12 Important Things Equity Investors Look For In Cannabis Firms
I regularly get calls from cannabis entrepreneurs and seasoned operators looking for help in raising equity capital. Few cannabis companies have the luxury of not needing money or not knowing whether they are investable by institutional capital.
Two of their consulting asks are: 1) assistance in creating and crafting their ‘investment thesis’ - the financial & strategic reasons why someone would want to put money into their company and; 2) helping them identify and prepare 'key success factors' – the organizational prerequisites that improve the odds of attracting capital and de-risk your business.
Getting these ingredients right is critical to raising money, especially when your financial results are less than stellar or if you haven’t built the business or IP, yet.
The following advice borrows heavily from my days as a Venture Capitalist in the tech sector, a space with many parallels to cannabis, as well my consulting work for Private Equity firms in the areas of valuation and due diligence.
I have tailored these learnings to the unique characteristics of the legal weed sector. For simplicity, I have categorized my thoughts into 3 broad buckets:
> Team & Skills
Savvy cannabis investors bet the jockey, not just the horse. They look for teams (one person is not enough) who:
1. Are battle tested in start-ups plus fast-moving or regulated markets;
2. Can park their egos and stretch their thinking to accommodate strategic pivots;
3. Have strong functional experience in germane areas to cannabis such as brand management, finance, regulatory affairs and sales;
4. Display a symbiotic spirit or esprit de corps;
> Business & Capabilities
What is a fundable business as well as the cheque size will vary by investor. These days, most equity capital funders will be excited by:
5. A focused & compelling market position and strategy;
6. The existence of and opportunity to generate defensible IP;
7. Light CapEx business models;
8. A data-driven operating platform;
> Financials & Governance
These days, most equity investors look for a 10x return in their high-risk equity investments, plus:
9. A financial model with strong cash flows, margins and growth trajectory;
10. Mechanisms that ensure financial transparency and spending controls;
11. A clean cap table that incentives management;
12. Founders with financial and time ‘skin in the game’
If you don’t tick some of these boxes, you’ll probably be asked to implement them.
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