With less than a month to go before legal adult-use cannabis sales begin in California, individual investors, family offices, entrepreneurs and dreamers alike are positioning themselves to take advantage of the hyper-lucrative Los Angeles market.
Hilary Bricken, Partner, Bricken-Harris law firm
Hilary Bricken, attorney at boutique law firm Harris Bricken, gave them and 250 hopefuls gathered at her firm’s recent Southern California Cannabis Investment Forum, held at Wanderlust Hollywood, a sobering forecast: “One thing I have learned from seeing this happen in Washington is that there are very few winners in this field. Many of these businesses will fail.”
That harbinger of doom aside, Bricken’s panelists—Paul Henderson, CEO of the multipronged cannabis company Grupo Flor; Stephen Kaye of the family office Big Rock; PayQwick CEO Kenneth Berke; Alex Fang, founder of concentrates maker Sublime CO2; and Bricken-Harris attorney Carlton Willey—poured their collective wisdom into a sprawling hour-long session for would-be legal cannabis kingpins.
Here were the major takeaways:
1: The Bar Is Low
Having just raised $6 million in a Series A investment round for Sublime, Alex Fang revealed the secret to his success: “All we did when we talked to our potential investors was to put together a business plan, a deck, a pro forma, a data room, everything that a serious investor would expect of you. When [we] talked to large investors they were shocked that we had it.”
In the days of the Grey Area (1996-2017), California’s cannabis operators didn’t need no stinking badges to build their businesses. To get to the next level, post-Jan. 1, they do.
“Ask for a bank statement, ask for a pro forma. Those are the big red flags for us when we go to an operator and they can’t provide you simple information,” advised Stephen Kaye. “It is a pretty low bar in cannabis right now because I think people are a little nervous to come out and bring that information.”
2: The Money Is Out There
Regardless of the ominous rumblings from the Sessions-led DoJ, none of the panelists worried much about a federal crackdown.
Paul Henderson, CEO of Grupo Flor
Grupo Flor CEO Paul Henderson wondered initially how he could raise money after reading the grim four-page prologue to his company’s Private Placement Memorandum, which warns potential investors of a possible total loss and imprisonment. He quickly realized that “most people, especially private investors, they’ve taken risks. They want to do this, and so you can even try and talk them out of this and they’re still going to come after you and say, ‘Hey, I want in.’”
Stephen Kaye of Big Rock concurred, up to a point. He warned against domestic businesses approaching the public markets at this point. “Then you are opening yourself up to the bogeymen and the Feds,” he said. Private companies need to convince their investors they are compliant with the federal Cole Memo as well as state law.
“I strongly encourage you to put in an employee spot for a chief compliance officer and delegate one person to do compliance for your cannabis business and that’s their responsibility every day,” Kaye added.
3. Don’t Be Afraid To Say No
None of the panelists could offer audience members explicit advice on finding investors. But they urged investors to choose their capital sources wisely.
“You should hold all of these people to the same kind of standards that you would want to hold yourself to in a negotiation,” said Fang. “If they have a pattern of not doing a series of small things when they commit to doing it, it’s a red flag.”
Henderson maintained that responsible entrepreneurs can attract the right kind of capital: “If you’re really doing it the right way, you will have options. People want to get into this industry and they just want to get in with the right group of people.”
4: Structure Your Deal
Fortune favors the prepared, so even if you don’t get everything you ask for, Bricken-Harris attorney Carlton Willey recommended coming in with a term sheet. Above all, it is essential to have someone on your team that has raised this sort of capital before.
“Not only are they going to put your data room together and your projections together, but they’re going to help you focus your message – the message you want to give to investors about what your business is,” Kaye said.
5: The Big Boys Haven’t Arrived…Yet
Despite what your parents have read online, Wall Street and other institutional investors have not entered the cannabis space. When the conversation veered toward Canada and opportunities on the Canadian Stock Exchange, the panel didn’t bite. They recommended focusing on fundamentals first.
As Grupo Flor’s Henderson said: “Everybody talks about Big Tobacco and Big Pharma coming in, [including my own company] before I got there. I said, ‘You guys, just stop with all of this. Build a successful company… and successful companies get acquired.’ [So] right now, we [want] the company to run and to run very successfully.”
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