If you’re looking to fund your cannabis startup or have an exciting new product that you’re sure is going to rock the market, there are a few things you should know first. Money comes in different flavors. And, investors, depending on their taste, are more likely to fund some ventures than others.
But that doesn’t necessarily mean your project needs to be strictly unique or innovative to get funded.
There are equity lenders and debt lenders. Most new entrepreneurs think of equity investors when they think of financing. An equity investor gives you money to make money, based on, among other things, how intriguing your project might sound. Of course, you will also need a solid business plan, assets and an exit strategy.
These kinds of investors are hard to come by.
Debt investors, on the other hand, really don’t care about your project or product. Debt investors sell money. They want interest and they want to know they’re going to make money on the venture.
Tevis Verrett of Triumvirate Funding is a debt investor. He described the world of investing as having tiers.
The first tier, and most desirable, includes banks. To get these kinds of loans you need, among other things, stellar credit and 10 or more years of experience in your area of business. Verrett says, “You have to prove your pedigree” with these kinds of lenders.
And you probably won’t get anywhere because most banks won’t touch marijuana.
This brings you to the next tier: private commercial money, which includes hedge funds and venture capitalists such as Verrett. This type of investor has money sitting idle and typically looks at six to ten percent interest on their money. Verrett says, “We have the same expectations as the bank. We look very carefully at every person. There are three things every banker looks at:
- Who am I lending to?
- How long will you keep my money out?
- How will I get my money back?”
However, if you find a marijuana-friendly investor like Verrett and have good credit and the right qualifications, your chances of finding funding at this tier are good.
The third tier is semi-hard money, which is a little more forgiving than the other two tiers. Here the dream is vetted by way of a business plan — and backed by assets.
And if you don’t qualify for one of the above, there are still tiers of investing you can explore.
One of the most important questions investors will want to know is what is your exit strategy?
According to Verrett, “If a person doesn’t have a clearly defined exit strategy, it doesn’t matter how good their credit is, or how much collateral they have, they are not going to get a loan.”
An exit strategy could mean growing your business until it’s large enough to be acquired. Another strategy would be to get it off the ground and profitable enough to attract more investors. Still another one would be to grow large enough so you merge. The new conglomeration will attract new, conventional funding at a lower interest rate, which can pay back the original loan.
There is money out there to fund endeavors, but ganjapreneurs need to have realistic expectations about what this means. Verrett says too many dreamers come in thinking his or her idea is going to be the game changer, but “That isn’t how the game is played with money.”
The old cliché that it takes money to make money may be true in this case. At the very least, you will need some assets to get a loan. If you’re looking for funding based solely on a brilliant idea, you are likely in for a rocky road ahead. However, if you approach an investor with a business plan, assets and a clearly defined exit strategy, you odds increase dramatically.
Photo Credit: Sebastien Wiertz