How to Raise Capital for Cannabis, Hemp, or CBD Companies

Oct 17, 2020 | Cannabis Business

Cannabis businesses have raised hundreds of millions of dollars in 2020, and these investments are expected to continue as the industry grows.

Much of this sector demonstrates its resilience to recessions and pandemics, even being categorized as essential, as many states have been observing heightened demands. But even with these companies being recession-resistant, some find it challenging to acquire capital for funding or obtain investor interest.

Besides going further into debt to raise their capital, cannabis companies must find a way to build capital without draining their resources. Regardless of whether you’re operating a startup or an established canna-company, this guide offers insight on how businesses operating in cannabis can significantly increase their capital.

The Benefits of Bringing in a Niche-Specific Accountant

An accountant specializing in cannabis isn’t always on the top of early investors’ and founders’ to-do lists. These investments don’t often pay off because these people lacked the insight to determine the health of the company.

You don’t have to go down the same erroneous path. The right cannabis accountant will ensure you bypass common errors and increase your business’s value by maintaining its health.

The majority of investors don’t participate in the day-to-day operations of their business. So a cannabis accountant is essential to maintain and monitor the investment. These professionals can prevent downside loss from theft, severe bookkeeping error penalties, and fraud too.

Investors look for the solid, visible data that shows them your business is the right investment. In essence, this information should exemplify the profitability and smooth operations of an investment-worthy business. But this information isn’t accessible without a professional to compile it properly.

Correct cost accounting, accounting policies and procedures, chart of accounts, documented internal controls, and other tools must be tailored to your cannabis business.

Cannabis-related businesses have complex accounting requirements. These also differ across unrelated verticals, including chemical manufacturing, product manufacturing, retail, labs, and farming.

Your accounting team should have a firm understanding of multiple niche-specific layers and regulations that impact the cannabis sector. This knowledge, along with a successful track record of supporting other cannabusinesses, shows this professional will handle all of the high-level tasks and sets your business up for smooth and successful operations.

Create an Incredible Pitch Deck

With the right data on-hand, it’s easy to put together an amazing pitch deck. This is what your all-star cannabis investors want to see. No one has the time to invest in reading through an in-depth business plan; the simpler it is to scan your pitch deck for what makes your canna-company a solid investment, the more likely you are to raise capital.

Here’s what you should include:

  • Moving/Compelling story: The right story does a lot to convince investors your company is worth their time – and money. This is where you showcase your company’s background, explain why it was started, and demonstrate what contributed to your current success. You should also explain the main customer problem your company addresses, as well as how your company solves that problem.
  • Proven management team: Explain your team’s background and past successes. A CEO and a qualified accountant who have experience successfully navigating the cannabis sector add credibility to your company.
  • List of advisors and/or board members: A solid team should demonstrate what your investors can expect after investing in your company. Make sure to offer seats to your potential investors.
  • Competitive analysis: Research the competition and explain what makes your company better.
  • Market analysis: Conduct some research on TAM (total addressable market) and contemplate how you expect the company to grow throughout years to five.
  • Market plan model: Explain your market plan, along with your plans for distribution and sales. If you’re a farmer, avoid the assumption that your product will be sold at top-tier prices, especially if you’re just starting your grow journey.
  • Financial model summary: Outline your key assumptions, growth projects, 5-year revenue outlook, and EBITDA.
  • Unit economics: Give pricing and margins from your business model, highlighting revenue drivers and the company strategy, as well.
  • Investor economics: Provide a company valuation, sources/uses of capital you’ve already raised, ROI, ownership size in relation to the investment, and expected payback time.
  • Amount of capital the owner has invested: Assess and record the capital you’ve put into your company.
  • Outline what traction you’ve had so far: This should include anything that shows your cannabis business’s progress and usually includes things like cannabis retail license acquisition and increases in sales.
  • Legal phrasing: Make sure to have a qualified attorney check your phrasing as this can be an issue.

Develop an Impressive 5-Year Financial Model

Your financial model should be aligned with the information you’ve included in your pitch deck. Sometimes, a model will receive an update. But without changing the numbers in your pitch deck, investors might question its accuracy. Here’s what you should include in your model:

    • Financial statements: Offer all financial statements, such as a P&L, balance sheet, and statement of cash flows.
  • Key assumption tab: This is where you’ll include all key assumptions, such as your pricing, production, etc.
  • Summary tab: Include key metrics and assumptions, along with financial ratios such as investor capital, overall ROI to investor, and internal rate of return at Year 5 exist under different valuations)
  • Best- and worst-case scenarios: Show the extremes to show investors what they can expect if your predictions are off by 50% or more. This ensures they will be prepared and understand what they should expect in regards to sales fluctuations

Other Considerations to Raise Capital for Cannabis

As you raise capital for your cannabis business, some other factors will come into play. Consider doing the following before you begin reaching out to investors:

  • Defining a realistic company valuation. This should be included in your business model and deck. The key here is to ensure your valuation is realistic. Consider whether the company is pre-revenue and whether it has any real assets besides an idea and a cannabis license.
  • Find your UVP and USP. Your Unique Value Proposition shows what makes your product or company unique, sustainable, valuable, and desirable in accordance with the market. Your Unique Selling Proposition highlights the reason your customers will purchase from you as opposed to the competition.
  • Obtain traction. Consider the milestones you’ve already hit to determine your next steps. If you’ve had a lot of traction, you’re likely prepared to raise capital and your valuation can be higher. This translates to you sacrificing less of your company to receive the capital you’d like to raise.

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