The marijuana industry is exploding at a rate that promises to make it an integral part of the US’ GDP. The revenue breakdown paints a pretty exciting picture for a possible cannabis investor. According to Arcview Market Research Group, a financial consulting firm specializing in cannabis business, the legal medical and recreational cannabis industry made $6.9 billion in 2016 and is predicted to make almost $22 billion by 2021 based on current trends. According to a report by the Tax Foundation, that revenue is proving to be extremely lucrative for states that have legalized. If the industry continues to produce at its current rate, it could generate about $28 billion in tax revenues annually.
Given this enormous growth, why do cannabis industries need to think hard about how to appeal to investors?
Despite a wave of support gaining exponential momentum, the legalization movement has yet to overcome its greatest antagonist: the United States Federal Government. Federal marijuana law, rooted in xenophobia and bigotry, matured into the 1970 Controlled Substances Act. That act developed the fascinatingly obtuse drug schedule, a category system that divides substances into 5 classes based on medical value and potential for abuse. The law officially made marijuana illegal, classifying it (along with heroine and LSD) as a schedule 1 drug, or a substance with no medicinal value and a high risk of abuse.
But as the November 2016 election demonstrated, social attitudes toward cannabis are changing. An October 2016 Gallup poll showed that 60% of Americans approve of legal cannabis use, and as of November 2016, 28 states plus the District of Colombia have legalized either recreational or medical marijuana, and that isn’t including the numerous other states that have exclusively legalized the use of CBD, a non-psychoactive cannabinoid, for medical purposes.
While these changes represent significant victories for the legalization movement, the future of legalized cannabis is uncertain. The newly appointed Attorney General Jeff Sessions has been an outspoken critic of the plant, and recently, Press Secretary Sean Spicer stated that “there is still a federal law that we need to abide by […] when it comes to recreational marijuana and other drugs of that nature” in response to inquiries about the direction in which the Trump administration would take the cannabis industry.
The tension between state and federal cannabis law puts the marijuana business in potentially volatile waters since, at any moment, the federal government could prosecute any and all operations growing, manufacturing, or distributing cannabis for recreational or medical purposes regardless of state law.
This means that it’s important for marijuana start ups to carefully consider how to approach investors. All of this talk of risk and law and uncertainty is definitely scary, but that’s the nature of progress. Someone has to forge the way, and if you want to be a part of that movement forward, mad props. Here are five tried and true, practical steps you can take to make your company attractive to potential investors.
Have a Plan B Investor
Investors will be more likely to trust your company if you can show them that you’ve considered multiple paths to success. Even if it feels repetitive, that additional route may come in handy if plan A falls through. This advice is smart regardless of the start up’s industry given the risky nature of entrepreneurship, and in an industry at direct odds with federal law, you can’t have too many safeguards when it comes to making investors feel safe.
Crowdfunding is effective because it gets people talking about your business, builds a loyal base, and demonstrates market demand. A successful crowdfunding campaign requires active communication with backers.
People aren’t going to empty their pockets unless they believe in the vision you’ve cast for them
Keep them updated during and after the campaign. Create an emotionally appealing video to win backers’ hearts and minds. Finally, prepare to deliver. If you are offering samples of your product to backers, make sure that you have the inventory to support demand.
Spell Everything Out, Including an Exit Strategy
This tip is in line with the previous. Your pitch should leave investors with very few questions. Provide as detailed a timeline as you can with specific goals and milestones. When it comes to projected profits and losses, show a three to five year projection and be sure to account for delays and the unexpected.
Investors already assume that plans will take twice as long and be twice as expensive as you predict, so show that you’ve considered those kinds of obstacles
Finally, make sure that you know exactly what the plan is in case of failure. How will you pay investors back? Will you sell the company? Will you go public? How will you execute any of these options? Investors know that no company is foolproof, no matter how detailed the plan. Make it easier for them to take the risk in you by giving them a clear, reasonable exit strategy.
Join an Investor Network
Become a part of investment groups such as the Arcview Group and Canna Angels and attend cannabis conferences such as the Oregon Marijuana Business Conference. These organizations and events will immerse you in the community interested in the industry, give your company publicity in the coveted inner circle, and expose you to innovative ideas you can borrow for your own business.
Hire a closer
A closer is a skilled negotiator who knows how to bring contracts to a—you guessed it—close. A good closer is able to secure funding from investors by creating a sense of urgency without pushing backers away from the investment. A closer isn’t everything—your company needs to create an organic sense of energy and excitement. However, a good closer knows when it’s the right time to tell investors that it’s “now or never.”
The marijuana industry is both incredibly lucrative and precariously positioned. If you are willing to think through your options, invest the time and resources, and take the bold pioneer’s step, you could find yourself making history.