Every small business has needed capital at different stages of development. Whether you are starting a brand new cannabis business or growing your already existing cannabis business, you’ll need to explore all your options when it comes to funding. Currently, with all the rules and regulations of the cannabis industry, it can be difficult to find funding. But there are options.
An angel investor is a financially well-to-do individual or group of individuals (angel network), who provide capital for a start-up business, usually in exchange for convertible debt or ownership equity. Angel investors usually give support to start-ups at the beginning stages of a company (where risks of the start-ups failing are relatively high) and when most investors are not prepared to back them.
Receiving funding from angel investors can be difficult, but with the right approach and matching interests, it can be done. You will not only gain a financial benefit but also their expertise in running your business and specifically the cannabis industry niche.
1. Know Who You Are Looking For…
The best way to find an angel investor is to know who to look for, by understanding the type of person an angel investor usually is. Here a few profile items of the “typical” investor:
- Middle-aged (around 40-60 years old)
- Previous business or entrepreneurial experience
- Net worth over $1,000,000
- Has previous investments, or participates in a group of investors
- Interest or familiarity with the industry
2. …And Who They Work With
While there are angel investors who invest entirely on their own, many invest as part of an informal network or group where they can pool their resources and share the risks. These angel networks usually meet regularly to review business proposals, deciding together whether to invest or not, and conduct due diligence to validate the plans, statements and history of the companies and their founding team. Angel groups also occasionally co-invest with other angel groups, individual angels and very early-stage venture capitalists to make larger, accumulated investments.
3. Know Where to Find Them
In most cases, you need to be referred to a specific angel investor. So it’s important to network! That means you need to immerse yourself in the community, find out who’s who, and remember that many successful business owners might end up becoming angel investors as well.
Many angel investors like to play an active role in the business they invest in, so in general they prefer to invest in businesses that are close to home. Start in your own network of friends and family to see if there is a potential investor you already know. These people know you the best, so they are the closest to you in knowing whether or not you are backable, as first-hand references. Just be careful with investments from friends and family, it is very difficult to mix personal and professional relationships. If something goes wrong with the business, Aunt Karen’s 70th birthday gathering might become quite awkward.
As we said earlier, it’s important to network, network, network! Especially if you can’t find someone in your own personal group of friends and family. Attend trade fairs, meetups, conferences, and events. Get your face and your name out there, and meet as many people as possible. Remember, the angel investor might not know you, so it’s good to have many people become familiar with who you are, in case you need someone else to vouch for you.
There are also more formal ways to find an investor, such as formal family investment offices, with professional managers screening deals for the angel investor. Networks aggregating angel investors are an option as well. Like the family offices, multiple investors set aside funds for investments, and a professional team source deals for the group. The individual investor keeps their anonymity while having the comfort of a team of managers doing due diligence on their behalf.
Finally, there are connection services available on the internet. You may be able to connect with specifically cannabis business investors through a website that provides investor matching. If nothing else, you can at least get your business proposal to a wider audience.
4. Get Your Business Plan and Financials in Order
Getting your business plan and financials in order is vital to any financial investment opportunity. Ultimately, you want to produce a company valuation which determines your startup’s worth. You need to factor in your profitability, market share, ownership, future projections, and forecasts. Your business plans should show potential investors that you have feasible goals and plans for business growth.
It important that your financials are done well and you account for all of the highly regulated tax and government rules that are associated specifically with the cannabis industry. Be sure to hire a CFO or accounting firm that specifically works with cannabis companies. Having everything in order shows your investor that you have done your due diligence and that you understand the value of professional help.
Finally, make sure you are completely transparent. Investors don’t expect your business to perfect out-the-box, and an apparently lack of challenges or issues you may be dealing with may arouse suspicion. Be honest and engage in an open conversation about your plan to overcome those challenges. The investor will appreciate the honesty and will probably be able to offer valuable insight into overcoming those challenges.
5. Have an Exit Strategy
One of the most common questions early stage companies are asked is “what is your exit strategy?” This is a critical question as it will determine how an investor will make a return on their investment. An exit strategy demonstrates that you have a clear, long-term plan for transitioning out of the business. Investors are interested to know how you plan on leaving a business if the company is bought by a larger company, sold to a private investor, and so on. Exit strategies include Initial Public Offerings (IPOs), acquisitions, mergers, or buy-outs, but may also include strategic default or bankruptcy to exit a failing company. Keep in mind that these various strategies are also not mutually exclusive, and your business may experience one or more of these through its lifetime.
6. Tell Your Story
At the end of the day, investors are people. They aren’t just investing in products and services, they’re investing in people, too. Tell them your story. Tell them who you are, and how you got to be here today. Show your enthusiasm and passion for your business. This is what will help you connect with the right people, who share your vision and will want to grow with you as a business.
Need help preparing for investors? Call us today for your free consultation! Dial: +1.424.274.3188