Marijuana Business Magazine July 2019

Marijuana Business Magazine | July 2019 60 revenue, doesn’t have a proven market yet and hasn’t shown how it’ll stand up to the competition,” Schnurmacher said. “I can’t tell you how many deals I see with $3,000-plus per-pound wholesale prices of marijuana. Same with CBD. A little tincture bottle is not going to cost $130 in a couple of years. There’s going to be a huge price compression. That’ll be a negative disruption, and when people don’t have that in their plan, it makes everything else less credible.” VC VERSUS PRIVATE EQUITY Startups with little histories to show should approach venture capital firms, while businesses with operating histories can approach private equity shops. “In the venture capital world, it’s all about the future,” Orlowitz said. “In the private equity world, there’s a greater emphasis on past performance. It’s all about your numbers and what they were in the last three to five years, and that’s what really drives valuations.” When Cresco was calculating its valua- tions, the metrics it used were multiples of revenue and EBITDA, or earnings before interest, taxes, depreciation and amortiza- tion. Other factors that go into valuating a company are often the highlights of the pitch, including the strength and experi- ence of the leadership team as well as how much market share the company already has and its strategy to gain more. Beyond the strength of your team and the credibility you’ve established through realistic financial projections and valuations, several other factors must go into a pitch: • The size of the market you’re serving. • The market share you’re aiming for and your plan to capture it. • Your competitors. • What makes you better than the competition. “These are all questions that can be translated into numbers and put into a model. But the numbers themselves can be very subjective,” Orlowitz said. CEDING OWNERSHIP Having your pitch accepted by investors is a big step, but the work of negotiating the deal remains. And if not done care- fully, that could unravel any agreement, cost you control of your company and trigger other misfortunes. When presented with an offer from investors, perhaps the most important question entrepreneurs have is how much company control they must cede to get the money. “When raising money and taking capital, entrepreneurs should focus on whether a transaction is accretive and not just dilutive. It’s better to own 10% of a billion-dollar company than 100% of a million-dollar company,” Sedlin said. “Entrepreneurs should manage and un- derstand dilution, but the more important idea is if the new capital will create growth that drives the price/share upward.” “In my experience, entrepreneurs tend to focus too much on dilution and the fact they will own less of their company. Most entrepreneurs need capital far more than they need a couple hundred basis points of ownership. It comes down to answering the question: ‘Will taking capital at this valuation allow me to increase the value of the existing shares?’” Sedlin offered his own company as an example: If people value Canndescent at $100 million, the dilution on current investors would be 40%—in other words, their ownership in the company would decrease by 40%. After comparing that outcome to selling the company today, Sedlin said he would “probably” conclude that it makes more sense to sell the company than risk running the business with additional partners who interfere with managing the company. “But if the valuation were for $200 million, then the dilution’s not that bad,” he added. “And if I can get the right terms around it, it makes a lot of sense to continue as an independent company as opposed to selling now.” To make these decisions, work backward, Sedlin advised. “You say: ‘If I get this money from this group at this price, am I likely to make the overarching pie more valuable and each of my shares more valuable?’ If the answer is, ‘I’m going to drive my shares from $10 per share to $10.20 per share in the next three years,’ then you conclude it’s probably not worth your time,” Sedlin said. In other words, it would be better to sell the company and move on to something else. “But if the money you take in takes you from $10 to $40 a share in nine months, that’s different. That’s what entrepreneurs need to be thinking about.” It’s all about your numbers and what they were in the last three to five years, and that’s what really drives valuations.” —Sheri Orlowitz, founder of Artemis Capital Hustle America