07 Jul The Soft Underbelly of Marijuana Investing
We were recently invited to the Harvard Club in New York City to cover a conference on cannabis investing as a roving reporter. The Harvard Club seemed to be more tweedy than weedy. Our interest flagged when we learned that there would be no edible samples at the conference. We wondered at the insensitivity of the conference organizers.
Even though there was nothing we could really sink our teeth into, on closer inspection there were points of interest. The conference was probably an excellent snapshot of the industry today.
Of the eight presenting public companies over half had gotten themselves listed on the OTCQB marketplace. Investors there are protected by regulations such as this: “To be eligible, companies must be current in their reporting and must undergo an annual verification and management certification process. Companies must also meet a minimum ($0.01) bid test and may not be in bankruptcy.” Two other companies were listed in Canada and one was on the OTC Pink.
The conference was kind enough to print a brochure that described the companies and their trading history. There we learned that only two of the companies traded as much as $100,000 worth of stock each day. The rest traded substantially less. Regretfully we did not get a sense of a robust trading marketplace in these names, which was not necessarily the fault of the companies. Some of them no doubt will be extraordinarily interesting. But we had the sense that the public marijuana companies had sadly hurtled headlong into bankers who encouraged them to go public prematurely with talk about the ease of establishing a trading market, currency for acquisitions and above all, visions of liquidity. And probably enough excitement to last a lifetime … for a few days.
A quick look at the trading range of these companies revealed that at the time of the conference most of them were trading on their lows at about 1/10 of the highest price they reached during the year.
The most robustly trading stock was MassRoots (OTCQB: MSRT), a social network for the cannabis community. Although we did wonder when community members would actually think to network with each other. It seemed like the marijuana social network would be a little bit more like herding cats.
To us the prime story at the conference was how many new cannabis companies had gotten trapped on the flypaper of phantom liquidity in semi public markets. We do hope that these companies don’t suffer from living in a bad financial neighborhood.
VC-Free Finance for Cannabis Companies
There used to be a funny joke about the sexual proclivities of a certain type of human. It helps us make a point, so we still want to use it. So as not to offend the subgroup or its defenders, we’ve sanitized it.
Q: What’s a (insert social/religious group) (insert gender)’s idea of foreplay?
A: Half an hour of begging.
It’s an old joke, from the time before science proved that one of the genders liked sex as much as the other gender. With the multitude of baby cannabis companies around, there are no doubt many CEOs having to go through way more than half an hour of begging just to get the offhand comment that the funder will be in touch.
Many new CEOs are unaware of the financing strategies based on assets already in their companies. That’s not surprising. Finance strategy is surprisingly overlooked by many companies. It’s much easier to get excited about sales or product development.
For the cannabis marketplace there are financing opportunities for companies that have recognizable products and real customers. Jigsaw Capital LLC is one company that deals every day in the world of private funders who finance orders from customers and the client’s invoices to those customers if the customers want or need terms.
The capital available doesn’t depend on a stock story; it depends on a company having legitimate sales. In those cases capital is available to finance sales growth to credit worthy companies much further. It doesn’t solve all of a company’s growing problems, but it does finance growing sales. Money for marketing or product development has to come from somewhere else.
Remember, though, that sales growth earns you additional money for marketing and lets you stretch friends and family funding much much further. And it helps you reach a critical point where you can command better valuations when you do have to sell equity.
Possible finance strategies in this arena:
- Financing for your domestic orders and subsequent customer invoices. Means that you can also outsource the collections process. If the customer is creditworthy, you’ll effectively release for other corporate purposes all the cash you’ve been using to finance your orders.
- Equipment leasing. If you sell equipment, the customer pays less out of pocket. If you’re buying equipment, you tie up less capital yourself … subject to your company’s ability to qualify.
- Unsecured lines of credit, quite definitely not at bank rates, but cheaper than equity. Amount available likely to be around 10% of your trailing average revenues for the last 12 months.
By financing smartly in a style that gets the job done with minimal excitement, cannabis companies might generate the gleam in the eye they desire when a VC offers to take the company home to see his, her or its etchings.