Cannabis Financing 101: How to Raise Capital for Your Marijuana Business
September 18th, 2017
Marijuana is legalizing everywhere. The green rush is on. You have that killer app/idea/concept that is ganja themed. You might even have a business plan and a budget.
In some ways, ganjapreneurs are in the same boat as any start-up. With one exception of course. Do it wrong and your start-up not to mention your grungy basement could be fending off SWAT team invasions if not a raft of nasty federal charges.
Understand also that certain aspects of this business are no longer mom and pop. Even in newly legal state markets. Getting a license to do business in this business, is not a cheap proposition. And that, in many aspects of this industry, is the gateway to additional cash.
Also remember that financing options vary greatly on where and who you are. In the United States, for example, this is still a federally illegal industry. Established “institutional” capital will not touch it directly until that changes. Elsewhere however, notably right now Canada, Australia, Israel and Germany, this is an entirely different proposition.
Despite all these caveats, however, what are the financing options open to the budding ganjapreneur?
Bootstrapping with Friends and Family
If the cannabis business at issue has anything to do with growing or touching the plant, unless you are a long-time member of a cannabis cooperative in San Francisco, own some post-industrial real estate in Canada you want to repurpose, or are a trust fund child, don’t bother. The average cost of applying for a license to grow, process or sell the plant and edible or smokeable products made from it, is already north of $1 million just about everywhere. Plus other costs which inevitably include legal.
If the concept does not touch the plant (i.e. it is for real estate, IT, equipment or media), this is a slightly different proposition. But remember that there will still be complications on the financing side, no matter what. Even if it is “just” for receiving payment. Remember that banks are still cautious of opening any kind of industry bank account. Or allowing you to get paid from legal customers who want to use something other than cash.
This frontier is far from settled. As a cannabis industry entrepreneur, this is a given and will be for some time to come in the U.S. Elsewhere, it is developing more normally, but it is still an issue. For example, Uruguayan pharmacies were directly contacted by their banks in August 2017 and told to stop selling cannabis to customers after the government gave the green light to proceed with distribution. Why? The local banks serving those pharmacies in Uruguay were first threatened by American financial institutions operating under U.S. federal banking law that they would lose access to the U.S. financial markets.
Guess which side the pharmacies decided to take?
In Europe right now, this is also very obvious to see. Cannabis seed distributors are also battling for payment options right now. Paypal, MasterCard, Visa and Amex refuse to serve these industries because of American banking law.
But don’t think legal troubles stop here. Cannabis media companies operating in Europe cannot accept payment from cannabis companies to advertise either. Why? Advertising of narcotics is banned in Europe. There goes ad revenue auf Deutsch, which is exactly the conundrum even large and established American cannabis industry associated firms like Weedmaps are facing right now. Google’s “medical only” Adwords guidelines may yet be challenged here too, for exactly that reason.
No payment options equals no customers and no business. Remember that when asking for start-up funds too.
As a starting proposition, as a result, just remember this. Most friends and family will not want the risk. They are already thinking about how many times a year they might have to visit you in jail.
Cannabis Accelerators and Incubators
Yes, these do exist these days. These are places where your idea can be developed into something that venture capital funds (VCs) might be willing to invest in. And there are also more and more cannabis-focussed investment funds, globally at this point. Not to mention Angels.
The better prepared you are, the better your chances of funding. And that usually means incubation or acceleration. On the incubation front, look at firms like Canopy Boulder. But there are many, many others. And not just in the United States. Israel, aka the Start-Up Nation, is moving in this direction fast. It is expected that by the end of the decade, every major accelerator in the country will have at least one cannabis start-up associated with it. Access to foreign markets is often achieved by creative partnerships with these kinds of firms. In other words, do not limit your search to local incubators.
To find out who and where these entreneurial hubs are based, go to industry conferences. They are springing up in every state right now in the U.S. and in larger cities across Canada and Europe. The larger ones draw people from all over the world. That is what you want. Cannabis Cup competitions and the ICBC are two great networking conferences you should make it a point of attending. This is where industry people with global contacts go. If you want to be a part of the industry, you need to go too.
Remember that this is now a global business. From the get go. This is absolutely true if your start-up is involved in any kind of cannabis themed media.
Angel Investors and Venture Capital Financing
Yes, it is available right now for the right ideas and teams. Even better news? There are more and more angels and even established VC firms who are specializing in the cannabis space. Look for companies with an available track record. See if they have funded anything like your idea. Go from there.
They could, absolutely, fund your idea from a basic synopsis sketched out on a napkin. Stranger things have occurred. Even in this business.
That said, your best bet in getting this kind of financing means that you know what is hot in the industry, and you have a bit more than a table napkin to back you up.
People who successfully raise money via this route are usually connected into the industry via accelerators, incubators or even academic connections. Or even the industry itself.
There are other online communities where you can also begin to explore this world. AngelList is one of them.
Do your research. Network. Rinse. Repeat.
Traditional Business Loans
Believe it or not, there are loan options now on the table. That said, just like every other industry, these are only available if you are already in business or have assets that are otherwise securitizeable.
If you fit these categories, you can now consider loans. Think real estate leases, equipment, and in some cases even operating cash. That said, all the other elements of the operation have to be in place. This is just like any other business in that respect. You will need things like P&L statements, receipts, and other standard business documents. Including, of course, proof of a bank account.
Public Market Equity
With very few exceptions, this is off the table for the moment in the United States. There are in fact, a few publicly traded U.S. companies in this space at the moment and this is not an option for U.S. based firms. The reasons start with the SEC but do not end there. For the moment, the real action in public market equity is in other domestic markets. The Canadian LPs which are listed on various exchanges around the world right now, are raising international equity this way. Very successfully. Everyone else is largely playing catch-up. And for obvious reasons.
In general? This is not a strategy to pursue unless your company is either a) already operating, b) already public and c) outside the United States.
This is another way to look at getting funding for your concept. Currently, in the United States, individuals are able to invest small amounts of money in businesses that raise up to $1 million. Regulations on crowdfunding also vary depending on where you are, and where the business will be. Follow them.
That said, yes, this is an option. There are even dedicated cannabis industry crowdfunding platforms springing up. Remember of course, that crowdfunding is time-consuming and expensive too. And while this has not happened yet, there is always the possibility that you could get hit with federal money laundering charges.
This is very, very strange space legally. Tread cautiously.
Ah, cannabis and cyber currency. An obvious combination, given all the other issues with capital if not basic payment for goods and services still facing this industry. Right?
What could possibly go wrong? For as long as there has been bitcoin, not to mention alt versions of the same, the idea of cyber-financing the cannabis industry has been a popular discussion item just about everywhere. An ICO (or initial coin offering) is kind of a cross between crowd financing and an IPO. The idea for using this approach to finance and capitalize a cannabis industry also has a lot of intriguing possibilities.
There are, however, a few problems. And there are about to be a lot more of them.
The first is that as cyber currency mainstreams, regulators are on the case. Think Silk Road and go from there. Authorities, in general, everywhere, are taking a dim view.
The outcome so far? No dice when it comes to cannabis. In fact, Washington State has already tried banning all cyber currency transactions related to cannabis. Despite the failure of that state initiative however, don’t think this is off the table. Despite several creative cyber currency schemes already launched, including Potcoin, this idea is not going anywhere.
On top of this, there is another very recent wrinkle, which is going to have repercussions just about everywhere in this market. The Chinese government has just banned all new ICOs. While they not be banned elsewhere, there are going to be increasing limitations on this finance tool, particularly for this industry. Starting in the United States and Canada. The SEC is already watching.
The trouble, in other words, is already more than it is worth.
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