#2: How Will You Raise Money?

5 Things to Consider Before Applying for a Cannabis License 

#2:  How Will You Raise Money?

Given the fact that, as of now, traditional bank loans are unavailable for cannabis businesses throughout the United States, one of the first questions faced by anyone interested in planning a cannabis business startup is, “How will I raise the money I need?”

From this stem two additional questions which we will focus on today:

“Who are my target investors?”; and,

“What opportunity am I offering them?”

 

Who Are My Target Investors?

Investors in cannabis typically fall into three general categories: small-scale investors; large-scale investors; and, friends and family.

Small-scale investors can be categorized as those with only a small amount of capital (low to mid-six-figures) that they’re willing to commit to high-risk investments like cannabis businesses. Large-scale investors are those willing to commit larger amounts of capital towards high-risk investments. The primary difference between these two categories of investors comes down to the number of funding sources you’ll need to secure your total capital raise and the level of influence that they will collectively have over your business.

For example, you might be uncomfortable with having only a few investors that collectively have a larger share of your business than you do. On the contrary, having a large number of small investors makes it harder for them to “steer” the business collectively, but means that you have more people to appease in the decision-making process for your business.

Lastly, we have investors who are family and/or friends, who can be either small- or large-scale with the primary difference being that they know you personally and that their confidence in the success of your venture, and their willingness to be more lenient in their investment terms, comes from the fact you have a personal relationship with them.

 

What Opportunity Am I Offering Them?

Once you’ve identified your target investors, they will all want to know exactly what kind of opportunity you are presenting to them. Different opportunities come in the form of different investment vehicles, which are: debt-based, equity-based, or a combination of the two.

For debt-based opportunities, you receive their investment capital in exchange for a return on investment with a contractually set interest rate and loan term. Once that debt is repaid, you’re off the hook and free to run your business as you please. This option is best for investors who aren’t that interested in cannabis in particular but are simply looking for a better return on investment than they could get at a bank.

For equity-based opportunities, on the other hand, you receive their investment capital in exchange for giving them an equity share in your company. In this case, you’re not obligated to monthly debt repayments, but you’ve instead partnered with someone who will maintain their control and share of profits throughout the life of the business. This option is more appealing for investors interested in cannabis who understand that, while short-term profitability is possible, they’re in it for the “long haul.”

Lastly, it sometimes takes a portion of both debt and equity to entice your investors to lend funds, leaving you with both the best and worst of both worlds. This option is best for investors who feel confident enough in the prospects of your cannabis business long-term but would like some guaranteed return on investment in the short term as well.

 

For more information about raising money for your cannabis business, feel free to schedule an hourly consultation with our experts today!

 

 

Contributing writer: Garrett Cropsey

Read the rest of the “5 Things to Consider” series.