By Matt Walstatter

My last two posts for CBE have discussed performing a business model canvas and writing a business plan. Once you have performed these steps, you should be armed with a crucial piece of data. That is, you should know approximately how much money you will need to launch your business and keep it afloat until you reach positive cash flow.

Armed with this information, you are ready to answer a crucial question: Do you have enough money to proceed? For the few that answer this question, yes, and congratulations. You get to skip what might be the hardest part of starting or expanding a business — finding funds.

If you answered no, don’t fret. Most entrepreneurs must raise some cash in order to execute their plan. It’s the nature of the beast. What follows are some tips to help you use your business plan to secure needed funding.

Debt vs. Equity

Most business funding falls into two categories: debt or equity. Some hybrids, like convertible promissory notes, do exist, but for now we will focus on these two types.

Debt financing refers to a loan. You get a fixed amount of money from a lender at a set interest rate. The principal and interest are repaid according to a schedule. At the end of the term, the entire amount of the loan, plus interest, will be repaid. You and the lender shake hands and part ways.

In an equity play, investors contribute cash or other valuable consideration to the business in exchange for an ownership interest. The money is not repaid; the investor is buying a portion of the company.

Both debt and equity have advantages and disadvantages. Most experts in this area advise that businesses give up as little equity as possible. Giving up equity dilutes your control of the company and may limit your options for later fundraising. If your company succeeds, a small piece of equity can wind up as a large payday for the investor. That, of course, is money that you won’t see.

On the other hand, equity financing gives you a partner, presumably one with deep pockets. If you come up short on funds, or want to expand, an investor who owns even a small piece of your business will have a strong motivation to come through with the needed capital.

Using debt financing does allow you to retain ownership of your business, but lenders expect to be repaid and most commercial paper is fairly short term — 2-5 years. This means that you must budget for debt service (payments of interest and principal). For many businesses, especially start-ups, debt service can be cost prohibitive.

Cannabis businesses face an additional layer in the debt vs. equity decision. Most lenders will not loan to cannabis businesses, citing the federal prohibition. Those that do often charge interest rates that most would consider usurious — typically 20-30 percent compared with single digit rates for non-cannabis firms.

When we began planning the Pure Green expansion, we thought that debt would be preferable. We didn’t want to give up equity. Initially, we found no options for loans, forcing us to an equity play. Later, we found some potential loans, all with interest rates in the 20 -30 percent range. When we calculated the debt service, it was cost prohibitive, steering us back to the equity play.

Finding Pitches

Once you have solved the debt/equity riddle, you are ready to find pitches. The amount that you need will be determinative here — will pitch different people if you need $25,000 than you will if you need $1.5 million.

I suggest starting with people closest to you and working your way out to those you know less. Many businesses begin with a friends and family round. Because they want to see you succeed, friends and family are most likely to take a chance on your idea. They are also more likely to accept terms more favorable to you.

If your friends and family can’t fund your business, you must look elsewhere:

• Take a spin through your address book. You are looking for anyone who might be interested in investing or anyone who might know someone interested in investing.
• Talk to other operators in your field, as they may have valuable insights or contacts. You can also ask your professional team, as lawyers, accountants and others may have contact with potential investors.
• All industries have conferences and seminars, and cannabis is no exception. Remember that just as you are seeking an investor, many investors are seeking talented operators to back. Those with no cannabis connections often seek inroads at these events, making them a fantastic networking opportunity that you should not overlook.

The Pitch

Your pitch should be individually tailored to you, your business and your plan. No set formula exists. We can, however, explore some common traits that most successful pitches share.

1. Be Prepared

If you take one thing away from this column, let it be this: Preparation is the key to a successful pitch. You should know your plan, including the numbers, backwards and forwards.

I try to walk in to a pitch with an answer for every possible question that an investor could ask. This requires anticipating potential questions which really helps you to think through contingencies. It also shows an investor that you are knowledgeable, thoughtful, and well-prepared, qualities that they will be looking for in an operator.

Remember that “I don’t know” can be a perfectly acceptable answer as long as you can explain why you don’t know and what factors are causing the uncertainty.

2. Be Flexible

Every investor is different, so every pitch may be different as well. You may have a great plan for your pitch that you have to scrap two minutes into it because the investor begins firing off questions. Don’t let this throw you off. Roll with it and tailor your pitch on the fly to meet the investor’s needs.

Remember, preparation facilitates flexibility. If you know your plan inside out, you can improvise more easily and comfortably.

3. Be Brief

Investors are busy, so make your pitch as clear and concise as possible. Focus on the unmet need your business meets, the problem that your business solves.

4. Sell Yourself

The difference between a start-up and a going concern is like the difference between college basketball and the pros. A professional team is made up of grown men — known commodities who have been in the game for a while. In the NBA, the talent of the players is most determinative of success. This is much like a going concern, where the business can be evaluated based on its track record.

In college basketball, the players are largely unheralded and unknown. It’s a coaches’ game. Your start-up is like that college team. Investors, especially those unfamiliar with cannabis, may have a hard time understanding and evaluating your business. They will be looking to back a winning coach.

5. Focus on the ”Ask”

The “ask” is, without a doubt, the most important part of the pitch. It can be difficult to ask a stranger for $100,000 or more, especially if you haven’t done anything like this before. But, you should be clear and confident with your “ask.”

This means you should ask for a specific amount of money or other consideration in exchange for specific terms. This does not mean that you need to pigeonhole yourself into a specific valuation. For example, you can ask for $1 million in exchange for a 25-40 percent equity share, depending on other terms. This shows the investor what ballpark you are in and sets a range for later negotiations.

Keep in mind that the investor likely needs you as much as you need her. This is an opportunity for both of you to accomplish something that you cannot do without the other. What you bring to the table is at least as valuable as the cash.

6. Be Persistent

Winston Churchill once said that “Success consists of going from failure to failure without loss of enthusiasm.” This holds true in many areas, including the pitch.

You will likely give your pitch many times before you find a deal. Don’t be daunted. Use each pitch as an opportunity to hone your presentation. You may have to pitch 10 or 20 times. Just make sure the tenth pitch is better than the first.

A challenging, rewarding endeavor

Starting a business is one of the most challenging and rewarding endeavors one can undertake. The ups and downs are magnified significantly in the cannabis space, where thoughtful entrepreneurs are currently tasked with building not just a business but also an industry around it.

While this is an inherently risky proposition, you can take steps to minimize your risks and enhance your opportunity to succeed. Start with a business model canvas so that you don’t waste time on an unworkable idea. Create a well-drafted business plan that shows clearly why you will succeed. Use that plan to get your business funded.

From there, be nimble, creative and flexible. Plan for contingencies, but expect to succeed.

Perhaps you will.

Matt Walstatter and his wife, Meghan, are the owners of Pure Green, a patient owned and operated dispensary in Portland, Oregon. They have jointly owned and operated cultivation centers since 2001. Their dispensary opened in 2013. Matt can be reached at (971) 242-8561 or matt@puregreenpdx.com.