The Marijuana Investor Summit was not short on speakers and panelists offering advice on financing a cannabis business. But many cannabis entrepreneurs learned a grittier lesson in the conference center’s labyrinth-like hallways and the hotel’s lobby bar: don’t rely on venture capitalists to finance your early-stage business.
Venture capitalists and angel investors are often seeking investment opportunities that fit within the boundaries of a checklist: an ancillary business that doesn’t “touch the plant,” a scalable market, and a viable, short-term, exit strategy with large potential returns. A few deals were closed over the three-day conference, but some entrepreneurs went home empty-handed, despite gleaming Powerpoint presentations and elaborate vendor displays.
But entrepreneurs shouldn’t lose hope: the future of financing for the cannabis industry might be on their computer screens. Various methods of crowdfunding were mentioned throughout the summit and are proving to be a valuable source of interim funding and seed capital for cannabis companies looking for cash. Token crowdfunding, which exchanges a donation for a “token of gratitude,” i.e., a product or service, and equity crowdfunding, which exchanges a micro-investment for securities in the business, are at the opposite ends of the spectrum, but both serve a strong purpose and have been used by successful cannabis companies that might not appeal to venture capitalists.
Kickstarter and Indiegogo are not a viable means of financing large-scale business development or paying staff salaries, but many cannabis companies have proven that launching an online fundraising campaign can be a solid strategy to test your market and price points before reaching out to venture capitalists. CDx, a company that designs and manufactures MyDx, portable chemical analyzers to test cannabis, raised nearly $40,000 through an Indiegogo campaign, exchanging its hand-held chemical analyzers for $100 and $200 “donations” to the business. After the campaign was finished, the company went on to raise a Series A round of seed capital. Founder Daniel Yazbeck credited the campaign as a means of proving to investors that people were indeed interested in buying a device to test the purity of their own cannabis.
Token crowdfunding has its limitations: if a company generates meaningful financial revenue, most supporters are going to want more than a t-shirt or a trinket in exchange for their money. But seasoned investors want to know that people are willing to buy your product before getting involved in the business, which makes token crowdfunding ideal for early-stage businesses designing and manufacturing products.
Ēdn tech, a company that builds automated home-grow cannabis cultivation boxes, also went the Kickstarter route before pitching the business at the summit’s CannaPitch event. The company’s campaign only raised $5,000, but when an investor remarked that there are not enough aspiring home growers to make this product viable, founder Lucas Powell had evidence to the contrary. Ultimately, Powell seemed to be the only entrepreneur who left the CannaPitch stage with sincere investment interest from one of the panelists, so clearly token crowdfunding has its merits for early-stage businesses.
Syndicate crowdfunding platforms like CannFundr are appealing to investors looking to dabble in the cannabis space without making a substantial commitment to any particular company. This method of crowdfunding allows a group or “syndicate” of individual investors to benefit from the due diligence and knowledge of one party. It is also ideal for entrepreneurs without a rolodex of investor contacts, as many crowdfunding sites allow companies to submit applications and business plans directly through their websites.
Crowdfunding has its drawbacks, and the majority of platforms only accept investments from accredited investors due to SEC regulations. However, platforms like CannaFundr are bridging a market gap between investors eager to break into the cannabis industry and entrepreneurs seeking capital. Crowdfunding also reduces the inherent risk that accompanies an investment in the cannabis space, by allowing investors to make capital commitments as little as $5,000.