Finding Investors for Your California Cannabis Business: Strategies and Best Practices

If you’re ready to seek outside funding for your cannabis company, it’s important to start in the right place. That place is research — research on the types of cannabis investors out there, the state of the investment market, and predictions for the future of the legal cannabis industry.

Cannabis Investor Types

• Venture Capital (VC): VC firms collect capital from outside investors and use it to create large investments in private companies, often those viewed as high-growth cannabis startups. Venture capital firms are often the first type of investors that come to mind when you think of investment, but they can also be the most challenging to secure.
• Private Equity: Private equity firms can be a single person or a group of individuals who buy a stake in a privately owned company, typically with the goal of taking an active role in the leadership and management of said company.
• Angel Investors: An individual with a high net worth who uses their own money to invest in a private company. This can be a great option for many companies, but can be hard to secure.
• Family Offices: Family offices are private wealth management funds for high net-worth families that have historically played a large part in institutional investment. Nowadays many family offices prefer to invest via venture capital firms.
• Crowdfunding: This is a new type of investing, thanks to the power of the internet, where large numbers of everyday people can come together and invest comparatively small amounts of money in a company in its early stages of growth. The main challenge with crowdfunding is securing enough investors to hit your goals.
• Debt Financing (loans): Cannabis companies not seeking traditional investor oversight may want to go the route of debt financing, borrowing money from a financier with a set repayment plan.

As one of the oldest legal cannabis markets in the country, California offers a lot of promise for investors. It is not easy to operate a cannabis business in the Golden State and if a brand can make it there, chances are they can make it anywhere. While the California cannabis industry continues to change, growth is constant, with some projections of market value reaching over $5 billion by 2030 — especially as municipalities that originally rejected cannabis sales are now changing their minds and updating their cannabis regulations.

To stand out in California’s crowded cannabis industry, a brand must prove itself to be innovative in its product production or capable of creating a highly engaged and loyal following.

If you’re building a cannabis business with the goal of finding investors, there are steps you can take from the time you incorporate to make the process a little easier.

Develop a Business Plan

Hopefully the first time you create a business plan is not when you decide to seek investment. But even the most robust business plans can use a little refresh before being sent off for investors’ consideration. Make sure your plan includes:

• A clear and concise executive summary on your business and your goals
• Market analysis for the areas where you currently do business
• Competitive advantage for your position in the market — AKA what makes you different
• Financial projections and plans for your current state of growth and your projected future earnings
• Team expertise, with summaries of all your key leadership positions

If you need to take a deeper dive into an investor-ready business plan, we have a Business Plan Checklist that is helpful. There are also several benchmarks that are helpful to know if your business is ready to pursue investment.

Demonstrate Financial Performance and Growth

Investors invest where they see returns, so proving financial growth is a big piece of your pitch. Comprehensively tracking your financial metrics now makes it easier to get everything together in the future.

From the time you begin business, track key financial metrics. These include your monthly, quarterly, and annual revenue, as well as your profitability and customer growth. Keeping a close eye on these date points can also help you gauge how successful your company is and how fast it’s growing.

Depending on your team size, you (or your CFO) should also be preparing financial statements on a monthly basis, including the income statement, balance sheet, and cash flow statements for your business. Not only is it a best practice for companies seeking profitability (which can all too often be elusive in cannabis), doing so now makes it easier in the future when you’re putting together financial statements for investor consideration.

Build a Strong Management Team

Hiring decisions are not made lightly; you fill the roles in your company with people who are best suited to excel there. But communicating this can be a roadblock for some cannabis companies, so consider how you can highlight the experience and expertise of your team members. Whether your leadership team came from within the cannabis industry or other similar industries, how can you showcase the diverse skillset your team brings to the table? Considering this in advance gives you time to do so in a way where everyone shines.

Once your business is in an investor-ready place, it’s time to start the search for the right person. Investing in general is something to be taken lightly, and when you operate in the cannabis industry, it’s vital that you find cannabis investors who understand the nuances and challenges of operating in this space.

Network

You have to start the investor search somewhere, and the best thing to do is to get started. You don’t have to jump into the world of investor networking with a perfectly clear picture of a partnership, but you need to be willing to take your time and have plenty of conversations.

By attending cannabis industry and investment events, as well as conferences and network-specific events, you create opportunities to have conversations that will help you get a clear idea of what the right partnership looks like — and may even open some unexpected doors. Reach out to other cannabis entrepreneurs and discuss their investment experience.  They may be able to point you in the direction of cannabis investors, as well.

Aim to have conversations and build relationships, not pitch as many people as possible. Genuine human connections will get you further than any elevator pitch will.

