What Cannabis (and CBD) Investors Want
Many privately held California companies are beginning to consider raising additional capital to scale their businesses now that they are through the legalization process. Investing in the cannabis market is risky but many investors are bullish on it, especially in California. Raising additional capital can be a long process, even in the current market, but being adequately prepared will greatly increase your chances of a successful raise and can put you ahead of the competition.
Revenue Growth / ROI
This may seem obvious, but investors will look at your P&L first if you are an existing business. Year over year revenue growth paired with efficient operating costs will make your business attractive to investors. In order to show this, you will need financial records that can be produced to investors. The new regulations require extensive financial recordkeeping and smart operators who have been paying taxes under the Compassionate Use Act will be able to show investors their revenue generation history and make a well-informed forecast.
A strong brand is key in order to reach consumers in California’s competitive cannabis market. Investors will want to see how your brand resonates with critical market segments, and how this aligns with your marketing strategy. What types of consumers are engaging with your brand and consistently buying your products? Additionally, investors may want to see that you own your brand’s IP and have gone through the process of registering for a trademark and protecting your brand (or have come as close as possible to trademarking for your product’s use if you are a cannabis brand).
In some cases, investors are interested in becoming involved in a company even before it is profitable. There would need to be some distinguishing feature that sets this company apart and makes the speculative move worth it. In some cases it could be a limited number of licensees within a geographical area with high demand. Regardless of whether you are profitable or pre-operational, you will need to articulate your competitive advantage vis a vis other operators to your investors. For CBD, if you are not in one of the FDA’s unlawful product categories, you have the benefit of interstate commerce within the U.S. after the Farm Bill, which opens up a major growth potential.
Tax History & Licensure
Investors will want to see that you have been paying taxes for the length of time you have been operating and are up to date on federal and state taxes. This shows financial discipline and a commitment to compliance. Additionally, it reduces their risk investing in your business. If you are not up to date on your taxes, find an account familiar with 280(e) who can help you become current. Also, it goes without saying, investors want you to be fully licensed and have as much runway as possible on your provisional or temporary licenses if you are a cannabis business.
The executive team is an important factor in many investment decisions. What are the key strengths your team brings and what are some of the gaps you can anticipate investors will ask about? Do you have a team that has extensive experience in the cannabis industry but not necessarily business operations expertise? Who is on your Board? These are the types of questions investors will ask and anticipating these questions will help you prepare for these investor conversations.
Investors will want to know if you have essential supply relationships in place -- for example, if you are a retailer, that you have an extensive catalog of desirable vendors you source product from and that its diverse enough that you will not be majorly affected if one brand has a recall or there is a bad crop in one geographical area one year. You may be vertically integrated in which case you are selling your own cannabis or CBD product, and this may also factor in to investor ROI so you will want to explain how. Make sure you think critically about how your business fits into the larger cannabis ecosystem and where you have vulnerabilities that can be addressed via strategy and execution.
If you center your pitch around these key issues and prepare adequately for investor conversations you can find them to be a way to propel your business forward not just in terms of capital infusions but also corporate strategy. As the cannabis industry matures, so is the sophistication of investors and the business practices required for attracting and closing additional funding rounds.