By Scott Jordan
As a veteran in commercial financing for marijuana businesses, I have seen many business owners struggle to obtain funding. There are several common mistakes I’ve seen time and time again. I’ll cover the top six mistakes I often see and what to avoid when seeking funding for your business.
Not asking the right questions before you start your presentation
When a funding source is looking to invest in or lend to a business, it has a set of criteria that business must fulfill. Lenders look at things very differently than investors do. By nature, lenders are focused on the return on their investment with regular payments over a period of time at a set rate. Investors are looking to hit a home run one out of every 10 times they supply capital, and expect to have to wait for an exit event in two to five years.
With these two very different mentalities, business owners need to understand who they are dealing with and tailor their presentations accordingly. It is important to do your homework—or even set up a pre-meeting—and to ask the funding source the following questions before giving your presentation:
- Are you a lender or an equity investor?
- What types of companies have you previously invested in/loaned to?
- What are you looking for in an investment or a loan for it to be attractive now?
- When are you expecting the return of your money and how much are you looking for?
- What are you hoping to achieve (return on capital, helping the business grow, medical breakthroughs)?
Bragging before sharing details and objectives of funding
Every funding source has an “underwriting box” or set of criteria it is looking for a business to fulfill. Don’t start the conversation off with how great you and your product are before you connect with them personally and engage them in a discussion about their needs. Do some research to find out about their background and past partnerships. Once you have verified that your interests are aligned, you can dive in to the details—how much you are looking for and how that money will be invested. It is important to show a lender how the cash flow will be increased or expenses decreased. An investor wants to understand how you will make money and when their money will be returned through an exit event. Even if the relationship isn’t going to move forward, don’t quit right there. Smart presenters will ask, “Since this doesn’t seem like a fit, do you know anyone who may be a better fit for funding my business?”
Not providing proof or samples
Once you have established a good rapport, it is critical to convey how you will make money, why your product fills a void or need in the marketplace and how it is different and better than what is currently available. Be prepared to discuss the credibility and experience of your management team when seeking an equity investment. Lenders will be more focused on cash flow and ability to repay a loan. Samples and product demonstrations help, but what really stands out is proof, whether that comes in the form of sales results or customer feedback. You have to demonstrate that you have what the marketplace wants.
Stay tuned for three more commons mistakes marijuana business owners make when seeking funding in Scott Jordan’s next column.