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.

Acting As If The Next Check Isn’t Coming

“ACTING AS IF THE NEXT CHECK ISN’T COMING…”

Cannabis entrepreneurs who tell us that this as their current mindset seem to be the same cannabis entrepreneurs who have investor interest. Cruel trick, but a reality.

These cannabis operators have resized or reshaped their operations to weather the current pullback. They don’t NEED investment to continue operations or fulfill an order. They know how to operate their business (however cash tight that operation might be). They also know that however long this pullback lasts, it won't be forever.

These happen to be very attractive characteristics to investors who have seen some of their investments vanish chasing unattainable growth.

So, for those cannabis entrepreneurs currently raising capital, maybe spend more time talking about how your current business sustains and less time talking about “Cannabis will be a $60B industry in 2026.”