Capital Ideas

Features - Finance

9 options for financing in an untraditional business environment.

April 1, 2016

Photo: weerapatkiatdumrong

One of the biggest issues facing legal cannabis producers is banking. In addition to posing challenges with paying bills, taxes and payroll, among others, professional growers run into even more trouble when trying to find the money to expand or develop. For many, that lack of funding is an unbreakable barrier to a launch or expansion to serve a larger market. Doing research to find the right match for a loan or investment can be tough, with demand out-pacing supply, and when some funding companies have disappeared as quickly as they appeared.

But options do exist. Here are a few capital providers on the market that may offer financial solutions that meet your needs, whether through more traditional loans or straight-out investments, as well as some sound advice to heed while seeking a funding source.


Lender: Dynamic Alternative Finance

Loan rates: Capital loans: +15% Real estate: 7.9%


Scott Jordan, director of business development at Dynamic Alternative Finance (DAF), says two types of people exist in the funding world: Those with a checkbook, and those who find the funding requests to take to the check writer.

As the director of DAF, Jordan falls into the second group, connecting cannabis business owners with available financial support. He works with businesses to get the details of what they need, then presents those details to potential lenders.

“The check writer usually doesn’t have feet on the street,” says Jordan. “He needs someone like myself to find and originate those deals, package them up, help collect the documents and do the rest of the things needed to close and fund the loan.”

One benefit to working with someone like Jordan is that the funding is treated similar to a bank loan, which means it doesn’t require giving up and diluting equity to make big financial decisions.

Jordan connects businesses with financing for equipment, working capital and real estate mortgages. For a working capital loan, currently the rate will land in the mid-teens and move up from there, depending on the risk profile, with a one- to two-year term. For equipment financing, the rates look similar, but the term will run a little longer, from two to four years. Real estate changes the game a little more, since there’s a tangible asset involved and a longer repayment term; interest rates start at about 7.9 percent.

Scott Jordan

Rates for loans to cannabis growers are higher than non-cannabis businesses, but those rates will improve over time as more lending sources get into the marketplace and cannabis business owners have more time demonstrating profitability and low default rates, says Jordan.

“Have up-to-date, consolidated financials for all your entities,” he says. “I’m looking for good credit and a good reason to use the funds. If you need the capital to be able to build out your grow because you’re selling all that you can, great news.” Taking on the challenge of expanding or buying a competitor isn’t as attractive for Jordan because of the extra risk involved.

Having a bank account also can make a difference, as can having your financials reviewed by a CPA. “I’d say [CPA-audited or reviewed financials are] the exception rather than the rule,” says Jordan, “but that really makes everyone much more comfortable with the quality of the numbers being reported and outlining the risks of the company.”


Financier: CannaWorld

Rates: Vary, sometimes convertible into equity


CannaWorld is a holding company formed by California Capital Partners (CalCap) that operates as a merchant bank (which differs from a merchant services company that supports credit cards). A merchant bank provides capital through share ownership (often referred to as creative equity financing) rather than loans.

CalCap offers three general lines of business: private equity, investment banking and consulting services. As CalCap’s vehicle into the cannabis industry, CannaWorld has a particular interest in building and supporting the infrastructure in the cannabis industry (such as oversight of the supply chain, quality assurance of products and how money is handled). All of these are intended to facilitate growth of the industry, says Mark Burton, director.

Mark Burton

CannaWorld offers resources to companies to help build that infrastructure through investors, private lenders and human capital. Once he determines a company’s needs and whether a loan or investment fits best, he sends the information to investors/lenders. After making that first connection, he’ll consult with both parties through a few meetings to iron out details and so both parties have had a chance to fully understand what they’re getting into.

Rates for private loans will be a little higher than might be seen through a bank, and in some cases it could be amendable or convertible debt that could turn into equity. CannaWorld also works with royalties investments, where capital is provided in exchange for a percentage of future revenues over a period of 10 to 20 years. The advantage of working with a royalties-based option is avoiding giving up equity.