Investor Databases

Take your networking online. Platforms like LinkedIn can help you identify potential investors who may not be geographically close to you. There are also investor databases you can access (either for free or for a payment) to research and identify potential investors who may be interested in your business.

Warm Introductions

Remember what we said about genuine human connections? Reach out to your existing business network and tell them your plans for investment. You never know who your network knows, and a warm introduction from a trusted industry advisor, a business partner, or other cannabis entrepreneurs can go a long way.

Your foot is in the door and you’ve got the opportunity to give a pitch to a qualified investor — what now?

Develop a Compelling Pitch Deck

Your pitch deck should tell a compelling story of your business in as few words as possible. Pitch decks don’t start out small. Still, start by creating one that includes all of the details about your business, products, plans, and key value proposition — and cut it down from there. This may require help from other members of your team to identify what is core and what is simply “fluff.”

In short, your pitch deck should include:

• High level summary of your business
• The problem your business solves
• An overview of your business and product(s)
• Marketing and customer acquisition strategy
• Introduction to your team
• Competitive analysis
• Financial projections

Your deck should be easy to present, both because of its brevity and from how much you practice delivering it. Again, pull in other members of your team here. Rehearse the pitch on them and get feedback. Where are you going too quickly? What isn’t clear? Where can the flow be improved? The adage practice makes perfect is highly applicable here.

Prepare for Investor Q&A

Nailing the pitch deck is half of the presentation battle — the other half is answering investor questions confidently and smoothly. What investors are looking for is a deep understanding of your business, your audience, and the cannabis industry as a whole. It can be helpful to pull your team into pitch deck rehearsals and have them ask you test questions so you’re rehearsed here as well.

If all goes well with your pitch deck presentation, an investor will be interested in moving forward with your business. Congratulations! The next step in cannabis investments is due diligence and terms negotiation.

Understanding the Due Diligence Process

Due diligence is the process by which an investor verifies that a business or company is the opportunity they think it is. It is essentially an investigation into a company to confirm facts and identify risks or exposures.

This process can feel invasive, but it’s important for investors to confirm everything they’ve learned about your company. Be prepared to share personal information about your cannabis business with an investor, including financial records, legal documents, and other relevant business information.

The due diligence process can take anywhere from a few days to a few weeks, depending on your cannabis business size and the investor. Don’t rush this process — it’s important for both sides to build trust moving forward.

Your potential investors may also want to know about your insurance coverage, and in particular about D&O coverage. Directors and Officers insurance is often a requirement for investors before money can change hands, to ensure that their personal assets are protected and separated from their cannabis investments.

Negotiating Investment Terms

Here’s where the rubber meets the road — negotiating the terms of the investment. If you’ve done the proper leg work and had the right conversations, nothing that comes up during negotiations should be a surprise to you. But protect yourself going into these talks by seeking out legal and financial advice. The investor wants favorable terms and so do you — the compromise that suits both parties is somewhere in the middle.

You need to understand key terms used during negotiations as well, such as valuation (what  your company is worth and how that is spread throughout stakeholders), ownership stake (who owns what percentage of the company), and exit strategies (such as going public or selling the company, and how that would work.)

Once you’ve secured an investor, the work is only half-done. Investors aren’t money machines that you punch in presentations and get financial assistance. Instead, they’re savvy businessmen and women who take interest in the companies they invest in. One of the biggest keys to success is regular communication that helps you build a long-term partnership.

Investors want to know what’s going on in the companies they invest in — which makes sense when you have thousands, if not millions of dollars, on the line. Maintaining open and transparent communication with your investor, or team of investors, goes a long way. Providing them with proactive updates on company performance and progress shows that you understand key metrics for success and the importance of monitoring performance.

Don’t be afraid to ask your investors for feedback on business direction or guidance. This is likely not their first rodeo, and they may have helpful insights that can help you avoid common pitfalls or early cannabis business challenges. All of this goes a long way towards building a strong, mutually beneficial relationship with your investors that can withstand the test of time and inevitable market changes.

Insurance may not seem to be at the top of your list when it comes to finding cannabis investors, but protecting your investment — and theirs — is a key piece of the puzzle. Partnering with a cannabis insurance agency ensures that your business is protected from all angles and you have the proper umbrella of coverage to protect your business as it grows.

Protecting your cannabis company can seem confusing; however, we’re a full-service insurance brokerage working with carriers worldwide to offer you the best coverage possible. We’re here to help! Please reach out to us today by email info@alpharoot.com or calling 646-854-1093 for a customized letter or learning more about your cannabis insurance options.