By: Scott F. Roberts
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5 Keys for Michigan Companies Seeking Cannabis Investors
Michigan medical marijuana companies seeking investors need to know that negotiating a successful pre-revenue investment will almost certainly be a “give and take” process. Because U.S.-based banks and credit unions refuse to lend to Michigan Marijuana growers, processors and provisioning centers, and traditional private equity has, for the most part, shied away from investing in the Michigan market, most Michigan cannabis companies in need of capital must look to private investors to fund their companies.
This means two things: first, a successful business owner will need to spend a lot of time and thought into making their company and business plan as attractive as possible to potential investors. Second, because there is a limited amount of investors willing to invest in this space, it means that if you want to limit the amount of equity you give to an investor, you will need to give the investor something in return.
There are certain attributes that make cannabis companies more attractive to investors, such as industry experience and a strong management team that is investing their own money in the venture. However, not every potential Marijuana grower or dispensary owner has tons of money to invest or the “right” experience that investors are looking for. That does not mean all is lost. You can still find medical marijuana investors to meet Michigan capitalization requirements and provide capital for your business. Here are five important tips that can increase your odds of getting investment.
Perfect your business plan
A partially finished business and operations plan tells investors that your marijuana business venture is not fully thought out. An incomplete business plan will be an immediate red flag to investors. It is crucial to make a good impression with a well thought out and thorough business plan or investor packet. This is especially important for Medical Marijuana companies without a previous operating history because investors will need to rely on the information in your business plan.
In my opinion, one of the most important items that are often missing from many Michigan marijuana business plans I’ve seen is detailed operating pro-forma, return on investment calculations and start-up costs. It is not possible to make every number exact—no one knows the wholesale price of Marijuana in Michigan three years from now—but that doesn’t mean you can’t try to be as close as possible. This also means you need to provide some room for error. Be sure to allow for plenty of initial operating capital so a few cost overruns don’t bankrupt you before you even open.
When putting together the start-up costs and a pro forma for your company, you should also be prepared to explain your numbers and go into detail. For example, your investor may have worked in the insurance industry or have specialized knowledge in Marijuana business insurance. So, if you allocate $8,000.00 to business insurance for your grow facility, and the investor knows that this number is not correct, they will likely want to know why. If you can’t give them a good explanation, then the investor will likely assume that all of your numbers are potentially incorrect.
The best way to avoid this issue is to provide the calculations or quotes behind your pro forma and start-up numbers, or at least be prepared to explain why you can’t obtain exact figures. This can be as easy as finding a couple of vendors on the internet and then asking for quotes. Most places are eager to provide them. Not every number can be so easily obtained, however.
One of the most important set of numbers in your business plan—revenue projections—is also one of the hardest numbers to accurately predict. It almost inevitably involves at least some guess work on your part. Nonetheless, it is still important to run projected revenue numbers, if only to see what revenue you need to break even and how much profit you would make at different revenue levels. Many sophisticated investors will want to see several different cash flow projections, including a break-even projection, a best guess using industry average numbers (e.g. average cost per visit, average visits per day), as well as a “blow the roof off” best case scenario projection.
Pitch, pitch, pitch!
You can’t get an investor to fund your medical marijuana company if you aren’t out looking for investors. Having a strong network helps, but absent that, having a well-connected accountant, consultant or attorney can help get your business plan in front of lots of potential investors. I’ve helped several companies find investors for their medical marijuana facilities. I can tell you that not all medical marijuana investors view a potential cannabis investment the same way, so getting in front of many investors will increase your odds of finding the right match.
For example, I provided a business plan and investor packet to a medical marijuana investor group that absolutely tore the company apart when I presented it to them. Nearly every aspect of their investor packet was torn to shreds. That same company took the same investor packet to a corporate executive who was familiar with their work in the cannabis industry and wanted to invest immediately. The difference? Perspective—the second investor saw the value of the client’s cannabis industry expertise, the first could not get past the dollars and cents of the deal.
