One of the most difficult things to do in any industry is raise capital. This can be said even for companies that have industry-disrupting products. It’s never easy. The white knight swooping in and closing an entire round of financing happens very rarely, and fundraising can end up being a multi-month or even multi-year endeavor. It often results in an extreme time drag on you and your employees’ daily activities, especially those at the management level, as investors always want to deal directly with the principals of the business, which usually takes place over multiple meetings.
Raising capital is difficult in general, but raising capital in a newly formed industry with fragmented laws and regulations—and minimal clarity from federal regulators—proves to be a special kind of difficult. But, as with most things in life, with great challenge comes great opportunity.
We’ve witnessed a few cycles play out for hemp investing. The passage of the Agriculture Improvement Act of 2018 (the 2018 Farm Bill) re-opened the U.S. hemp market and removed hemp and its derivatives, including cannabidiol (CBD), from the Controlled Substances Act (CSA). In 2019, entrepreneurs and investors flocked to the industry. Poseidon Asset Management saw many pitch decks a week, mostly for hemp-based CBD products, but also for cultivation and processing facilities. This climate set up a boom-or-bust year for many: The boom of hemp biomass for more than $4 per percentage of CBD content per pound in Colorado, Kentucky and Oregon, according to U.S. hemp benchmark price provider PanXchange, followed by the bust of an oversupply and lack of buyers for many.
A common concern among investors is losing money because of regulatory changes. The lessons learned in the past and some recent clarity in the U.S. Department of Agriculture’s (USDA's) final rule are giving operators more focus and providing investors peace of mind, presenting new opportunities to get your business funded. Having spent the past two and a half years raising capital for cannabis and hemp companies, I’ve observed that interest in hemp from investors in the first two months of 2021 is as strong as it’s ever been. Here are four tips to help give your company the best chance for success when raising capital.
1. Educate potential investors.
Education is by far the most important thing to take into account when speaking to a prospective investor. Go into meetings assuming the investor knows very little to nothing about the hemp industry, and give them the opportunity to prove you wrong. Sometimes a first meeting can be nothing but education, but it’s gaining that level of knowledge that turns a prospective investor into a partner. I’ve heard from both high-net-worth individuals and multi-billion-dollar fund managers that they don’t have the bandwidth and/or resources to do the proper diligence on the industry. Assume that the people you’re pitching will only invest in things they truly understand.
When we live and breathe our industry every single day of the week, it is easy to forget that the vast majority of Americans know very little about the plant and everything happening on a regulatory basis. The 2018 Farm Bill made hemp and CBD legal—what else is there to know?
Many individuals and investment offices have flocked to the cannabis and hemp industries expecting growth due to lack of institutional capital because of the restrictive federal banking landscape. However, they are not always familiar with the products themselves. For example, I recently told a prospective investor I take hemp-based CBD daily in the morning, which has greatly improved my overall well-being. The look of horror on this person’s face made me realize they had no idea what hemp-based CBD is, and our conversation had to shift immediately. I made an assumption and it almost ended the conversation simply due to lack of knowledge.
Start from the beginning and be as transparent as possible. Think about the questions you would have about an agricultural industry you knew nothing about and explain the answers—what hemp is, what it’s used for, its benefits, its history in the U.S., the 2018 Farm Bill, the current laws and regulations, how you measure quality, what the Biden administration may do, the import-export market and more.
2. Make flexibility a selling point.
I’ll break this into two parts—the flexibility needed for the ever-changing regulations on a state and federal level, and the flexibility needed for cultivating hemp varieties that are in line with customers’ ever-changing needs.
An investor needs to know that regulatory changes aren’t going to have a materially negative effect on your business—on the contrary, they’re likely to have a net positive effect on business, as they will provide the stability and guidance needed to grow the industry. The industry is awaiting certain regulatory guidance, and proving to an investor that the possible outcomes will not negatively affect your business is important. It is also important to prove the same about growers’ customers’ businesses.
For instance, if you’re growing a high-CBD strain for customers infusing food and beverages, how will the pending U.S. Food and Drug Administration (FDA) guidance affect their business? These are the types of questions it’s great to address head-on. Other recent developments that would be helpful to address with investors are the introduction of H.B. 8179 to Congress, which would legalize CBD in dietary supplements, as well as different facets of the USDA’s final rule on hemp that would impact your business. No matter what your opinion is on these developments, these will all excite investors because they are now seeing more regulatory guidance and industry stability.
Another selling point is around your flexibility to adapt to changes in the market. As more end uses become viable at scale, there will be high demand for different hemp varieties needed from different industries. Talking to investors about what data is driving your crop selection and your ability to adapt or diversify is important. It also educates the investor on how many end uses exist for hemp and how we’ve just scratched the surface of most in terms of industry disruptors.
3. Have a strong revenue strategy in place.
The 2019 cultivation boom and associated price compression made investors wary of farms without known buyers. Investors want to know if you have buyers or letters of intent in place. Who are the buyers, and what are the terms of the contract? (It is helpful to have an experienced agriculture attorney draw up and review the contract, assuring it has mutually beneficial length, price and futures pricing.) Also, how are you sourcing prospective buyers, and what gives you a competitive advantage over others? How are you sourcing genetics, what cultivars are you using, and what end uses are you focusing on? Showing a consistent revenue stream, or the ability to achieve that revenue stream, is critical.
4. Create an organized data room.
Access to your company’s information and full transparency are going to be your most powerful tools to attract investors. When I ask a company if they have a data room and they say, “Yes,” or “We’re working on it,” I get an immediate sense of organization and professionalism. Investors see it as a great start.
An online data room allows documents used for due diligence to be securely stored and distributed. They are not complex, though they can take some time to build. They are invaluable to an organization raising capital and, once built, can be easily updated and used for years to come. Always assume it’s never the last round of capital.
Here are some data room items to consider having in an organized manner:
- Marketing deck and bios
- Financials and projections
- Business formation documents, licenses and insurance
- Customer contracts and/or letters of intent
- Customer pipeline
- Photos and videos of the farm
- Crop information and lab results
- Intellectual property
- Land use history Summary of regulations on a federal, state and municipal level
With an investment push toward Environmental, Social, and Corporate Governance (ESG) investing, investors are taking note of hemp. I’m seeing more pitch decks from early-stage R&D companies focused on diversifying the end uses of hemp, some of which already have partnerships with major corporations. Hemp's potential for technological breakthroughs across a number of industries is promising. With that disruption will come the need for more hemp acreage, which will be fueled by a new crop of investors seeking a true American growth story.