For straight investments, rates are going to have to beat other options for investors especially given the industry’s inherent risk, says Burton, and might fall somewhere between 8 percent and 12 percent. But being aggressive with a quick return on a loan doesn’t always sit well, either. He likes to see terms of 36 to 60 months, and that can be a little more attractive with some convertible or amendable debt, he says.

The important point for Burton is that the company doesn’t give up equity immediately for capital. It can be appealing to the startup to open up for quick investment, but the valuation of the company isn’t going to catch an investor’s eye. If it does, the investor will own most of the company, and the founder will find himself working as an employee with little equity to show for his efforts. After a few years of building a company and a strong infrastructure, that changes.


Investor: Lizada Capital

Rates: Vary, usually convertible into equity


Steven Trenk, managing member at Lizada Capital, began to explore the cannabis industry when his son graduated law school and got involved in municipal land use issues in the medical marijuana movement in Arizona.

Trenk worked with the ArcView Group to seek out for investment both people and businesses with successful experience and the motivation to reach their objectives, he says.

“I’ve been investing in private companies for 30 years, so my strategy generally starts with management,” he says.

His focus is on startup and growth opportunities, since the industry, as a whole, is still in its early stages. He’s gotten involved in a few of the companies he invests in, but once he’s satisfied with the company’s plans, he prefers to get out of the way.

His terms usually run between 3 and 10 years, with an eye to a more long-term investment. Although he has invested in debt transactions at fixed rates, in almost every case the debt is convertible into equity.

Trenk is always more apt to invest in a company that’s brought to him through an organization like the ArcView Group, since, he says, “I’m not the first one to look at them and I have other investors to help vet them.” He also keeps an eye on accelerator programs like CanopyBoulder. “Deals that have come through that process have a great deal more appeal than a guy working out of his basement. Those organizations make it so much easier to gain credibility and attract capital.”


Investor: CannaFundr

Rates: Vary, include equity options


CannaFundr CEO and founder Randy Shipley comes from a background of angel and venture capital investing. When Colorado legalized recreational marijuana, he worked with social networking software to build a way for cannabis professionals looking for funding to connect with investors online, in a manner similar to crowdfunding.

“[CannaFundr] allows entrepreneurs and investors to connect with each other, with co-founders, with mentors,” says Shipley.

A business owner creates a profile on the site and details the type of funding she is seeking. Then, CannaFundr creates an LLC to manage investment in the company. An attorney works with the business owner to make sure all the necessary compliance securities offerings are taken care of “because there’s enough issues potentially with marijuana without doing an illegal securities offering as well,” he says. The attorney also verifies that a particular investor is from the appropriate state.

CannaFundr then operates like a fund administrator for the LLC and gets paid a portion of the investors’ profits. Particular rates and terms will change with what the cannabis professional is asking for. The fund is required to have a $2,000-per-year dividend to cover tax filings and registration for the fund.

Because the money is handled through an LLC, the company owner treats it as a single investor, even if there are 20 investors in the fund. Any payments go to the LLC itself, rather than the business owner having to manage multiple investors.

But no matter how many there are, the investors are still on the lookout to make their investment back, says Shipley. “You might say to the fund, ‘Here’s how I’ll pay you back,’ and sometimes it’s just equity.”

But “what everybody looks for, the first thing, is [whether] there [is] a viable need for the business,” he says. “And then, … do they really have the experience [and team] to execute?”


Lender: Platinum Finance Center

Loan rates: Term: 5%-7%, Revenue: 18%-35%


Though it’s tough for legal cannabis growers and producers to establish a bank account, it’s a requirement for business to Allan Stevens, owner of Platinum Finance Center (PFC). Stevens offers term and revenue loans for expansion and other growth, but can only do so when there is already a bank involved, he says.

He works with an international bank to provide merchant accounts (which allow businesses to accept payments via credit and debit cards) to those businesses with bank accounts. Even where cannabis is legal, banks have to pay compliance fees to continue to do business. Cannabis businesses should expect to feel some of that pressure as well, he says. “The dispensary or grower or delivery service, they have to adhere to the compliance rules and fees also. What I’ve been hearing is ‘I don’t want to pay any fees.’ Well, you’re in a high-risk business.”

