Raising Capital? 3 Things Investors Look For

Business

Proceed with caution!  You may not like what you discover about your readiness to raise capital for your cannabis company after reading this. Ideally, investors want to invest in a company to fill gaps in the business, not fix deficiencies. Raising money is one of the hardest, and highest risk, activities an entrepreneur will undertake. The entrepreneurs who successfully raise capital critically ask themselves these three questions before going to investors, and if you are not ready to submit your business to this level of scrutiny, you are not ready to raise capital:

1. Is this an “idea” or a “company?”

2. Is the business a long-term fix or just a Band-Aid?

3. Are the founders and investors aligned in how to make money?

Every entrepreneur at some point convinces themselves that their business idea is so incredible (if it wasn’t, why would you do it?) that all they need to do is talk to a few investors and the resources they desperately need will flow freely. The reaction most entrepreneurs have to their conviction is to focus on the market opportunity and make a business case solely on the size of the industry or current trends.

No investor or entrepreneur in the cannabis industry would debate that the industry is expanding rapidly on a global scale. Convincing a prospective investor of this is a wasted effort.  Investors are presumably at the table because they understand this and have their own perspectives and research. What they are looking for is the infrastructure, team, systems, and business model the company has developed that can capitalize successfully and compete in the industry. The following chart illustrates the difference between ideas and companies:

In the cannabis industry, so many businesses have been successful with a “build it and they will come” strategy.  This is fine when there is so much momentum and a new industry is just being defined.  However, experience in every other mature industry would indicate that this is not a sustainable or long-term strategy.  So many companies fall victim to quick success because of an identified opportunity but have not contemplated the long-term viability for their business.

Particularly in the cannabis industry you need to ask the question, “Am I building a short-term fix or a long-term company?” The best litmus test for this question is to stress test your business through the complex and changing regulatory environment. What regulations are you benefiting from today? What is the probability that those remain in place or change, and in what timeframes? When there are changes, will this open up new competition from bigger and more well-funded competitors, or will new solutions to your value proposition make your business obsolete? All of these issues are potential critical failure points that short-term fixes don’t normally survive.

The final question is about how investors and entrepreneurs find alignment and ultimately a way to make money. It is good for an entrepreneur to have a perspective as to how the company will realize value for shareholders; however, no one way is the right way to plan for this. What we do know is that every projection and forecast will be wrong. No one has a crystal ball, but the best equipped entrepreneurs will form a perspective that indicates that when actual results come in, these results will be as close to the projections as possible. The best thing an entrepreneur can do is articulate what their plan is for creating value and extracting value through an exit event, then understanding if this fits the investors perspectives. If the investor only wants to make money through taking a company public within two years, and the entrepreneur wants to stay private and grow the company over the next 10 years, there is a fundamental misalignment that either needs to be bridged or should provide both parties with a reason to not engage in a transaction together.

Take some time to evaluate your reactions to these three points and think about your readiness to submit your team and your business to an investor’s scrutiny. These are just three initial questions of a list of hundreds that investors deploy when evaluating an investment opponent.  If you are not ready to make it through these first three, it would be good to work on these elements of your business before undertaking a more in-depth process. The more you can communicate with investors by critically viewing your business through their lens, the higher the probability you can find alignment and success in partnering with an investor to build your business together.

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