When building a new or growing cannabis business, like it or not, in most cases, you’re going to have to raise external capital to give yourself some runway. There are, of course, companies that don't raise capital and bootstrap, and while that’s recommended if you can do it, it’s really not feasible for most companies who want to invest in growth. Once you decide the time has come to raise that capital, the worst thing you can do is take the first check offered to you without doing your research. So, in this week's episode, Chip talks about the four steps to take when approached by an investor for your cannabusiness.
What to listen to next:
Episode 01 - The 10 Reasons Investors Say No to Your Cannabis Business
Episode 03 - The Secrets of Raising Capital for Your Marijuana, Hemp or CBD Business
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Well, hi there and welcome again to this week’s episode of The Business of Kush podcast!
If you’re a new listener, a hearty welcome to what we think is quickly becoming one of the best business podcasts for cannabis entrepreneurs. And, if you’re a regular listener and subscriber, thanks for joining us again this week. Really happy you’re here.
So, 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.
And hey, just a quick favor to ask before we get started this week: If you can leave a review on Apple podcasts or hit the bell icon on Spotify that would be a big help to get this podcast to more cannabis business owners.
I’ve included a link in the show notes that explains how to do this. And, thank you in advance for being awesome and helping out.
So, I recently had a former client who started up a new venture. And, let me pause right here for a sec.
One of the great things about entrepreneurs and why I enjoy working with them so much, is they build one thing, find success, and then do it all over again. I mean, their desire and passion to build and grow great companies is just so impressive. I just love working with ‘em!
So, back to my former client who is on company number two. She calls me the other day super excited that she has been approached by a potential investor.
As I said, she’s very excited and asked me for some advice. And, if you find yourself in a similar situation now or in the future, I’m gonna give you the very same advice I gave her.
Now we know that when building a new or growing cannabis business, like it or not, in most cases, you’re going to have to raise external capital to give yourself some runway.
There are, of course, companies that don't raise capital and bootstrap, and while that’s recommended if you can do it, it’s really not feasible for most companies who want to invest in growth.
Once you decide that the time has come to raise that capital, the worst thing you can do is take the first check offered to you without doing your research.
So, here are four steps to take when approached by an investor for your cannabusiness.
But, before we get to them, if you’re on the other side of the coin where you’re the one approaching potential investors, listen to Episode 1 about the 10 reasons investors say no to your cannabis business and Episode 3 about the secrets of raising capital for your marijuana, hemp or CBD business before approaching an investor for your cannabis startup.
Now, if and when, however, you get approached, I’d do this:
1. Ask yourself and potentially them, why they want to invest in your company?
This is actually the most crucial step that so many entrepreneurs don't understand. You get a call about someone wanting to write you a big check and you’re flattered, and rightfully so. I get it.
But, not every investor is right for every company. Some investors have an appetite for early stage companies, while others avoid them because of the high risk involved. Some investors avoid certain verticals in our industry and will never invest no matter how great the company is.
Once they dig into the details they may decide your company isn’t right for them, or you may decide they’re not right for you. And, especially if you’re a spcial equity applicant, you gotta approach these conversations at a maeasured pace because you have something that’s very valuable and is really meant to be beneficial to you, so don;lt give that away until you understand why they want to invest in you.
These may be tough questions to ask, and you may worry about spooking an investor, but its better to flesh this stuff out long before you spend a bunch of time and energy with the back and forth of negotiating a deal and getting your hopes up.
And, oh by the way, ask them how they find out about you? And, what was it about you and your company that’s attractive to them?
As an entrepreneur, it’s your job to critically ask the questions and understand what’s in it for them and why your company so you can better understand if this is a good opportunity for you and your company rather than just being good for them.
Don’t just jump at the offer until you’ve exercised a bit of skepticism because getting far down the path with the wrong investor or an investor that’s not really serious makes you frustrated, takes your eye off the ball, and wastes everyone's time.
2. Study the portfolio of that investor, mainly for competitors.
Now, once you’ve answered question #1, you’re going to want to make sure that the investor approaching you doesn’t already invest in a competitor.
