There are many reasons VCs won’t, or just can’t, invest in your cannabis company regardless of the numbers and the potential.
5 min read
Opinions expressed by Green Entrepreneur contributors are their own.
As every entrepreneur knows, an influx of capital is necessary in order to build and scale a budding business. One of the most common tactics for securing this cash is to obtain funding from Venture Capital (VC) firms, groups who are hungry to own a piece of the “next big thing.” When I was looking for the right investors for our company, Baker Technologies, a CRM platform, I pursued this same route.
Like many startup founders, I opted for a fundraising tour around Silicon Valley. As a graduate of the 500 Startups accelerator program and with one-third of the nation’s dispensaries already on our platform, my co-founders and I had no problem securing meetings. The challenge was actually securing the fundraising. We were growing quickly, and had very strong metrics for a software business (low churn, good payback period on new customer acquisition, and a large amount of inbound leads every month). The underlying issue was the industry Baker was designed to serve: cannabis.
Baker isn’t alone in this challenge. The barriers to fundraising in the cannabis industry are high. In addition whatever stigma cannabis carries for individual VCs, the cannabis industry at large can also pose conflicts of interest. Most VC firms have vice or morality clauses with their limited partners (LP’s), which restrict what types of entities their partners can invest in (think pornography, gambling or alcohol). The fact that many LP’s are established entities like universities or pension funds for public employee unions makes it even harder to raise money for funds with fewer restrictions.
Morality clauses are one major limitation, but the other is everyone’s favorite R word: regulation. Cannabis is still classified by the Federal government as a Schedule 1 narcotic meaning, in theory, the DEA could shut down every cannabis company in the United States tomorrow. While that is very unlikely to happen (in fact, the pending STATES Act is designed to ensure it doesn’t), investors are risk-averse. Meanwhile, burdensome and perpetually evolving regulations in states where cannabis is legal mean the industry has yet to become the profitable powerhouse many are predicting. Additional public interference, like Proposition D that passed in San Francisco, puts an additional city tax on cannabis businesses. This all adds up to an environment that is less-than-attractive to traditional investors.
And yet — we had no trouble securing meetings from every big name VC firm that tech startups dream about one day pitching. Investors knew we were in the cannabis industry (we didn’t surprise them), and despite knowing they couldn’t invest, they took the meetings out of curiosity. We welcome their interest, but their failure to write checks is what will continue to hold the industry back.
A lack of VC funding for cannabis technology companies means, as an industry, we’re slower to innovate and get our ideas off the ground. It’s not like investors hesitate to take on big risks. Crunchbase found that the AR and VR industry saw $2.1 billion in investment in 2017. Compare that to cannabis’s mere $95M in investment in 2016, according to CB Insights, and the disparity is clear. Oculus Rift may certainly be cool, but its market value can’t come anywhere near that of cannabis. Consumer VR is predicted to grow to $11.5 billion in 2021. Cannabis? $146.4 billion by end of 2025. Can you imagine what we could do with VR money?
So the question becomes: how can the cannabis industry overcome this challenge?
After our fruitless stint around the Bay Area, we changed our fundraising strategy. We approached individuals, rather than traditional VC firms, and met with cannabis-specific funds — ultimately securing our $8M Series A. Thankfully, groups like Poseidon Asset Management, Phyto Partners, Panther Capital and others were designed specifically to fund cannabis companies like ours, and their support was instrumental to Baker’s success.
While this money was helpful, we knew we needed more than $8M if we wanted to achieve our big vision. The real key to our success would be finding a creative solution to circumventing our fundraising obstacles. In May, we announced a merger with strategic players Briteside, Sea Hunter Therapeutics and Sante Veritas Holdings; we are already activating on our promise of expanding Baker’s offering and building a more comprehensive solution.
As pioneers of a budding industry packed with huge potential, cannabis startups need to be resilient and scrappy, continuing to pursue alternative funding methods so they can expand. It might be difficult now, but we can’t give up on the future that we’re working to create. And before we know it, the “informational” cannabis VC meeting will be a rarity rather than a commonality.