One common mistake cannabis entrepreneurs make when pitching investors is that they drone on and on when pitching the investor. While each pitch situation is different, as a general rule, a good pitch should be between 15 to 25 minutes and have no more than 15-20 slides. Marijuana startups often feel the need to include all the operational details in their pitch, which can cause investors to lose focus and attention. A good pitch should focus on the investment highlights and high-level operations, leaving the details to the investor packet or for investor follow up questions.
You can’t always get what you want
The Michigan Marijuana market is unique. Investors know that capital sources are limited in the Cannabis space. Unlike other start-up businesses, Michigan marijuana businesses cannot get an SBA loan or obtain traditional bank financing, and many traditional investors balk at the extensive license application process and ensuing disclosure requirements. That means Marijuana start-ups, more so than other businesses, need to find ways to accommodate investors if they want to get funded.
While there are certain points you should never concede on, such as control over your company, you may need to be flexible on others. I like to tell both medical marijuana investors and medical marijuana companies seeking an investment that a deal in this space only gets done if both sides give a little. If you are not willing to work with a cannabis investor to find a middle ground you are both comfortable with, you will be fighting an uphill battle.
Investors Want Quick Payback Periods
Given the legal uncertainty in Michigan marijuana laws, investors want to see their original investment returned as quickly as possible. While a select few investors have enough money that they do not need to see an immediate return on their capital, many investors prefer shorter payback periods as a way to minimize their risk. If you have ever watched Shark Tank, you have probably heard the sharks ask some version of “when am I going to get my money back” countless times. I similarly hear some version of this from nearly every investor who is looking to invest in the Michigan medical marijuana market.
Depending on how your numbers shake out, you may need to get creative when structuring the deal terms. For example, part of the investment can be structured as a promissory note or debt, or investors can be given a separate class of shares with preferred distributions, liquidation preferences, or guaranteed returns on capital. This is where a good Medical Marijuana Business Attorney can be worth his or her weight in gold.
Using Security to Ease Investor Concerns
Even with quick payback periods, certain investors may still look to limit their risk due to perceived regulatory uncertainty or concerns about your company’s experience or amount of “skin in the game.” Without security, a promissory note is worthless if a company is losing money and can’t pay back the investor. The best way to ease these concerns is to allow investors to secure their investments with hard assets.
Let’s say you are looking to open a co-located growing and processing facility with an attached provisioning center. In this hypothetical scenario, the total investment to buy and build out the building, purchase processing, and growing equipment, and obtain initial inventory is $1,000,000.00.
In this scenario, there are many ways for Michigan marijuana companies to use “security” to ease investor concerns. For example, the company could allow the investor to purchase the property outright or offer the investor a mortgage or deed of trust on the property. The company could also allow the investor to obtain UCC financing statements over growing and processing equipment, which would allow the investor to essentially repossess the equipment if the underlying note isn’t paid.
Here, again, a Michigan Medical Marijuana Business Lawyer will help you craft a deal that minimizes investor risk or addresses other investor concerns, while in turn maximizes the amount of equity you can keep. Be careful though—not all attorneys calling themselves “Marijuana Business Attorneys” have the knowledge and contacts needed to help your secure investment. An attorney with a strong business law background, as opposed to a criminal law background; plenty of Michigan medical marijuana industry contacts; and experience working with start-up companies, rather than on criminal matters, will help your marijuana company immensely. Luckily for you, you know of one already Scott F. Roberts.
Mr. Roberts is the founder and managing member of Scott Roberts Law, a Detroit-based Cannabis Business Law Firm founded in 2014. Scott has spent his entire career representing businesses and helping them comply with municipal, state and local regulations, as well as assisting on transactional corporate and real estate matters. Scott is an accomplished attorney, author and public speaker, having spoke at CannaCon, Cannabis Industrial Marketplace, CannabisAid, and 420 Canna Expo, to name a few. He has also taught Continuing Legal Education on Marijuana business matters, meaning other attorneys see him speak to learn about the nuances of cannabis business law.