(And the One Thing You Need to Avoid at All Costs)
By Doug Poretz
Over-simplification is always a risky endeavor, but often an attempt to get at the basic fundamentals of something can be beneficial. I’m a communicator, not an investment banker. So I can’t give you insight to the trials and tribulations of conducting due diligence or coming with up with pricing strategy for your shares and all the other specialized details that go into either a private capital raise or a public offering. But I’ve helped scores of companies craft and present their stories to investors, and in the process I’ve come to some conclusions about the most critical components of your investor pitch.
Of course, each story is different, but every presentation that resonates with investors has three components, and lacks one – and does all that in a dozen slides or hopefully less. So … from the For-What-It’s-Worth Department, here’s my shot at trying to help you understand the basic fundamentals:
- Track Record. It’s trite but true: the investor buys the jockey and the horse. In other words, when it comes to a track record, they want to see what the leadership of the company has been able to do in the past, and they want to see what the company itself has been able to do thus far. So … your first priority must be to present your credentials: Have you and your partners started other successful companies? Did you engineer a rewarding exit? Did you grow those companies under exceptional circumstances? Overcome industry challenges? That’s the type of experience you really need to banner. It gives the investors the sense: “OK. I’m dealing with some people here who really know what they are doing.” And that translates into confidence and investor confidence is an absolute necessity for an investor check. But unless the management team includes some well-known business star, even a great personal track record can be meaningless if your company doesn’t have its own track record to show off. That may be the case for one of two reasons. If your company is a start-up there is, by definition, no track record. That’s going to give you a big challenge: you are going to need to convince investors that your start-up is going to succeed. Maybe it’s the business model. Maybe it’s about your product or service. Or how you deliver great value for a lower price to your customers. Whatever it is, without the track record you better be able to make it compelling to skeptical investors who have heard a lot of promising stories before. Or maybe you don’t have a great track record because you’ve confronted unanticipated problems. That’s OK. Explain why they weren’t anticipated and how quickly you discovered them and then what you did to address them and how that worked. An investor may even consider that experience to be an asset: your ability to identify and develop a solution to a problem. When life hands you lemons and all that. Of course, if the enterprise already has a great track record, check the box and move on.
- A Replicable & Scalable Business Model. In 1981, I joined a NYSE multi-national company that became a very hot stock because it was the first company to be contracted by the NIH to produce human interferon. At the time, that was considered “the” cure for all cancers (well, that was wrong). It was as exciting and received as much hype then as “dot com” companies during their period of hysteria – or cannabis businesses today. We got the contract because we were able to produce the product in our labs. That’s when I learned the lesson of scale-up: producing something in a test tube is a lot different than producing something in vats (which the company was never able to do – and the company doesn’t exist anymore). Here’s how the lesson applies to the cannabis business: If your successful track record is the result of being the one and only legal dispensary in a 200 mile radius, sorry that’s an aberration and not replicable or scalable. Or if you had great sales last year because your competitors had not yet launched, that also mitigates the prospects to replicate and even surpass that result this year. You get the point: help your investors understand that you know how to build on and even improve your business model and identify the other markets and initiatives that provide the opportunity for you to do that. Then your investors can apply the results of what you’ve achieved thus far to your new markets and products and make reasonable projections. Which brings up the issue of projections: do not ever forget that as much as irrational exuberance may help set an enterprise valuation during certain periods, in the final analysis any enterprise value will be determined by actual results. If you aren’t going to be serious about your discussion of projections (how much, at what growth rate and margins, and why) then your investors will likely not be serious about your company. And if they still are serious even in the face of such a shallow discussion, maybe they will be the wrong investors, involved with your company because of very fleeting hype over which you have no real control. (Don’t dismiss the importance of having the right or wrong investors – it’s a quality of life issue for you).
- Investing is all about the future. An investor writes a check because they think that at some point in the future this investment will be worth more than they are buying it for today. In other words, the investor is making a leap of faith. The less risky that leap, the more the investors are going to be conservative and risk-averse. But that’s not likely to be the investors in cannabis industry enterprises. Those investors are taking very risky leaps – after all, the entire core of the industry is built on something that is still illegal at the federal level. So … you are asking investors to take a big leap and you have to give them backbone for that decision. The more you have to support their backbone, the more credibility you’ll need. You build it in many ways, from the way you present your products, the tone of your writing, the way you achieve your promises or explain how you’ve missed targets – all those things that if you do not know, do yourself a favor and get out of business now.
- And The One Thing You Absolutely Need To Avoid: Ego. Here is an immutable truth every investor knows either implicitly or explicitly: If the company is driven by business goals, what the company does can be understood and predictable, allowing reasonable assumptions about the prospect for success; but if the company is driven by ego, management actions and decisions can’t be understood and predictability is non-existent and although the enterprise may ultimately be wildly successful, investors know that success would be a surprise, albeit a pleasant one. In other words: If you are going for money, leave your ego at the door.
As warned in advance, all the above is over-simplification. Of course, there are many other factors that will influence your ability to raise capital, but start with these fundamentals. If this is all second nature to the way you are thinking now, build on that and go the next steps. If you can’t check these boxes, wait! Get this under control before you go on the money hunt. Then: go for it.