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Oct. 26, 2021

The 10 Reasons Why Investors Pass on Investing in Your Cannabis Business


Funding is critical to the growth of your cannabis business. And, each meeting where an investor rejects your idea is a gut punch, but it also teaches us something about what investors are looking for and which ones need to be targeted.  

Every investor wants to bet on a winning horse and over the past few months, I’ve been helping put together pitch decks for a several startups and reviewing other ones, as well as watching 30 episodes of Shark Tank and seeing about 120 products pitched. 

So from all of that, this inaugural episode talks about the 10 most common reasons why investors take a pass at investing in your cannabusiness.

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Transcript

Hi there and welcome to the first ever episode of The Business of Kush podcast!

Happy you’re here.  I’m Chip Schweiger a 27 year veteran of public accounting and corporate finance, and also the founder and managing member of The Green Leaf CPA. 

We’re a CPA firm that helps cannabis, 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, you may be asking yourself, why a cannabis business podcast?  And particularly, why one from a cannabis CPA?

Well, we’ve been looking in the podcast world for a great cannabis business podcast. Now there are certainly good ones out there and I’m a fan of ‘em, but we wanted to create something specific to cannabis owners, and particular those of you who are either just starting out or are looking to scale and level up your cannabis business.

So, The Business of Kush was born, and episode one is right here, right now for you, the cannabis entrepreneur.

Because being an entrepreneur is tough.  It often takes years of hard work, long hours, and getting comfortable with rejection to become successful. A lot of entrepreneurs give up, or fail for other reasons, like running out of money. 

In fact, according to Forbes magazine, many businesses fail because they cannot raise the right kind of funding at the right time at the right valuation. 

They use too much of their own money and way too much money from friends and family – which becomes a distraction every time a friend or family member asks about how the company – and their investment – is doing. 

Cannabis entrepreneurs, like other entrepreneurs, can struggle too because they may not know how to value their company or how to phase investments along timelines designed to optimize valuations. 

They also often don’t appreciate how much money it takes to meet milestones. Or how to respect their investors who deserve professional communications on a regular basis – especially if they plan to keep asking those investors for money.

Add to this that being a cannabis entrepreneur is even tougher because you’ve got myriad regulatory matters to think about on top of the challenges that you share with non-canna businesses, especially if you’re in a plant touching side of the industry. 

Which bring us back to money. And, to investments in your cannabis business.

One challenge we see a lot is hearing “no” from investors, which really hurts right? 

It hurts the confidence. It hurts the pride. And, it hurts the wallet when investors don’t want to fund your cannabis startup. 

And for the folks that I know of, including some I’m working with right now, hearing “no” over and over again continues to sting. I mean, if no one else believes in your idea, then it can’t be that good. Right?

Well, that’s not necessarily true. And the trick is to flip the script and use the pain as a sign to find out why there is a lack of interest on the part of investors. 

It could be that you just have been targeting the wrong type of investors for your cannabusiness or you need to provide more evidence of current and future success.

A lot of times, I suggest that folks ask those very investors for a reason why they turned you down so they can regroup and try again. 

There are so many stories of founders who were rejected 10-20-30 times (which you know had to hurt).  I mean, come on!

But, if those folks gave up and skipped out on that 31st meeting, these companies wouldn’t be where they are today.  And, I think it’s because each meeting teaches us something about what investors are looking for and which ones need to be targeted.

Every investor wants to bet on a winning horse because what’s the point in losing money on purpose? But that’s the risk taken on a gamble. 

And the same can be said about investing in cannabis startups. 

Watch Shark Tank – one of the most brilliant shows out there and a masterclass on pitching – and you’ll quickly realize that as brilliant as your new cannabis venture may seem, it’s got to make money for your investors. 

That’s just the plain and simple truth of it. 

Look, no matter what stage your cannabis business is in, you’re probably going to need some investment dollars. Over the past few months, I’ve been helping put together pitch decks for a few startups, and reviewing other ones, as well as watching 30 episodes of Shark Tank and seeing about 120 products pitched.  

So, to save some time for each of you, in this first episode let’s talk about the 10 most common reasons people don’t invest in what looks, on the surface, to be a good cannabis business. 

And I offer these as help because if you can address them head on, you dramatically improve your chances of securing financing.  

So, the first two I’ve posted about on social media and it comes down to answering the question of do you have commercial viability and do you have market acceptance?

1. There’s no proof of commercial viability

You wanted to develop an idea that could revolutionize the cannabis business, and it could be an amazing idea. But your concept is too far out. 

Most investors are going to stay away until there’s been more research, your product has traction with customers (think crowed geographies with a dispensary on every corner) or other investors show interest. 

Investors typically want to stick with a proven business model, especially in this industry.

2. There’s no market acceptance

Once we’ve tackled commercial viability, we also need to get over the hurdle of market acceptance, meaning can you actually sell any of your product or service?

Is there evidence that there’s interest in your CBD line or that it has some traction? Have you sold anything yet, maybe on Instagram or eBay? 

Have you run a successful Kickstarter campaign for that delivery service? Have you launched any kind of startup before? 

Passing those tests would prove that you have what it takes to get this startup off the ground.

If there are no preorders for your on-line CBD shop or not much interest in your cultivation facilities, then it gets harder to prove that people are willing to pay for your product or service. And, when that’s the case, why should an investor give you money? 

