THE STATE OF THE MARKET
Despite growing support for cannabis legalization, investors remain hesitant.
The global cannabis market is predicted to swell over the next 5 years, with a CAGR of roughly 14.5%. BDSA reports that Global cannabis sales for 2022 will reach over $35 billion in 2022, projecting sales at $61 billion in 2026. Given the sprawling growth rate expected across research groups, it’s time for cultivators to begin asserting their place and better their footing in an explosive market. It’s time to prepare for a head-to-head battle with a sea of competitors, and to contend with a set of unique challenges. The goal? Finding the funding you need to move forward.
ARE YOU READY TO COMPETE FOR FUNDING?
Investors want transparency to reduce risk.
Federally insured banks are prohibited from lending to cannabis entrepreneurs, and without these traditional loan options on the table, most cannabis stakeholders are forced to seek funding through venture capitalism and private equity. That’s a challenging way to fundraise. Market growth has historically contended with larger government regulations, laws and initiatives, and though support for legal cannabis is at a record high with legislation following suit, the legality of cannabis is a gray area issue.
This increases the risk of the investment. For now, it seems, the potential upside has its thumb on the scale pushing the cost/benefit analysis toward benefit, but it also means that the pool of investors are looking for best-in-class operations that have a likelihood of success and can mitigate the risks – particularly when it comes to compliance.
In the battle to attract and close VC or PE funding before your competitors, you have a silver bullet: usable, thorough data is key to reducing the risk. Read on to learn more about the key factors investors are looking for, and how Broadleaf’s platform can help you prepare for the important conversations.
COMPLIANCE IS KEY
Heavy regulation means investors require close controls.
In addition to compliance risk mitigation, investors want assurance that the operations they choose to get behind are positioned for growth, and that means consistent, repeatable processes, iterative improvements on quality, and visibility into COGS (Cost Of Good Sold) in order to reach profitability targets.
A recent Investopedia newsletter survey showed that roughly 60% of readers were actively invested in the cannabis industry. But of those respondents, “under 10% of those […] committed over $25,000 to the cannabis sector,” a conservatism that reflects the murky legality, market volatility, and risk involved in cannabis.
The risk to capital is only one factor considered in due diligence. Your company’s compliance, and the proof of it, and the proof to support it, are key differentiators. A compliance violation can draw the end for your business, no matter how profitable or efficient it is. The rules and regulations for cannabis businesses are some of the most burdensome of any industry, and this high level of risk, coupled with rigorous compliance requirements, can be prohibitive to investors. Or at least, will be a point of scrutiny during due diligence.
WHAT ARE INVESTORS ASKING FOR?
From the initial pitch to the due diligence process; the more data you have, the more money you’ll get.
So, you’ve managed to score the meeting. Now what?
As part of due diligence, and even the initial pitch itself, cultivators can expect an investor to ask for data from sales, including POS systems and wholesale marketplace activity, as well as accounting documentation with cost and revenue insights, and even proof of federal and state compliance. Without operational and financial data, you can’t account for growth. For example, let’s say you’re claiming a spike in financial growth. But… at the same time of the spike, you added significant capacity and increased COGS incrementally. You haven’t added efficiency, only volume– and your investor’s due diligence team will catch on quickly. To successfully secure an investment, your potential investors will want a full spectrum of data, with correlations clear as day between each moving part in your business.
WHERE DO I GET THE NUMBERS?
You already have most of the data you need. But, do you know where it’s hiding?
The metrics typically come in pieces from different places in the business, across compliance and regulatory reports, machinery used in the growing process, and reports from POS systems, as well as data from purchasing and procurement platforms and other operational and financial systems. The goal is to achieve traceability and tie-in from retail all the way back to plants, so that you’re able to offer investors the full picture, not just the brush strokes. For the thorough and accurate record-keeping you need, a DIY solution like Quikbooks is not your best bet.
Some of your most important data is already being logged in your compliance records. The sheer number of requirements, spanning a wide range of ops, labor, safety, environmental and financial reporting, is close to impossible to manage without automation. Your company is required to collect a large amount of data that needs to be reported, anyway – why not tap into it for your own operational and fundraising use?
A KEY DIFFERENTIATOR
Data helps establish credibility, and makes completing due diligence that much easier.
If you can’t produce the data investors ask for, the impression is that you’re winging it.
And, you are.
An ability to present and understand data from various touch points throughout the cultivation process is proof that a company is at the level of competency and legitimacy that investors look for. It shows organization, deep understanding of your own business and operations, and provides empirical proof of a company’s value. That data also makes due diligence that much easier– which, alone, can be a differentiating factor.
Providing thorough, quality data takes the thorn out of the investor’s side– and yours– by expediting the process. It’s greatly appreciated that your company readily hands over the information that PE and investment firms usually have to dig for in due diligence research. Wouldn’t you rather work with a company that makes a typically long, arduous process easier for you to complete? If you and a competitor are on equal footing, this factor alone can offer a swift nudge in your direction.
