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Capital Constraints:
Con - We are limited in our access to venture and institutional capital because this type of money is subject to strict adherence to federal banking, and other rules that disallow investment in cannabis. This means that, as an industry, we are somewhat capital constrained and forced to look to angels and high net worth individuals for the larger blocks of capital that would traditionally come from institutional and venture capital investment houses.
Pro – The immaturity of our capital marketplace means that the really great deals are still out there for an engaged angel community that is disciplined enough to undertake effective due diligence. In Silicon Valley the best deals are networked between a small number of high profile investors and funds. The result is that 80% of the returns from seed stage investors in tech are accrued by 20% of investors. The rest are lucky if they get their money back. This dynamic will certainly come to bear in cannabis, but for now, there are still great deals out there for the smaller, individual investor or well organized angel group.
Illegal Federal Market:
Con - Cannabis investors must be made fully aware of every possible risk associated with a cannabis investment, and it is a long and intimidating addendum to any competent cannabis investment offering. Words like asset seizure and foreclosure and federal indictment can have a chilling effect on even the most optimistic investors.
Pro - The nastygram that is our risk disclosure is where the real impact of Schedule One is laid bare, but I did not lose a single investor to this disclosure during my initial seed round. The truth is that many of these risks are negligible, verging on non-existent, but they do deter some investors and that reduces capital supply and creates a buyers market for cannabis opportunities that further increases the investor’s opportunity to get a great deal in an early stage investment. Also you will get a sense for the professionalism and integrity of a team based on how thorough they are prepared to be in their risk disclosures.
Regulation and Compliance:
Con - Our companies are subject to a much higher degree of IRS and state regulatory scrutiny. This raises the bar for long term success in the industry, which means that as founders we must invest in the non revenue generating functions of professional financial management and compliance oversight at an early stage when we are capital constrained.
Pro – The compliance issue is interesting. I addressed this in my last piece for CannaInvestor Magazine where I talked about what investors’ should look for in a business. The risk associated with strong financial management and the rigor associated with conformance to a highly regulated marketplace are, in my opinion, the greatest risk that most investors face in these early stage investments. If you find a company that has its act together in this department, then you should know that you have found a team with a strong and sustainable competitive advantage in the industry. Cannabis is weak on professional level financial management and the record keeping associated with compliance, so it is a great way to spot company with what it takes to win.