The Cannabis Economy | The Language of Raising Capital
While I was in the research phase of writing “Cannabis Capital” something stood out that seemed out of place. Referring to cannabis as an “industry” no long fit as I explored the overall impact that the legalization of cannabis will have in society and business. The initial purpose for the book was to provide a detailed resource for entrepreneurs to help them be more successful in raising the capital they need. The disconnect between companies that secure funding and those that don’t, comes down to many factors. Timing, business model, the team, and HOW they operate their businesses. Well run companies are rare in any sector, and it became apparent when we launched our venture capital fund that many of the entrepreneurs who were approaching us, didn’t come from a background of raising capital or traditional entrepreneurial finance.
This was certainly the case for me when I started out with my first few businesses. I specifically recall having a conversion with a prospective investor and didn’t know how to explain the valuation of my company. More specially I didn’t know what he was getting at when he asked me for my valuation. As a practical matter, to my mind, my company wasn’t worth anything until I had produced some results and suffice it to say that the investment discussion didn’t go very far. So, I set out to learn these concepts, and more importantly the implications on a business of things like valuation and investment structures.
This information wasn’t readily available to me and it was very difficult to find clear explanations. Even after I completed my MBA the closest class was on mergers and acquisitions and wasn’t sufficient to translate enough technical knowledge to a career focus, or even help with passing my investment banking licenses.
Looking back on a career in entrepreneurship, investment banking, venture capital and private equity investing, it was clear I wasn’t speaking the same language as investors when I was on the other side of the table earlier in my career. I was lucky and able to raise investment capital in my first start up very quickly from friends and family along with putting in some money myself. These people ultimately invested in me, and when the company was closed down we all lost our investment. This was also the turning point in my career when all of my entrepreneur friends were asking me how to raise capital. Every single one of them was having the same problem.
When I saw so many of the founders that were coming to us with cannabis companies to invest in, having the same issues, I knew I had to write the book. And specifically write the book that I needed when I was starting companies 20+ years ago. As I was developing how to convey the language of raising capital and entrepreneurial finance to entrepreneurs in “Cannabis Capital”, it became apparent that calling cannabis an Industry was actually getting in the way of the conversations that investors and founders needed to be having.
All too often we would see a founder fall back to the position that we “just don’t understand the cannabis industry” when being pushed in a presentation. And let’s be clear, when you are presenting to investors you WILL be pushed to explain your business and experienced investors don’t react to anecdotes or “sizzle’. We want facts, we want to understand the core operational tenets of the company and how you will make it a success and be a good custodian of the capital we provide. Falling back to the position that simply because the business is a cannabis business it is going to be huge because of market demand, falls on deaf ears. We all know the cannabis markets are emerging and presenting massive opportunities, otherwise we wouldn’t be investing in the space.
Many times, we would be talking with other investors and co-investors we would see the same challenge with the perspective that cannabis is an industry. They would be characterizing the entrepreneurs as “cannabis industry people” (advocate or legacy black-market experience) and not a classically trained business operator. This too is flawed and does not give credit where credit is due. The majority of the pioneering entrepreneurs bring deep prohibition era experience that is highly valuable. It is how that experience is adapted to the emerging professionalization and modernization of cannabis that lays the groundwork for building long term sustainable businesses.
It became clear that we needed to talk about cannabis in a different way. We need to be talking about the business of cannabis, not cannabis as a business. The acceptance and legalization of cannabis is not fueling one industry, but impacting dozens of new industries. I would also challenge that there isn’t a single existing industry today that won’t otherwise be impacted be the legalization of cannabis. Cannabis, or cannabis derived products will be in every home, period.
How does this help with raising capital? The game changers who are building the great businesses today, are building on a foundation of operational excellence and business execution. They just happen to also be businesses that have a cannabis centric business model. With an alignment of perspective, that cannabis is much broader an impact that just the industry a company operates in, we can have the discussion that is needed to make an investment decision by focusing on the core merits of the company and its management team.
So, if cannabis isn’t just one industry, what is it? In “Cannabis Capital” I have defined the Cannabis Economy as:
“A global system for exchange of goods and services facilitating cannabis-enabled commerce, education, and policy.”
When you are raising capital from an investor, it is not about convincing them what your view of the world is, it’s about identifying their world view and aligning your proposal to those views. The Cannabis Economy is therefore a foundational concept such that when investors and founders have agreement in the concept the business discussions can ensue. In the article for next week I will take a deeper dive into the Cannabis Economy.