The Operator Perspective Mitigates Risk

Many of our investors in the Receptive Capital Syndicate are operators. The operator perspective mitigates risk in investing.

The ability to conduct due diligence through the lens of an operator enables the operator to, among other things, ask the tough questions, manage growth expectations and provide the entrepreneur with more useful feedback. That is most likely why operator investors make great advisors! We have been cautious to lead another deal this year. Candidly, we have not seen many new companies that fit our investment strategy and those who did, were still hoping to raise at unrealistic valuations in a historically timid cannabis investing environment.

This is starting to change but It’s still not clear to us if we’ve begun the turn around. We’ve seen signs of life in September following the HHS announcement and more recently with SAFER making its way through committee for the first time. Companies who are positioned well and called off fund raises in 2022 and 2023 are back out again. While attending the Benzinga Cannabis conference in Chicago last week, we noticed a different energy. We would call it “cautious optimism”. Perhaps the greater investor community is starting to take a page from the operator perspective.

Converting Demand vs. Creating Demand

Investing in the cannabis space, quite often I receive the question “why did you choose to focus your investment group on cannabis?”

“Invest in what you know” is a solid answer but there was available and obvious data that was very helpful. In early stage investing you invest in companies with a new or novel product or service. Inevitably, the question of demand for the product or service needs to be addressed. Who uses the product? Will they continue to use it and if they do, how will they use it? You see where I’m going here?

Cannabis has been used by a silent majority for thousands of years and with each year that passes, the silence is evaporating into an unapologetic consumer base finding new and useful ways to enjoy the plant.

Most early stage companies are out driving new demand for the product. Cannabis companies have an opportunity to not only create new demand but to convert existing demand. Creating demand by bringing new users out of their silence or by trying cannabis products for the first time (or again). Converting existing demand through an existing user base that already purchases and uses the products through legacy channels. Most new industries have the former but not the latter. That opportunity was (one of) the deciding factors.

Sending Updates To Our Membership

Four times a year we send out an update to our entire membership. Today we sent the second update for 2023.

As a reminder, we operate a syndicate (or group of investors) that evaluate and opt to invest on a deal-by-deal basis. While members will receive confidential updates about the companies they choose to invest in, this update is sent to the entire membership. This is a chance for us to communicate with everyone who has shown interest in our thesis and investment strategy.

We typically follow this format:
1. Top of Mind - This is an opportunity for our Syndicate Lead to address the most impactful current topic for the syndicate.

2. Portfolio Updates - Quick hits on the companies we have invested in (concentrating mostly on publicly available information).

3. Informative Cannabis Industry Reads - I highlight a handful of articles from the last 2-3 months that cast a wide net as it relates to the cannabis consumer, removing the stigma, criminal justice and social equity and more. I try to be mindful that most people in our membership are not obsessing about cannabis everyday like we are.

This update’s Top of Mind focuses on revisiting our investment strategy. After 2 years, we thought it was important to maintain transparency with our investors and broaden membership. We wanted to share an excerpt from a this most recent update that fires us up:

“We are undeterred by the recent challenges that face the industry. This risk is built-in. We maintain strong conviction about our investment strategy, albeit, at a slower pace than originally anticipated. But most importantly, we have the strongest conviction in our portfolio companies who all find themselves in strong positions during challenging times.”

Cannabis Companies Planning to Raise Capital from Equity Investors in 2023

Some thoughts for cannabis companies planning to raise capital from equity investors in 2023.

1. Have a plan to not only deploy the capital but also include in that plan a set of established KPIs to achieve from this capital raise. A pie chart on a slide is no longer good enough.

2. Validate the assumptions behind your plan. Be conservative with these assumptions. Raising capital to fuel unattainable growth leads to failure in the cannabis industry. THIS IS NOT TECH. If you’d like to see some examples…you’re not paying attention.

3. Ask yourself, is this investment needed? Does it add immediate shareholder value? If it does, plow forward and be relentless. If not, I suggest waiting out another 6-12 months and reassessing. If you are one of the few who planned ahead or have a plan for 12-18 months that is cash burn neutral, why raise money now?

4. If you don’t have customers who love at least one of your products or otherwise can demonstrate revenue growth, go back to the drawing board and build something that has one or the other. This isn’t 2019 (or 2021).

5. Stop giving equity to advisors and service providers so early on. Unless this advisor comes with an investment in your business or a significant asset to contribute to the business, do your best to avoid compensating your team of service providers in equity. And if you do, make sure that equity vests or is otherwise granted over a period of no less than 4 years. They shouldn’t get better deals than your future employees will.

Step by Step Process of How Our Syndicate Works

When you become a member of the Syndicate, you're under no obligation to invest in any deals. You are only showing interest in receiving information about the deals and committing to keeping any information you receive confidential.

The Syndicate Lead invites members to participate in or pass on any given deal. The Syndicate members pool capital into a special purpose vehicle (“SPV”) that invests in a single company alongside the Syndicate Lead, on a deal by deal basis.

Here is a step by step process of how an investment is completed through the syndicate.

1. Syndicate Lead leads ongoing sourcing and evaluation of investment opportunities.

2. Syndicate Lead completes necessary due diligence and secures allocation from the target investment company.

3. Syndicate Lead sends an Investment Memo to the Syndicate.

4. Syndicate members review the materials and decide whether or not they would like to participate.

5. If a Syndicate member chooses to participate, they make a non-binding commitment to invest in the SPV.

6. Once commitments meet or exceed the allocation from the target investment, the opportunity is closed to the syndicate.

7. Shortly thereafter, those members who participated in the SPV will receive closing documents for review. 

8. Participating Syndicate members review and agree to the closing documents and wire funds. The investment is now complete.

Sounds like a lot of work? Receptive Capital provides administration services including document review, signature and investment management.

Have more questions?