One of the primary reasons startups fail is that they run out of money. Cash is the fuel that allows a business to grow. Growth is challenged by too little cash and, ironically, also by too much cash. Effective cash management is thus crucial to a startup’s growth and success.
Access to capital can be a significant challenge for many reasons. Money is always cheapest to borrow when you least need it. Loans are easiest to obtain when your ability to repay them is at its highest. Access to liquidity, while difficult in any industry, is even more challenging in the cannabis industry due to the noticeable absence of any major financial institutions. Despite these challenges, cannabis capital infusions are at an all-time high and we think will never be this low again.
2016 Cannabis Capital Raise – $1.2 Billion
According to MJ Business Daily, founder savings and personal debt funded over 88% of cannabis businesses in 2012 compared with ~72% in 2015. Continually expanding acceptance and law changes will drive this even lower as more outside capital continues to enter the industry. Viridian Advisors reported 2016 capital flows in the US/Canada at $1.2 billion. This number will increase as cannabis businesses mature and capitalize on the opportunity to scale into ever expanding markets. Funds such as Tuatara Capital(~$93 Million AUM), Privateer Holdings (~$122 Million AUM), and Poseidon Asset Management (~$12 Million AUM) are well poised to deploy capital today; future funds will deploy billions more in the coming years.
Institutional capital will continue to expand investments as regulatory evolution allows existing businesses to scale. As often accompanies scale, exits similar to the recent Whaxy acquisition by Massroots and the KIND financial partnership with Microsoft will increase. As the industry continues this maturation process, the investment climate will also increase in complexity. Given the massive amount of cash that is and will be available for deployment, the capital opportunity for founders has never been brighter. Along with this comes increased sophistication, which raises the bar for all involved.
One, of course, cannot control whether their business fits into a portfolio manager’s sector thesis or how portfolio construction and rebalancing might affect their access to capital. Capital commitment decisions are made on a variety of qualitative and quantitative factors, and founders are best served focusing on those that are within their control.
While social skills, vision, speed to market, founder discipline and grit are essential, fundraising skills and resources alone can make or break a business. Amongst other things, sophisticated investors look for audited financials, pro-forma projections, term sheets, a high-quality pitch deck, and an offering memo or a private placement memorandum before they will commit to even reviewing a company offering. Startups are well served to also have an executive summary, a defendable valuation, a target investor list, FAQ, customer testomonials, a product summary and a developmental roadmap.
There is a lot of money entering the fastest growing industry in America. With this influx of capital comes increased sophistication, heightened expectations, and a bar that is raised for all. Even with the best team, timing, business model, and discipline, a lack of cash can cripple your business. Are you adequately poised to capture this capital to maximize your growth potential?
A successful entrepreneur can create extreme wealth. With extreme wealth comes extreme responsibility. The responsibility to create wealth without exploitation, to grow it without environmental damage, and to dispose it with the greatest positive social impact.