As a new business entering the cannabis space, the biggest piece of the puzzle can be finding the money to fund an idea.
When it comes to planting cannabis seeds, one of the first considerations is the type of medium used to grow and house the plants. Some are easier than others and often, the “easiness” of a medium depends on the current conditions. Financing is the same way.
1. Private placement
One place to start is with private placement so friends, family, business associates and accredited investors can inject money into the business early on. However, relying on this small a pool may only fulfill part of your fundraising goals. Especially if you’re trying to set up entire cannabis cultivation and extraction operations.
Mark Spear of Wildfire Collective, a network of outdoor, small-batch cannabis farms, understands this well. Once he secured investments from interested immediate contacts, Spear started looking into crowdfunding schemes. He was already piquing the interest of individuals ready to invest in his outdoor, terpene-focused, organic cannabis grow; they didn’t have a way in through the private equity model.
However, democratizing the investment process using a crowdfunding platform would allow more people to invest in Wildfire in a way that they couldn’t through private placement. Those who get involved not only receive equity but they become brand ambassadors, helping to spread the word and giving feedback on the product.
2. Equity crowdfunding
Depending on your experience, you may be familiar with crowdfunding sites like Gofundme or Indiegogo, but few are aware that equity crowdfunding exists. The concept is relatively new in Canada, and there are few platforms registered across Canada as regulations on these sorts of campaigns vary from province to province.
Wildfire Collective, which has a pre-equity fundraising evaluation of $7.3 million, is using a platform called FrontFundr to raise a minimum amount of $500,000, up to a maximum of $2.5M. Investors have until Sept. 28; investors can enter the Wildfire Collective crowdfunding opportunity for as little as $1,000 and gain direct equity ownership in the company. Last year, the same platform allowed Okanagan Valley-based Green Mountain Health Alliance raise $1.3 million in investments.
The newness of equity crowdfunding is one of its biggest challenges, Spear’s lawyer and accountant were unfamiliar with the model. It took time to research the benefits of going down this road, learn how it all works, and complete the required paperwork.
Then there’s the burden of educating investors that the business owner must bear.
“You have to be very careful not to promise anything,” says Spear. You have to be careful with forward-looking statements when you’re doing raise like this. It’s a challenge to get the point across while not running afoul of the regulations.”
Nonetheless, Spear is very confident that this campaign is going to be successful in raising the money they need and that several smaller cannabis companies will be following this lead to financing anything from cultivation to a retail shop.
3. Supply agreements
Need tens of millions of dollars for your cannabis business without giving up ownership? Zenabis, a licensed producer of medical and recreational cannabis with facilities in Atholville, N.B., Delta and Langley, B.C., and Stellarton, N.S., did that with minimal dilution by using two types of financing.
The first type is a prepaid supply agreement they forged with High Park, a recreational cannabis brand owned by Tilray. Under the terms of the supply agreement, Tilray provides $30 million upfront, and Zenabis will deliver a monthly quantity of dried cannabis to High Park, starting this year.
“This arrangement significantly reduces the requirement for potential further draws on our $60 million unsecured convertible debenture facility,” Zenabis CEO Andrew Grieve said in a company statement about the arrangement.
The second prepaid supply agreement Zenabis is engaged in is for $10 million with the medically-focused Starseed, bringing Zenabis to a total of $40 million raised with prepaid supply agreements.
The bottom line
So, should a business try an accelerator program, or appeal to a venture capitalist? Ask friends and family for money, go into debt, or put up some future equity? Making this decision may be more complicated due to the newness of the Canadian cannabis industry, but a few considerations stand out as being undeniably important. Knowing the timeline of your deliverables along with full transparency is a winning combination, and there’s no substitute for confident investors when it comes to fulfilling your funding goals.