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.

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.

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.”