With legal cannabis sales expected to top $30 billion this year, it’s a great time to get in on the ground floor of America’s newest industry. However, if you’re looking to launch or expand a cannabis business, you know that securing funds can be a challenge. Oaksterdam University has partnered with The Arcview Group to create a 2-day course designed to help canna-preneurs find the funding they need. The course, Raising Funds for Cannabis Businesses, examines the beginning to end of raising capital — from figuring out who investors are to building a winning pitch deck. The course also identifies key factors that investors tend to consider when they are vetting an investment opportunity and outlines best practices for pitching your idea to potential backers. In preparation for the course, we asked Instructor Louis Han to talk about some of these issues.
Oaksterdam University: What are the unique challenges cannabis businesses face when seeking funds?
Louis Han
Louis Han: In the U.S., larger sources of funding for cannabis businesses are usually private sources, such as private lenders or investors, which typically aren’t the sources of startup capital for traditional brick-and-mortar businesses. Traditional sources are usually banks, merchant cash advances, the SBA, or other state and federal funding programs. With cannabis, those traditional sources aren’t available due to its Schedule I status. That really bottlenecks the process.
You would think that some of these issues would be cleared up when cannabis is federally legalized, but we can look to some other countries that have nationalized cannabis, such as Canada and Germany, and see that’s not necessarily the case in the short term.
Legislators still need to figure out how to best regulate these operations and once the risk has sufficiently gone away, it’s only then some of these other funding programs I mentioned become available. It’s all about risk, and flipping the legalization switch on its own isn’t enough for a major institution to jump in feet first right from the get-go. It takes time to build the infrastructure and regulations for these institutional capital sources to feel the risk is low enough to participate.
OU: What are some of the key factors investors tend to consider when they are vetting an investment opportunity?
LH: Under the umbrella of risk there are a lot of reasons investors say ‘no,’ but only a few reasons they say ‘yes.’ Based on my experience reviewing thousands of decks and speaking to many, many entrepreneurs, I’ve boiled it down to 3 “T’s”: Team, Traction, and Terms.
- TEAM: Does your team have a track record of getting it done? What are their qualifications? Do they have a history of working together? Have they built a business before? With executives and founders, it’s kind of like hiring your first employees. Wouldn’t you want some of the most qualified people working for you? Investors want to invest in the people as much as a sound business, if not more.
- TRACTION: What steps have you taken to prove your business model works? That customers will actually pay you for your services? Do you have eyeballs, users, sales, or market share? In my experience just knocking on an investor’s door with a business plan isn’t enough.
- TERMS: Even with the perfect team and an amazing product, terms can be some of the trickiest parts of getting things done. Without understanding complex terms like discount rates and pre-money valuations, you may not know what levers you can pull at the negotiating table.
These aren’t exclusive, but some of the top things I’ve seen investors take note of. It’s validating to see that some of these same things that resonate in tech investments resonate among cannabis investors as well.
OU: What are some common mistakes you see cannabis businesses make when pitching to potential backers?
LH: One of the biggest is not understanding where they are in the life cycle of the investment conversation. In our digital, connected age, it’s often e-mail, slide decks, and executive summaries that make that first impression. I’ve coached a number of people who are surprised when the PowerPoint they’ve spent weeks working on fails to land them an investment from the get-go. It’s just a calling card. All you should expect from these materials is the next conversation. Would you hand a million dollars to a stranger just because they asked? It takes months or years of careful vetting to trust someone, let alone the due diligence on the business itself.
The second common mistake founders make is not knowing who they’re pitching to. Research your audience. It sounds so obvious but people fail to do it all the time. How well do they know cannabis? Are they industry investors or new to the sector? Speak their language and start where they’re coming from. If the investor already has a portfolio of cannabis investments, maybe you don’t need to explain its unlocked potential. They probably already know that, and can jump into why your business makes sense. On the flip side, don’t immediately start nerding out about your product or service with an investor who doesn’t know the difference between THC and CBD. Meet them where they’re at.
OU: A lot of people are trying to make moves in the cannabis space. What sets some apart and makes investors take note?
LH: I think we should take a minute to discuss the difference between lifestyle businesses and startups. Lifestyle businesses can carve out a small slice of the market, support dozens of employees, maybe become a generational company that can be passed down to heirs — think tea shops, laundromats, accounting firms, law firms. You can definitely turn these businesses into a comfortable life for yourself and employees.
However, investors are looking for scalable businesses and start-ups with the potential to dominate a market. They’re looking for outsize returns that beat the 7 percent return or so they can get by investing in the stock market. Investors have a keen eye for those businesses that are scalable. And savvy entrepreneurs should be honest about their ambitions and their business’s potential. When a savvy entrepreneur meets a keen investor, that’s when the magic happens.
Louis Han is the founder of PQ Advisory where he advises founders in investment, pitch coaching, and executive business strategy. He is formerly a Vice President of The Arcview Group. The Arcview Group is the cannabis industry’s first capital network and during his time there Louis has vetted thousands of cannabis and hemp companies from around the world. The select few who have survived his screening have received $100 million in investment capital. Prior to his time at Arcview he was a cannabis entrepreneur and worked in international commercial real estate investments. He holds a JD from Santa Clara University.
Oaksterdam University offers its Raising Funds for Cannabis Businesses webinar throughout the year. The next session is set for Jan. 22 and 29. Learn more or register here. Use coupon code 𝐢𝐧𝐯𝐞𝐬𝐭 at checkout to get $100 OFF the course!