So, the trick here is really to show that your business is something worth putting hard-earned cash into and that this investment will work hard for your investors as your company starts to have success.  

OK, the number 3 reason really comes down to trust. Are you sharing all the relevant facts and figures for an investor to fairly assess the opportunity, or are you’re keeping critical pieces of information from potential investors? 

They’re not asking you to reveal every little secret regarding your business. But if they’re investing in your cannabis company, they have to at least know the basics of what makes your company tick. 

How do you sell? On-line hemp lotions or in a brick-and-mortar dispensary? Do you have any patents or registered trademarks and are they protected? Are there already other investors and if so, what does that dilution look like?

Investors want to know everything relevant about your business. Keep these key matters secret and you’ll risk having a potential investor flat out not trust you. Saw it just the other night on Shark Tank. And guess what: they didn’t get the deal

4. You don’t have a business model or plan

If you don’t have a business plan, you have failed to tell an investor how and where you expect to take your company in the next couple of years. Even though you indicated that there’s interest in your cannabis company offerings, creating a business plan is such an important piece of the puzzle.

If your business plan doesn’t add up, or worse, you don’t have one, then they won’t invest in your startup. Full stop. 

Yes, I hear you that it’s the next great thing to solve a massive problem, but no business plan = no money.

Pro Tip: Get help with your business plan from a consultant before you pitch

5. They don’t believe you can build your company

A great idea is one thing. Making it a reality is another. If you haven’t convinced investors that your company can actually function, it’s gonna be tough to get them on board. 

They may need to see some sort of working prototype of a product if you’re developing. They usually also like see research that says the geography for a new dispensary isn’t already saturated. And, customer testimonials are important.

So, consider asking friends and family to sample your new THC infused product, or look into market research for whether your town can handle a new dispensary.

6. Your company is not the first to enter the market or is not unique

Most investors in mainstream industries I know typically don’t invest in startups that are not trying to create something new or that have not come up with a different business model. 

Barbara Corcoran is famous for this question about who else is doing your thing or something similar.

And, the same is true on our industry. You must have something different or unique beyond what the competition has. There are a ton of CBD companies out there right now, and more coming each day. 

Similarly, there is Delta-8 and around every corner, so what is going to be the differentiator for your business if you get into Delta-8?  

Want to get into THC infused anything? Same question holds true: what’s gonna make yours different?

You need to be able to answer this question to potential investors. But, the differentiator doesn’t have to be complicated.  

There’s a lot of talk about THC benchmarks right now, so that’s a place to look.  Or, perhaps enter a new geography that just opened up to medical or recreational cannabis.

7. The founder or CEO is uncoachable

If you’re not willing to listen to advice or suggestions and become defensive when someone criticizes an element of your business, investors probably aren’t going to be interested in working with you.  This is a partnership and the best ones have likability at their core.

Just the other night, again on Shark Tank, several founders came to pitch, and Robert Herjavec made one suggestion. They became offended. One of them even challenged Robert that he didn’t really understand their business and asked what gave him the right to make that suggestion. 

Well, he picked up his toys and uttered those famous words “I’m out.” It made for great television, but they didn’t get a deal and their company is out of business now. 

8. Your startup costs too much

You may think your new canna company is worth $10 million. But investors price deals on earnings and margins and projections of customer sales and signed committed purchase orders.  

Yes, figuring out the value of your startup can be a challenge. And yes, the value should be based on past accomplishments and the company’s potential. But there’s got to be some anchor there to reality.  

And, if investors feel that a startup is being assessed at a value that’s too expensive, they may just look elsewhere for another investment opportunity.

9. They’re not the right investor 

I call this the “it’s not you. it’s me” phenomenon. Essentially, your company is not operating in their area of expertise or they are currently oversubscribed in a particular vertical, say extraction businesses. 

Just like a doctor might have a specialty, so do investors. Usually in every episode, one or two sharks will say how impressed they are with the idea being pitched but admitted they just don’t know enough about the niche to help.

Do some research ahead of time and locate the investors who are involved in your vertical or who have experience with vertically-integrated operations if that’s the direction you’re headed.  

Pro Tip: Seek out canna-friendly investors only. Don’t waste time with others.

10. There aren’t any other investors

If investors don’t find evidence that others have invested in your business, even a couple of thousand dollars, it’s gonna be tough to get an investment.  

They aren’t interested in dilution, but they do want to see interest from other investors. And, oh by the way, that could be from you.  How strongly do you believe in this and how much have you put into it?

The presence of other investments gives an indication that someone else sees potential in your startup and that other people are supporting your vision. 

And a trick here is having a couple of investors already is good as they can help promote your business to larger investors.

So, there you have it, the unofficial, official list of the top 10 reasons investors are likely to take a pass at investing in your cannabusiness.  

Give ‘em a review and role play responses before you go into your next pitch. If you’re not more successful with these tips, you’ll at least feel more comfortable because you’re better equipped. And, you’ll get the next one. 

This is one of the biggest moments in your cannabis business’s life.  It makes sense to take it seriously.  So, don’t wing it!

OK, so this first episode has really been a blast! Before we run out of time, let’s get to one last thing and that’s a segment we call “news of the day”

[READ NEWS]

And, there ya have it. 

I think that about wraps it up for this first episode.  You know, we’re in the fourth quarter of the year, so next week, we’re gonna talk about what you should be thinking about before the end of the year as it relates to the business side of your cannabis business. Hope you’ll join us again. And, until then, have a great week.