The last thing you want is to send your confidential investor deck to someone who can give it to your biggest competitor. And, I’ve seen this before. Think a non-disclosure agreement will protect you in these circumstances? Well, maybe, but they are so hard to prove which makes them tough to enforce.
Additionally, the chances of an investor deploying capital in two companies that are direct competitors are slim to none and it is your job to do that research and not get into the trap with that investor.
3. Speak to other cannabis entrepreneurs (or even mainstream entrepreneurs) who have gotten capital from that investor.
This might be the most important step of all. Once you have entertained that first call, speak to CEOs who have raised money from that investor in the past. Some of the questions you should ask are "Is the investor entrepreneur friendly?"
"Does the investor provide value beyond a check?" "When the going gets tough, does that investor step up or give up?"
It’s a huge mistake to take money from someone who will make your life more difficult.
Being an entrepreneur is hard enough as it is, the last thing you want is an investor who will make it harder. I know you’re flattered. I know you want the money. But, I’m telling you if the chemistry isn’t there, it’s like any other relationship with a bad break up. It can be a real shit show.
4. Research the investor using their social channels and search engines.
If the investor courting you passed all the first three tests, now it's time to do some deeper research. Now, you don't have to agree with everything that investor tweets about, but I recommend you read what she puts out there, just to make sure that there is a cultural fit.
Remember, from our very first episode, this person is not just an investor, they are going to be a partner for the whole journey of your cannabis business, so you’re going to want to make sure you get along.
We all read about these mega investment rounds and we glorify raising capital, but I believe not enough attention is paid to the process of raising capital from the right person at the right time. Hopefully, these tips will help you make the right long-term decision for your company rather than taking the quick money and getting into a rugged deal down the road when getting a divorce will be expensive and time-consuming.
Well, before we finish for this week, our last segment. The one we call “news of the day"
And, one last piece of news. Actually, not directly related to the cannabis industry but rather related to college football. There is a tie-in here, but if you’re absolutely not a fan of college football in any way, it was great having you again this week and we’ll see you next week.
For everyone else, have you seen the seismic shift news in college football today? I mean what in the fuck happened?
First, Lincoln Riley, who coached the Oklahoma Sooners to 4 consecutive Big XII championships and three college football playoff appearances accepted the head coaching job at the University of Southern California.
Then, Brian Kelly, who is the winningest head coach in Notre Dame football history, essentially said “hold my beer’ and took the head coaching job at LSU.
Both are huge, huge stories in college football and now place OU and Notre Dame “on the clock” so to speak to find new head coaches.
Now in full disclosure, I’m a proud graduate of USC, the fourth in my family to attend school there.
Also, my daughter attended OU for a year and I really like that university and the football program, so a real loss for OU, but a huge win for ‘SC. And, my son-in-law is a graduate of LSU, so we’re all sitting around thinking, “Did we just see what we thought we saw?!”
So, why am I mentioning it? Well, other that it’s pretty much all anyone can talk about in college sports right now, it shows the value of putting your head down, working hard, and the rewards and big payoff will come.
You’ve got to trust the process though and taking shortcuts won’t get it done. Spend the time to build a great cannabis company and at the right time, you’ll reap the rewards. And, especially for you trailblazers who have been working in the shadows in our industry for so long. You’ve been in the trenches, and legalization and legitimacy have now come so just keep going. Keep grinding and stay of the path of truth, a pure heart, and a commitment to the plant and you’ll be fine.
OK, and there ya have it for this week’s episode. And, thanks for letting me blabber on about college football. A quick shout out to my fellow Trojans with the Cannabis at USC group doing great work of students educating students on all things cannabis. Looks like we got us a great football coach!
And, if you want to follow them on Instagram, you can find them at @cannabis.usc
Hey, just a reminder that if you have specific questions, please drop us a note at TheGreenLeafCPA.com/Listen.
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And with that, we’re done for this week. Thanks again for your continued support of the podcast, and look forward to you joining us again next week.
We’ll see ya.
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