The Secrets of Raising Capital For Your Marijuana, Hemp or CBD Business

Hi there and welcome to this week’s episode of The Business of Kush podcast!

So happy you’re here.  As a reminder, I’m Chip Schweiger, The Green Leaf CPA, and a 27-year veteran of public accounting and corporate finance, and also the founder and managing member of a CPA firm that helps marijuana, hemp and CBD businesses stay on the right side of tax, accounting, and compliance rules so you can focus on growth. 

And, because we’re a firm that solely caters to the complex compliance needs of the cannabis community, we understand the unique challenges you’re facing. 

So, as I mentioned last week, our first episode on getting investments into your cannabis company really was a hit.  Lots of positive comments and a ton of questions. 

So, this week let’s rework the episode schedule a bit and talk more specifics about the secrets of raising capital for your cannabis, hemp, or CBD business.

In 2019, $8.1 billion of capital was raised by Cannabis companies. Down a bit in 2020 due to the pandemic, but after a lackluster 2020 investment in the cannabis industry has reawakened, with the amount of capital raised up 118% over 2020 as of Sept. 10.

And as more states move toward full legalization, that amount will only continue to grow. 

Additionally, industry experts are seeing that these niches appear to be recession-resistant (even “virus-resistant”) with many states experiencing recent record sales, mainly since Cannabis and hemp/CBD markets were deemed essential during the pandemic. 

However, even recession-resistant companies can experience challenges when finding capital for funding or seeking investors. Many Cannabis companies have been looking to debt and creditor solutions for capital growth, but that’s not the only solution business owners should take into consideration.

Beyond putting a company further in debt just to raise capital, Cannabis CEOs need solid, non-resource-draining solutions to build capital. 

From startups to founders of established companies, let’s talk about nine tips – very specific tips – that can help you significantly boost capital if you are a CEO or someone helping businesses in these industries. 

Tip 1 - Rock Solid, World-Class Accounting

So, I just gave a talk last week at the Lucky Leaf Expo in Houston about the importance of accounting.  Yes, it sounds ironic coming from a CPA and I’m sure it’s a real shocker, but many early investors and founders in the Cannabis space ignored securing a niche-specific accountant and are now regretting this decision as they find their investments turning sour. In fact at my firm, we just picked up a client last week from another firm that sold themselves as cannabis accounting experts, but were anything but that.  Not the way I want new clients, but I’m seeing the accounting industry a lot of times provide little value to a cannabis CEO.

So, this is a great opportunity to learn from past Cannabis investors’ and CEOs’ mistakes, especially the ones who failed and didn’t recover. 

By adding a world-class accountant to a Cannabis operation, investors can rest easy knowing that they have a pulse on the overall health of the business. This is super important, as most investors are not involved with day-to-day operations.

When a highly trained accountant is hired, the value of a company increases by 10% or more over time and, most importantly, helps prevent downside loss from theft, fraud, and severe bookkeeping error penalties. 

The best way to attract an investor is to provide concrete and visible data that proves that the business you represent is a tight, compliant ship. This proof can only be acquired through complete and correct cost accounting, documented internal controls, accounting policies and procedures, chart of accounts, and other tools tailored to Cannabis.   

In the past, it was difficult to obtain this ultra-specific scope of knowledge, tools, and workpapers, all in one consolidated place. 

But today, there are a lot of very good accountants and bookkeepers across the United States that have industry specific experience and the right tools to create added value for their CEOs, including attracting investors and capital funding.

The Cannabis and hemp/CBD niches have highly complex accounting requirements (i.e., cost accounting) and span several unrelated verticals: farming, chemical manufacture, product manufacture, delivery, labs, and retail.  

To leverage full 360-degree accounting services and raise capital, you need a dream team in place of community experts that understand these multiple niche-specific layers and regulations. 

Not only should your team possess the required tools, processes, and knowledge, but it should also consist of a team of executives with a successful track record of supporting successful companies. Amassing attorneys, COOs, subject matter experts, and CFOs helps ensure that all the higher-level tasks are accounted for and that the business is protected and set up for success.

Tip 2 - Develop a Concise, Complete, and Compelling Pitch Deck

A great pitch deck is essential to landing an investor and raising capital. Throw out your 100-page Word doc business plans and ill-prepared pitch decks. Investors don’t have time to comb through a long business plan; they need to be able to quickly review key information.

Improve your chances of landing the attention of an investor on the first try by integrating these vital pitch deck components: 

• Proven management team: describe your team, who has shown a track record of success (including a qualified accountant and a CEO that is not just a “grower”)
• A good story: define the company’s background, why it was started, and how you achieved your current success (along with describing the key customer problem your company addresses, and the solution you offer to solve that problem) 
• List of board members and/or advisors: the more robust your team, the better (and be sure to offer some seats to the future investors) 
• Market analysis: provide an accurate look at TAM (total addressable market) and what your share will be during years three to five
• Competitive analysis: here you identify your competition and analyze why you are better 
• Potential challenges: define potential challenges you may face, such as whether your competition advantage is sustainable, if there are any barriers to entry, and how the landscape of your business will change if 280E disappears 
• Market plan model: delve into describing your market plan, including distribution and sales (without making the mistake that you assume any product grown can be sold at high prices)
• Unit economics: include pricing and margins in your business model, as well as revenue drivers and company strategy 
• Financial model summary: outline key assumptions, 5-year revenue outlook, EBITDA, and growth projections  
• Investor economics: include company valuation, sources/uses of capital raised, ownership size for investment, ROI, and time to payback
• Amount of owner capital invested: assess and record how much capital from the owner has gone directly into the company  
• Offer: determine what you are offering the investor, i.e. 20% equity for a $1 Million investment (one of the single most neglected aspects of most deck pitches)
• Traction: line out what you have accomplished so far, such as acquiring licenses and boosting sales 
• Legal language: never fire off a deck pitch without having a qualified attorney review the language (phrases like “formal offer” can cause snags where you least expect them) 

