How to Prepare for Investors
How to Prepare for Investors or Loan Applications
How Do Investors Make Decisions?
If an investor is talking to you about investing in your cannabis operation, then it is likely that they have already decided to invest in the cannabis industry and it is just a matter of who or what company will receive the investment.
A truly well-schooled, scientific investment manager will have arrived at this moment by evaluating the investment potential for an industry, like cannabis, from several angles. First, they will look at the expected growth in the market and expected price performance. Next, they will look at the risks of an industry: the future growth, possible negative legal and economic consequences, and price volatility from changing expectations. Newer industries are generally considered riskier that more established industries. Investors will also evaluate investments in individual companies or pooled investments such as Limited Partnerships or Equity Funds. If they decide to move forward with the investment in an industry, they will then generally look for the individual investment opportunity.
In almost every case, value is determined by looking at an investment period and estimating what the cash returns will be during the period and the value of the assets at the end of the period. The longer the period, the more important the cash flows and less important the ending value. Equity investors tend to use an infinite horizon, thus the value from the cash flows dwarfs any ending value. Lenders and Private Equity tend to use shorter horizons; thus, the type of asset and perceived liquidity is important.
Equity Investors and Lenders generally follow different paths from this point on. If your business fails, then the Equity Investor shares in that loss with you. They generally accept this potential for loss in return for a say in the management of your business and a piece of the profits. Lenders, on the other hand, expect to be repaid the loan amount regardless of the success or your company but only receive the agreed upon payments and have no say in the operations of your enterprise. Limited Partnerships offer a combination of the two investment risks, a limited voice in the operations of the partnership, but exposure to a complete loss of their investment. Lenders are higher in the capital structure, meaning they have right to seize assets before the equity investors are paid.
Equity Investors tend to look at the risk of the industry in terms of volatility and possibility for loss, but also in terms of correlation with other investments in their portfolio. Correlation measure the tendency of an investment’s price or value to go up or down in conjunction with other markets. Equity Investors diversify into various industries with the low correlation to reduce risk of losing 100% of their investment. To illustrate, Investment A may not have the highest return, but if its value tends to increase when the rest of the portfolio’s investments tend to decrease and vice-versa, then Investment A could reduce the risk of the entire portfolio while not lowering the return significantly.
Lenders focus on the cash flow of the enterprise that measures the ability of the borrower to repay the loan in the future. They measure the excess cash flows – the amount of cash left over after business expenses - in relation to the interest payments on the loan. Lenders will also evaluate the variability of the cash flows over time. The greater the excess cash flow in relation to interest payments, the more variability the Lender will accept in the cash flows.
How Do Investors Make the Final Decision to Invest in Your Operation?
If there is one thing that I could teach any inventor, producer, grower or any entrepreneur; it is that investors make their final decision based on the confidence and presence of the leader or presenter and not primarily on the “best idea”, perceived profitability or performance. This is a common misconception that inventors or company leaders have when dealing with investors. Based on the investment process in the first section, you would think that it is only logical that the investor’s final decisions are primarily based on the best idea or most profitable idea, but this is not the case and this is based on my personal experience (more stories than will fit in a book) and on published research.
Several studies have shown that investors base their decisions on the confidence and passion of the pitch. Probably the best story comes from the first three or four paragraphs of the “Elements of Presence” section in Amy Cuddy’s book, “Presence.” Cuddy discusses the results of a study by a visiting student who found that “confidence, comfort level, and passionate enthusiasm” were the strongest predictors of the pitches to receive investment money.
Confidence comes from preparation: this means that you must be fully prepared to discuss the strong points of your company. This also means that you should spend much more time on rehearsal and presentation preparation then on putting together the numbers. Confidence also comes from your attitude; you have a good strong product that will make an excellent investment for someone’s portfolio – do not let any other emotions get in front of that knowledge. It may not be the first few investors who decide to give you money, but there is someone who will understand the advantages of your firm and invest in you.
Investors can sometimes be very obnoxious people. Not all investors are obnoxious, but there are quite a few. They can ask extremely aggressive questions and react with arrogance and rudeness if they do not get the answer that they expect. First, do not take this kind of behavior personally because it has nothing to do with you. Second, it might mean that you really did not research the investor enough to determine if that investor is a good fit for your firm. Finally, it might be a blessing in disguise in that you really do not want this investor for a partner anyway. The next sections provide a brief outline to help prepare for investor meetings.
“The unprepared speaker has a right to be afraid.” Ralph C. Smedley, Founder of Toastmasters International.
Preparation for Investor Visits
1. Use the process below to build your elevator pitch so that you can explain your concept in one minute – about the time of an elevator ride. What makes your operation different? What sets your product or service apart from the competition?
2. Have an Executive Summary of Your Operation and a Business Plan for future growth or future product development
a. Mission statement is a simple statement that provides the mission for your company – your company’s reason for existing on earth – grow better bud, grow healthier bud, the most scientific, or you utilize the terroir. This should be one paragraph with a few statements the outline the problem or need and provide a solution that is stated as simply as possible.
b. Opportunity in the Marketplace – Why is there a need or a market for your product? What is the market in numbers – how much of your product is sold each year and what is the growth rate? Who is the competition and what is the competitive environment? Set this information in a table or diagram so that it is easily explained.
c. Products or Services – Provided a detailed description of your product and its competitive advantages. Why will it meet the needs of the market above? What will your customers value or appreciate about your product that sets it apart? Note: things like delivery and guarantees are part of this discussion.
d. Sales and Marketing Strategy – how do you plan to market your product (purchased advertisements or social media?) and how do you plan to distribute your product (direct to consumer or through distributors or both)? How much do you plan to spend on marketing and who will be responsible?
e. Team, you need to build a strong team and have succession plans in place. This is especially true if you are a Sole Proprietor or a small company.
3. As discussed above, the investment or loan amount are based on cashflows for your operation, not only on assets. Have a complete set of financial statements prepared – both for the past and for expected future performance for your operation.
4. Use information from #3 to calculate the amount of money you are seeking and explain how you plan to use it to reach the goals specified in your plan
5. Research the investor before you meet them
Prepare your presentation on PowerPoint or another format and practice, practice, practice your speech. Try to think of the questions that investors will ask and be prepared to provide thoughtful answers. Think of areas where you think there are weaknesses in your firm and be ready to discuss them from a positive perspective. Finally, you are not going to have all of the answers to their questions, be prepared for that. Regardless, stand your ground and maintain your belief in your product and the opportunity.