the results.
5. A clear view of the cash: With many companies accustomed to bank denials and dealing with large amounts of cash, our industry faces a special challenge.
Cash could be parked in multiple locations, making it difficult to know how much you have at any one time. Investors want confirmation you can pay your bills and to know how you’ll do it.
A typical question you may hear is, “What kind of payment terms have you established with suppliers and can you meet them?”
6. Trustworthiness: Investors need to know they can believe in the information you’re telling them.
Do you have controls around how financial information is recorded? Or does everyone follow their own process?
The way information is gathered, the systems that are in place to monitor it, and a track record of timely, accurate information can significantly affect how hopeful investors will be about your business.
7. Comparability and predictability: Are you able to pinpoint any patterns that may show up from week to week or quarter to quarter?
This information gives investors an idea of what they can expect from the business and whether that fits into their goals.
They’ll also be curious to know whether you can accurately project future results.
8. Future plans: Be ready to talk about where the market and your company are headed. Investors will be interested in understanding your insights about customer behavior, potential expansion, and possibly your exit strategy.
Even if that’s a way’s off, they may want to know that you’ve gone through enough scenarios, that you have the ability to come up with realistic plans, and that you’ve decided which routes are worth contemplating or pursuing.
9. Clean financial statements: Anticipate being asked for audited financial statements and know that getting these together can take up more time than you might expect.
If you haven’t established a habit of regularly closing the books, a drawn-out process of looking back over the past couple of years will become a must-do. This is a common struggle.
Start with getting the financial house in order so you know where a company stands before deciding how to reach out to investors.
10. Transparency: The investor relationship won’t end once you get the funding. Your investors will want to know where the money is going and they expect updates.
That means coming up with how you’ll keep them informed and assuring that your company will operate with integrity.
Adopting an “Investor Ready” Mindset
Whatever the reason you’re seeking capital – whether your dispensary wants to add a new location or your cultivator aims to ramp up production – give consideration to how your business will be viewed by potential investors.
In a volatile market among tight competitors, companies can stand out if they go to the pitch table as prepared as possible.
It takes a great deal of time and effort to become the kind of company that can confidently seek out a strong valuation, but the alternative is no investment at all. Be prepared.
Images courtesy of Kukuza Associates.