Another harvest season is here, cutting down equally stalks of hemp and the investment dreams of many.
With the days shorter and the shadows longer, hemp’s growing season is coming to an end. So, too, are many hemp-farm investment deals — even if the investors don’t realize it yet.
After all, many startup hemp farms today are using investment participation to finance their initial grow operations. For investors attracted to today’s popular hemp market, such investment deals can be a welcomed opportunity to take part in what many view as a mythic, can’t-lose money-maker: a modern hemp farm.
Invariably, though, many of the investors who shell out thousands of dollars or more to participate in these new startups don’t know the first thing about growing hemp. And worse, they sometimes don’t seem to know the first thing about the deals they’re financing, either.
Inevitably, many are shocked to discover their investments are good just for the first year’s grow, when the company’s inefficiencies are the steepest and ROI is at its lowest.
A growth investment
Getting investors to support an expensive grow operation as it launches is a no-brainer for today’s hemp producers, many of whom have never run a hemp farm before and who are literally learning as they go.
To get a hemp farm off the ground, you have to get crops out of the ground, especially if you are to have any hope of reinvesting in the next season’s crop. Consequently, a lot of effort and money are put into the initial season of planting and growing. During this time, farms are experimenting with everything from seeds and soil to staff and sunlight — all in an effort to produce the best possible yield.
In this initial crop, the learning curve is steep and the inefficiencies quick to multiply as new producers grapple with an array of typical first-year farming challenges. Weather, water, geography — these and so many other variables can affect the operation and profitability of new farms, especially in year one. Clearly, having financial help in the beginning can be as important for growers as sunlight is for outdoor crops.
For investors, the financing deals for these new farms can seem attractive, especially at first glance and accompanied by the usual projections of phenomenal returns. It’s only natural for many investors to think about these first-year ROI projections and multiple them out yearly toward an early retirement in Belize.
But the details of the deals often foretell a different and less sun-filled outcome. Because, after the farms get up and going, the growers then can better streamline their operations and run things more productively and efficiently in the subsequent seasons.
By pushing aside investors after year one’s costly growing season, the farms can then go on to reap a bigger financial return all for themselves.
That such short-term deals exist is one thing. It’s an entirely other matter, though, that many hemp-farm investors take a fiscal hit by not knowing the details of where their money is going and for how long. There’s really no sound reason for this, especially if investors would consider a few basic due-diligence ideas. For example:
Understand your disclosure statements. Sure, this common-sense dictate really shouldn’t have to be discussed. Yet it’s surprising how often seasoned and otherwise savvy business people rush into $100,000 investments despite not knowing — or understanding — the details that most immediately affect their money.
It’s in the disclosure documents, of course, where investors can find all the details about a farming operation’s business model, its projections on yield and the company’s timeline for when investment returns will appear. It’s also where investors can — if they look — see the true investment horizon presented by the deal. This temporal horizon will indicate just how far into the future an investment might last — or how quickly it might end once the first grow is harvested.
Use background checks. For any investment involving the kinds of money needed to run a hemp farm, it’s important to consider running background checks on the principals involved. After all, in such a cash-filled yet largely unregulated marketplace like hemp, fraud is an everyday reality. And, given how the mostly unregulated industry has attracted many previous illicit-market operators, background checks can reveal potential threats to investments that might not readily be seen in the financials of the deals. With background checks, you can find out if growers are struggling with tax liens and other debt. And you also can find out about any possible criminal charges, which should be strong red-flag warnings for most investors to back out of any deal being considered.
Talk to your lawyers. Aside from fully understanding your investments’ disclosure documents, the best way you can protect yourself from a bad hemp deal is, of course, to seek legal guidance. For something that costs so little up front compared to the money it saves in the long run, a quick legal analysis of any investment opportunity is the ideal first step investors should take once they find a deal they like.
Certainly, lawyers can go through investment documents to uncover all the legal risks and responsibilities. They can reveal hidden pitfalls in hemp deals, such as investment horizons that end before the second grow or operating plans that pay the principals first, regardless of how the company performs.
But legal reviews also help investors in other ways. First, they educate investors to be better prepared for future investment opportunities by showing the right kinds of questions to ask. And they inform investors how to be on the lookout for certain risk topics, as well.
Perhaps more importantly, though, lawyers can reveal the real economics of one investment compared to another. Put another way: Lawyers can show how hemp-farm deals stack up compared to other investments for the same cost.
Unfortunately and too often, lawyers only get to review these investment deals after the fact, when the harvest has come and the investors find themselves cast aside like the hemp retting in the fields this time of year. And, certainly, any legal recourse at this point is limited, even if the cost to attain it is not.
In this regard, investors can learn from hemp farmers, who understand that the little things they do at the beginning of a grow greatly influence autumn’s harvest. It’s time for investors to realize, too, that the amount of professional due diligence put into their investment ideas early on can so greatly affect their financial success — and for much longer than a single season.