Funding the next stage of growth in the cannabis industry

“Cannabis is still a very capital-constrained market, particularly in the U.S.,” said Arcview CEO Troy Dayton at the 2018 Arcview Group Investor Forum in Las Vegas. “There aren't many companies that really have their choice of investors at this point, which makes it great for investors right now. But the capital is really showing up and it's going to put companies in the driver's seat very shortly.”

The injection of capital into the cannabis industry is accelerating at break-neck speed. The industry is on track to bring in $8 billion by the end of the year — up from $3.5 billion in 2017, according to Investor’s Business Daily.

And it’s not enough.

Paul Rosen, CEO of Tidal Royalty, speaking at the Arcview Investor Forum in Las Vegas

New Frontier Data’s The U.S. Cannabis Report: 2018 Industry Outlook forecasts the legal cannabis market to grow to triple — to $25 billion — by 2025. “There is an alarming shortage of capital in the US. The U.S. cannabis industry is a $200-billion plug away from maturation,” says Paul Rosen, CEO, Tidal Royalty Corp.

For cannabis companies looking to profit from this rush, the time is now to get the right capital in place to meet the coming market demand explosion. But it’s not without its challenges. More sophisticated capital means greater due diligence, more polished storytelling and greater scrutiny for the types of investments cannabis companies might consider.

Capital Challenges

“I learned that it's tough to get money in the cannabis industry, especially when you're early before revenue,” says Shanel Lindsay, founder & president of Boston-based Ardent Cannabis. To grow her business, Lindsay raised less than $600,000 from her mom, friends and a small seed round from Northbud to scale up Ardent and has sold more than 14,000 units of her in-home decarboxylation devices in 2018.

Shanel Lindsay, Founder and President of Ardent Cannabis

“One thing that's been helpful for me has been debt. Small loans I've paid back have really allowed me to hold on to my equity, especially when you need money for inventory and it's not the right time to go to investors,” she says. She recommends cannabis companies explore interesting capital, investment and deal structures — like royalties — to hold on to its their equity.

As new capital enters the industry, Lindsay is looking to raise $3 million to fund the launch of a commercial version of her NOVA Decarboxylator — a personal, coffee-grinder-sized device that activates THC in flower, kief or other concentrates — and to build out her edible product lines.

Institutional Capital Is Coming

“This industry is a race to the balance sheet. That's really the bottom line,” says Sturges Karban

CEO, MJIC based in California. “If we're talking about scalability, you need the capital in order to grow. The underlying priority for every enterprise in this industry should be to capitalize yourself properly.”

Sander Zagzebski  a partner at law firm Greenspoon Marder
Sander Zagzebski, a partner at law firm Greenspoon Marder

Increasingly, the capital in the cannabis industry is evolving toward an institutional investor class, says California-based Sander Zagzebski, partner at Greenspoon Marder.

“The good news for operators is that deal sizes are getting bigger and the ability to raise money from one institution to fund your entire round is more likely now than it was a couple years ago,” he says. “The downside is these institutional investors are looking to see real due diligence. As companies look to raise capital, the sooner they can position themselves, address deficiencies in their documentation, the better. The cleaner the package they're presenting to the investor, the more likely it is the investor's going to make an investment.”

Find Value-Add Investors

Cannabis companies looking to raise money need to think about their fundraising roadmap, says Patrick Rea, CEO & Co-Founder, CanopyBoulder, a venture fund and business accelerator in Boulder, Colorado, focused on ancillary products and services, hemp, and CBD. “You have to have an understanding of what you need now, how far along that will get you, and what key metrics you’ll hit that will justify your next valuation,” he says.

Beyond that, get picky about investors.

AC Braddock  CEO of Eden Labs
AC Braddock, CEO of Eden Labs

“When it comes to capital, because we've done this so long, [investors] have to bring me an added value,” says AC Braddock, CEO, Eden Labs, who has bootstrapped her Seattle, Washington CO2 extraction equipment business for 24 years.

Arcview Group CEO Troy Dayton agrees. “Are those people actually providing real value to the company?” he says. “A lot of companies like to say they're looking for smart capital because that's the thing you're supposed to say. But the truth is, many will take whatever capital they can get.”

For investors, Dayton advises they be very entrepreneur-friendly even if they don’t have to be now because of the limited access to capital. “That scenario is going to change very soon. Capital is really showing up and it’s going to be the companies in the driver’s seat very shortly.”

“Cannabis is still a very capital-constrained market, particularly in the U.S.,” said Arcview CEO Troy Dayton at the 2018 Arcview Group Investor Forum in Las Vegas. “There aren't many companies that really have their choice of investors at this point, which makes it great for investors right now. But the capital is really showing up and it's going to put companies in the driver's seat very shortly.”

For more insights on the legal U.S. cannabis industry, financing for cannabis companies and more, sign up for Tidal Royalty’s bi-weekly newsletter.

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