Conversely, coming up short with the information you’re asked for is an embarrassing faux-pas, and could ultimately cost you the investment. Without hard data to back it up, the benefits you tout to your investors in a pitch are all anecdotal, and the investor isn’t likely to want to take the chance– especially without a case for the long-term improvements. A proper forecast is created with proper data, and isn’t that the whole point of investing? You need to prove the potential for ROI, and that means taking a glimpse into the future.
You can forecast your hopes, but can you forecast your realistic future? Can you produce the historical numbers needed to accurately peer into the next five to ten years? At the heart of all investments lies ROI: longevity, predictability, and positive insights for the future. Investors want to forecast the success of their investment, and in turn, establish that your company is worth the time and money.
BETTER PROCESS, BETTER PRODUCT, BETTER INVESTMENTS
Having the necessary data helps you improve your business operations in every area, from growing and sales to process and operations. That speaks for itself in the boardroom.
When you care deeply about what you do, the goal is to do it even better. A consistent, high-quality product is the cornerstone of your brand, and it takes repetition of ideal conditions and consistent improvement to hone your craft at a high level. Can you replicate the growing conditions that produced your best crop? Can you trace which marketplaces or points of sale that offered the most revenue? Can you repeat the operational efficiencies that lowered cost and raised profit?
With so much competition in the market, consistency and quality are also the keys to building a brand that stands out and creates a loyal customer following. Whether your customer is the end user of the product or the manufacturing company that will process it and turn it into the end product, you want your brand to be known as a first-choice.
All of these conditions are key to a sustainable and successful business, and each is made possible by leveraging data to inform decisions about operations and create more profitability. With better process comes better outcomes, and those outcomes alone can raise the eyebrows of potential investors. This empowers you to position your business for investment long before funding starts running dry.
Creating well-constructed data practices within your business makes it more attractive in a holistic way. From eschewing compliance concerns to presenting thorough ops records and impressive financial benchmarks, it’s all about bringing the data points into a useful format, and doing so quickly enough to utilize their value before it’s aged out– something you just can’t do on your own. That’s why we created Appature.
INTRODUCING APPATURE
Leverage the data you’re already producing in an actionable, transparent, and insightful way.
Prospects typically produce financial reports from software like Sage, Intact, or Quickbooks, but these platforms may not include operational numbers or business insights that are important to investors. For example, it’s vital to know your margins, your most successful product lines (prepare for the phrase “show us the mix of your strains” to be spoken), and other detailed factors in finance and operations. No matter the area of business, overall, the data presented needs to be rooted in current numbers from an operational standpoint. If it’s not up-to-date, it’s not accurate.
This timeliness can be difficult to maintain without real-time reporting, and accounting for the investment in labor that comes with DIY data collection, you lose time and money coming up with data that is already stale by the time it’s produced. Broadleaf has created a new platform that addresses these data collecting challenges head-on, automating the process to create maximum potential for your business.
Appature is a new data management platform, launching later in June, that empowers growers to collect and track data– and put it to good use. The software collects data from important pulse points, starting with METRC and LeafLink, and consolidates these numbers into an easy-to-use platform to help cannabis cultivators, growers and other professionals manage their data touchpoints and keep a handle on compliance, profitability and fundraising necessities. Appature can accomplish what DIY-reporting can’t: real-time information that leads to useful, actionable insights.
GET FIRSTHAND EXPERT INSIGHTS
Join our live panel discussion. Register today!
In preparation for the Appature launch later in June, we’re hosting a webinar to help cultivators with a roadmap for using their data. Panelists include Brain Gruber of Franklin Fields, David Murray of Redbud Roots, and Sarah McGuire of MGO. We’re offering a full scope of insight on creating a business powered by data, increasing visibility, profitability, and security in stature within the industry.
THE BIG PICTURE
Data drives business forward. Appature is the vehicle.
The benefits of collecting quality data are circular. When you incorporate quality data into your decision-making process, you make better decisions, and when you make better decisions, your business flourishes, creating an attractive picture for potential investors. From shaving down due diligence times to creating a better business practice, your maximum investment opportunity starts with Appature. Join us Tuesday, June 21 at 3pm CDT for Unlock Success: How Data Can Drive Growth in Cannabis and start harnessing the power of your numbers.
Sources:
https://www.grandviewresearch.com/press-release/global-cannabis-cultivation-market
https://www.globenewswire.com/news-release/2022/03/02/2395463/0/en/BDSA-Reports-Global-Cannabis-Sales-to-Jump-22-in-2022-Forecasts-61-Billion-by-2026.html
https://www.investopedia.com/how-risky-are-cannabis-investors-4685009
https://www.law.com/njlawjournal/2020/07/01/in-cannabis-industry-profitability-and-data-security-go-hand-in-hand/?slreturn=20220215112157
https://www.dummies.com/article/business-careers-money/personal-finance/investing/investment-vehicles/stocks/11-criteria-for-choosing-a-cannabis-investment-283111