Tip 3 - Build Out a Bullet-Proof, 5-Year Financial Model

Your financial model must be complete, accurate, and align with the numbers in the pitch deck. Often a model will get updated, but the numbers remain the same in the pitch deck, which can quickly scare off an investor. A good model will be simple and free from massive Excel files. Look to include the following: 

• All financial statements: include a balance sheet, P&L, and statement of cash flows (each section should show years one to five, and you can add a tab to show the P&L for Year 1 only broken down by month) 
• Key assumption tab: make sure to have all key assumptions, including production (i.e. plant yield) and reasonable pricing (i.e. per pound) 
• Summary tab: record key metrics and assumptions, as well as financial ratios (investor capital, internal rate of return at Year 5 exit under different valuations, and overall ROI to investor)
• Best and worst case scenarios: depict these extremes to give investors an idea of what happens if your predictions are off by 50% or more (so they can prepare and know what to expect with sales fluctuations)

Tip 4 - Comprehensive Capital and Entity Structure 

You also need to analyze entity structure prior to capital raise. Is the company a flow-thru entity or a C-corp? Are there many entities or just one?  

Most smart investors in my experience will insist on a C-corp structure for a Cannabis startup because the risk and tax rates are lower (assuming there were no dividends prior to exit, which is the plan for most cannabis startups).

Flow-thru entities can create sizable tax liability to a minority investor and, assuming no dividends, this is not a good situation for an investor to be in.  Also, a business creating many entities to “avoid” 280E is a red flag to investors.

Furthermore, consider the type of equity the investor will obtain (convertible, SAFE, or direct equity). You also want to look at which component of capital will be funded through debt, and if there are stock option plans for employees or other options to take into consideration that an investor may inquire about.

Tip 5 - Define A Realistic Company Valuation

Realistic company valuations will be part of your business model and deck, and is an extremely important aspect of raising capital. For example, if you are giving up 20% of the company for $1 million dollars, that means the company is worth $4 million prior to the capital raise (and will be worth $5 million once the investor adds $1 million). 

Ask yourself these questions: Is this realistic? Is the company pre-revenue? Does it have any real assets other than an idea and a Cannabis license? Company valuations that are based on nothing other than a “made up” financial model will often receive little interest from investors.

Tip 6 - Determine Your UVP and USP

UVP stands for Unique Value Proposition and explains clearly why your product or company is unique, valuable, sustainable, and desired by the market. USP (Unique Selling Proposition) explains why your customers will buy from you and not someone else. These aspects are important to know and discuss in-depth with investors.

Tip 7 - Accumulate Traction

Step back from the business for a moment and analyze the steps you have taken to raise capital. If you have an idea, deck, and model, what’s next?

The next step is to secure a license, conduct a test market with customers, and then work towards accumulating revenue. 

Look at the milestones you have hit, and determine next steps to take. The more traction you have on the path towards preparing for raising capital, the higher your valuation can be, meaning the less of your company you need to sacrifice in exchange for the capital you are raising.

Tip 8 - Access to Investors

Finally, without access to a pool of investors, a great plan, product, and team will go nowhere. Do you plan to use Angel Investors? Friends and family? Cannabis Investor Funds, or other ideas? 

Develop a strategy surrounding the who, how, and when of getting in front of ideal investors, and then jump in with this new toolkit on your belt. 

And, remember from Episode 1, don’t waste time with people who don’t understand the cannabis industry.

Many companies are competing for capital in the Cannabis and hemp/CBD space. While many investors have been burned by cannabis investment deals run amok, you can win over even the most skeptical of investors if you approach them with prepared and compliant records, models, pitch decks, and a competent team of experts.

Well, before we finish for this week, one last thing, and you know what it is, that’s a segment we call “news of the day”

[READ NEWS]

And, there ya have it for this week’s episode.  

So, we’ve got to rework the episode schedule just a bit since we inserted this special episode in here, but in coming weeks we’ve got episodes on banking reform, and the capital markets, and on insurance planned.  And, I said from the start, we were going to get through the first 5 or 6 or now it sounds like 7 episodes, and then start with some guests, so stay tuned for that.

And, if you have specific questions – and I should have offered this in episode 1, please drop us a note at TheGreenLeafCPA.com/Listen.  

There’s a form there for you to submit questions, or you can do it on social media with the #bizofkush and I and my guests will give you our thoughts, live in future episodes.

OK, now I think we’re done for this week.  Hope you’ll join us again. And, until then, have a great week.