The upside for building that background when looking for funding is that it establishes the company as a legitimate business later on as more and more of the country legalizes cannabis on some level, Stevens says.

“What they’re going to be looking for is proof that you are a legitimate business, that it’s not drug cartels running these dispensaries. How do you prove that? You have banking. You have a merchant account. You’ve established a loan. You are a regular business, and they can see it. There’s a paper trail,” he notes.

For term loans, PFC rates run about 5 percent to 7 percent because they mimic a Small Business Administration loan, depending on credit score. PFC’s business revenue loans provide capital based on the company’s actual revenues and FICO score. For example, if the business is doing $50,000 each month in revenue, it probably qualifies for a loan between $30,000-$60,000, says Stevens. The rates can run anywhere between 18 percent to 35 percent, depending on the FICO score.


Investor: Mentor Capital

Rates: Potential company interest


Another way to get funding is to be involved with an incubator, like Mentor Capital. Chet Billingsley, CEO, works with cannabis businesses and investors to grow public-ready companies.

Billingsley studied cancer treatments in his graduate work at MIT, invested in companies working in cancer therapies and was a registered investment advisor with the SEC. He’s worked with developing companies between Silicon Valley and San Diego for the past 30 years.

His work brought him in contact with medical cannabis, and he saw how it improved patients’ quality of life, he says, but “it seemed that … a lot of it was newcomers to formal business structures. ... It’s not a criticism, just a natural evolution,” he says. He started building an incubator for cannabis companies not only to provide funding, but also to teach owners the basics of operating a business in the public market.

The incubator works by creating a new legal entity that’s able to be separately financed as a standalone company. The cannabis company then sells the unambiguously legal assets to the standalone company, and those assets are leased back to the cannabis company. The lease proceeds and assets are governed by the incubator, and liquidity is provided back to investors through Mentor Capital. After a year, they can cash out using a valuation formula targeted to roughly equal the value that would be given to a division of companies like Pfizer, Anheuser-Busch and Philip Morris.

Spinning off the new company is the final step in the process, which creates a new, standalone public cannabis company — similar to the results of a reverse merger where syndicators typically charge 25 percent of the company value to complete the going-public transaction, says Billingsley. In contrast, in its introductory transactions, Mentor Capital doesn’t charge a percentage on spinning off a cannabis company beyond recovering direct costs. Over time, the incubator will be able to sustain itself through investment returns from multiple companies brought up through the program, after providing liquidity and making cash investments averaging about 15 percent in equity.

One advantage to working with an incubator is being able to focus on building the company, rather than spending time looking for funding, or even acquisitions and sales. There’s also the added education of business basics from growing inside a larger entity. Companies working with Mentor Capital don’t have to go public, but when they’re finished, they should be well-prepared to economically do so via spin-off if they wish, says Billingsley.

Though Mentor Capital does tend to invest in the companies in the incubator, they currently don’t do traditional loans or funding outside of its portfolio, says Billingsley.

“We’re only going to provide equity funding to people we’re already working with and well-understand,” he says.


Investor: Green Growth Investments

Rates: Potential company equity


Jonathan Cantril, managing director at Green Growth Investments, is looking for companies with a strategy in mind. The private investment group invests in 23 states nationally, but is focused in states such as Arizona and Nevada because they have the lowest number of licenses per capita, which gives them a better chance to be influential in the market.

“We’ll find a successful operator, see what they have and where their vision is,” says Cantril. “If we have some kind of synergy, we’ll influx that corporation with funding and negotiate equity.”

Cantril works with companies that are fully integrated, from cultivation through retail. They approach every case separately, so the amount of both the investment and the equity changes based on what the cannabis company seeks. Green Growth entertains deals from $100,000 to $20 million, though their typical investments start between $1 million and $15 million, he says.

With the investment, Green Growth performs due diligence on the company to see where they can save money with renewable energy and lower manufacturing costs for cultivation clients. They also serve as the funds’ coordinator for the investment, so cannabis companies have to know who their vendors are and what they’re getting for money they spend.

Along with that, Green Growth provides backup on regulatory and compliance issues in 23 states, and Cantril and his team work to stay ahead of the laws.

