What are investors looking for when they consider investing in cannabis businesses today, and what are the biggest mistakes companies make when trying to attract investors and secure funding? The answers to those questions may surprise you.
The latest edition of MJBizDaily’s Annual Marijuana Business Factbook provides data that tells cannabis businesses exactly what investors want and don’t want. Let’s dive into the findings.
What Cannabis Business Investors Want
According to the data, two out of three investors (67%) say the most important factor they consider when evaluating cannabis businesses for investment is the management team’s experience, qualifications, and strength.
In fact, this criteria was considered to be more important overall than the potential size of the return on the investment (56%), and shows how critical it is to build a strong team before you seek investors for your business.
Other top considerations included the business plan, past performance, and future potential. Nearly half (44%) of investors prioritize a detailed and realistic business plan in the investment evaluation process, so be sure to take the time and invest your own money to create a complete, winning business plan.
For one in three investors (33%), historical financial data or performance is a key consideration, and the same percentage of investors weigh the potential of the company and its role and prominence in the industry as a top consideration.
Less important to most investors but still essential are the pro forma financials (22%), the timeline for the investor to get a return on their investment (22%), and the strength of the business’ defensible assets such as their intellectual property (i.e., patents, trademarks, etc.) or equipment (11%).
What Cannabis Investors Do Not Want
During the investment evaluation process, investors see cannabis businesses making some common mistakes that put their ability to secure funding at risk.
The top two mistakes investors see are an incomplete or inadequate business plan and limited relevant education and experience of the management team. One out of two investors (50%) cited each of these mistakes as the top errors businesses make.
For 40% of investors, unsubstantiated or baseless financial projections and valuations as well as grandiose statements are additional top mistakes that cannabis businesses should avoid followed by a failure to acknowledge barriers to market entry or competition (20%), unprofessional behavior or appearance (20%), and an underwhelming pitch (10%).
Where Cannabis Investments are Being Made
In 2020, just 18% of global investments in the cannabis industry went to private companies ($0.8 billion for private companies compared to $3.6 billion for public companies). Both private and public companies saw a significant decline in investment activity compared to 2019. Private company investment activity dropped by 78% while public company investment activity dropped by 55%.
The majority of 2020 global investments in the cannabis industry went to the cultivation and retail sectors – a trend that has been consistent since 2018. In total, 60% of 2020 investments went to the cultivation and retail sectors with the next largest investment winner being real estate with just 10%.
Digging into the data a bit deeper, investors are targeting a variety of cannabis businesses. Vertically integrated businesses are the most popular with 89% of investors who participated in the MJBizDaily survey indicating that they invested in these businesses in 2020.
Overall, 90% of investors invested in two or more types of cannabis businesses in 2020. Both cultivation operations and medical dispensary and/or adult-use retailer business investments attracted 67% of investors followed by hemp and/or CBD companies (44%), and infused product processors and extractors (33%). Together, ancillary technology, products, and service firms were targeted for investment by 55% of investors.
Key Takeaways about Cannabis Business Investing
According to the data, a highly professional, experienced team paired with a comprehensive business plan are the keys to attracting investors and securing funding in the cannabis industry.
If you’re seeking funding, be prepared and avoid making pie-in-the-sky claims. Be realistic and back everything up with data. It’s your job to prove that not only is your business a great investment but also that it’s the best possible investment.