Marijuana Business Magazine July 2019

Marijuana Business Magazine | July 2019 58 The Debt Set Entrepreneurs who need capital but don’t want to give up the ownership required in equity deals usually go to banks or other lenders for loans they can repay over time. But because most banks and credit unions remain leery of working with marijuana companies, the debt route has mostly been blocked to them. That’s slowly changing, however, as more untraditional lenders enter the space and more investors are willing to provide capital to cannabis companies on debt terms rather than equity terms. “It’s viable but not necessarily in the traditional sense,” said Brent Johnson, CEO of the Hoban Law Group in Denver. MORE DEBT AVAILABLE An increasingly common way to get debt financing is through deal brokers or loan brokers. The brokers have a pool of investors they work with or find, such as high-net-worth individuals, family offices and private investment funds. The broker arranges the loan, getting a fee or a slice of interest. The company gets its capital, and lenders get their returns. It also has become easier for marijuana companies that have built up assets to obtain debt financing. “More cannabis companies seeking debt financing have collateral, which is helpful because many investors are looking to do asset-backed loans,” Johnson said. “You’ll see people lend against real estate, then that real estate gets used for a grow or a manufacturing facility.” LOWER INTEREST RATES Debt is also an increasingly attractive option because interest rates for cannabis companies are coming down. Just two or three years ago, interest rates for cannabis companies were 15%-18%, observers said. Now, those rates are around 8%-12%, while some companies have gotten rates as low as 5%. “It’s coming down. Part of it is just because the industry is evolving. There’s more debt financing available through these private investment firms, so there are more sources,” Johnson said. But be warned: Cannabis companies should be wary of predatory lenders who still prey on desperate entrepreneurs and can trap them with interest rates of 18%-20% or higher. FASTER AND SIMPLER Debt is also an attractive option because it is faster and simpler to obtain. Basic loans can be handled with promissory notes—documents that note the principal, the interest payments and maturity date. Promissory notes for smaller amounts, say six digits, can be drawn up in a day, while larger debt transactions involving bigger companies may take several days or a couple of weeks, Johnson estimated. Convertible debt—debt that can be converted into equity later—can be structured in about three weeks, Johnson estimated. “It’s effectively a promissory note, but there are extra terms in there that relate to the conversion of that into equity in the future,” Johnson said. – Omar Sacirbey we had created a lot of momentum. It’s what (Gotham CEO) Jason Adler and his team brought to the table,” Ford said, noting the New York-based private equity firm helped iAnthus land new hires, identify acquisition targets and refer U.S. public investors. If you’re successful in your first rounds, it’s easier to get those investors to reinvest in later rounds—and they may also provide additional leads. “Every investor you get will introduce you to at least one or two more over the next couple years. It’s networking. Now we’re doing much larger capital raises against dedicated cannabis funds and family offices. We might reach out to them and say, ‘We’re doing a Series C.’ We’ll send them a one-page teaser that describes the team, the idea, the opportunity, the context,” said Adrian Sedlin, CEO of California cannabis cultivation company Canndescent, which raised $23 million over two rounds in 2018 and was raising another $50 million when this magazine went to press. “If they’re interested, they might sign our (nondisclosure agreement). Then we’ll send them a pitch deck, and I’ll either meet the investors to present or do it over the phone.” PERFECTING THE PITCH What makes a successful pitch? For most investors, it begins by being impressed with the people and their backgrounds. “When I see people that have overcome huge obstacles, huge problems, and they keep on going, that’s a real indi- cator of someone who has the grit and determination to do what they need to do in the startup world,” Orlowitz said. What makes a good pitch? According to Sedlin, having a great team should be the first priority. In addition, he said, pitches should leave investors feeling you: • Are trustworthy. • Are smart. • Have a good idea. • Will make them money. “That’s where the entrepreneur needs to be focused,” Sedlin said. “You don’t prove you’re smart by reading a rehearsed narrative. You convince people you’re smart when you can answer questions on the fly.” Credibility is the biggest concern of Larry Schnurmacher, managing partner at Phyto Partners, a Florida-based mar- ijuana investment fund. The best way to prove credibility, Schnurmacher said, is to present what he calls “realistic” financial projections for the company. “Most of the time it comes down to if I find the entre- preneur credible and super-knowledgeable about how the industry is changing. A lot of times, it’ll come down to how realistically they value their company that has very little Hustle America