“I’m looking for an entrepreneur who has taken some risk and is willing to make an investment, whether that’s in time, lifestyle or money. I don’t want to be the only one at risk.” — Steven Trenk, Lizada Capital

When a prospective client or company approaches Green Growth, Green Growth wants to know basics of the corporation seeking capital, how long the company has been in business, how many partners the owners have had, equity breakdown and whether the client is seeking a loan. But the company should also be ready to show its assets and its ability to return on an investment. Depending on the deal or project, they like to work side by side with the clients to achieve the best results for their capital.

It’s just as important to have a new approach to the industry, however, especially leaning toward the market for CBD or CBD-infused products, Cantril says. “If … they want to expand, or if they have an innovative product, that would catch our eyes,” he notes.


Investment Facilitator: The ArcView Group

Rates: Varies with investors


Although The ArcView Group won’t begin direct investing in companies until May, its more than 500 members have invested in more than 100 cannabis companies, according to Troy Dayton, CEO. ArcView Group has a network of more than 500 accredited investors, each having at least $1 million in net assets or who have made $2 million a year for the last two years. They pay a membership fee to be a part of the organization, and the ArcView Group puts cannabis entrepreneurs with business plans in front of them.

Every week, a subset of ArcView’s investor members hears pitches from three to five companies in a webinar. Each of those companies has gotten some time with a full-time mentor, Francis Priznar, in advance.

“Francis spends a couple hours with them to make sure they’re putting their best foot forward, and gives them help and advice,” says Dayton. “That’s valuable work, and the companies just love it.”

Once in front of the investors, they pitch the business, get rated and get immediate feedback on the pitch, says Dayton, or even find a champion or investor right in the webinar audience. If they’re chosen by the selection committee to go to the next round, there’s another round of preparation with ArcView Group mentors. Then it’s time for the big stage at the ArcView Investor Forums, held four to five times each year.

Troy Dayton

The key is having a well-constructed plan, says Dayton.

“We’re not the place to go if you don’t have a really well-put together business plan, and good pro forma financials, or are not already incorporated,” says Dayton. “You’ve got to have all those pieces in place if you’re going to compete at ArcView.” (The group does have opportunities for earlier-stage businesses to develop those plans and pieces through the CanopyBoulder accelerator program, though.)

Companies hit the stage at the Investor Forums looking for investments anywhere from $150,000 to $20 million, says Dayton.

“It’s a really highly concentrated group of people [at the Investor Forum events]. Whoever’s standing next to you at any given moment is someone you should probably know.”


Investor: Poseidon Asset Management

Loan Rates: 18%-25%

Investments: Potential company equity


Loans are an option for established operators looking for growth capital with Poseidon Asset Management, says Morgan Paxhia, director, but they’re not open to just anyone.

“When we’re doing [loans], it’s with people we know, people we trust, who have an operating history,” he says, though most states haven’t been a part of the industry long enough for entrepreneurs to build that kind of foundation yet. Poseidon offers short-term loans at current market rates ranging from 18 percent to 20 percent.

When loans aren’t an option, Paxhia commonly turns to a convertible note, essentially short-term financing that can be changed into future equity in the company. Using a convertible note is an established tool to raising capital for early-stage companies with low cash flow, says Paxhia. Working with a convertible note also doesn’t set a hard valuation for the company at an early development stage.

Morgan Paxhia

More recently, Poseidon also has been using a Simple Agreement for Future Equity (SAFE) which is similar to a convertible note, but strips out the debt component. Instead, the SAFE gives Poseidon the future option to purchase equity in the company at a predetermined valuation cap or discounted rate. A SAFE fits a little bit better with companies that have done their initial angel or seed round of investments, but need a little more traction before their first significant round of venture capital.

Entrepreneurs should be ready to show their financials and prepared to answer probing questions about the company, says Paxhia. They’re looking for people with a strong vision, but not too large of an ego to avoid an honest, open dialogue about the company and its finances.

“We want to see entrepreneurs who are serious about the business and have taken the time to do their prep work,” says Paxhia. That also means staying professional even in your opening email to Poseidon. “Someone writing ‘gonna’ or using a smiley face is the quickest way for me to hit the delete button.”