Raising capital is one of the biggest entry barriers to the cannabis industry. While breaking down certain facets to that barrier has progressed in the past decade, challenges new and old continue to keep certain individuals from pursuing their cannabis dreams.
In 2009, when Wanda James and her husband, Scott Durrah, opened the first Black-owned dispensary in Denver, she said the industry was a “very different place,” Cannabis Business Times Assistant Editor Andriana Ruscitto recently reported.
Before Colorado’s cannabis market officially opened up to out-of-state investors in 2019, James and Durrah—who now own and operate vertically integrated Simply Pure—had to go through “a bunch of ridiculous gymnastics” to bring in out-of-state dollars. That meant funneling money in as a personal loan, putting that money into their dispensary and then paying back investors through a personal loan or a lien on their house.
Back then, it wasn’t so much about the money as it was about not going to jail, James said.
But as more states have adopted cannabis programs, and as public policy has filled in some of the gray areas, entering the cannabis space is now less about going to jail and more about raising capital. And as the industry continues to grow, it’s apparent that more people are interested in investing in cannabis.
However, many of those would-be investors shy away from U.S. tax code Section 280E, which prohibits the use of standard business deductions by any company involved in “trafficking” a federally controlled substance. Meanwhile, other potential investors may be hesitant to partner with start-up operators.
While James and Durrah first got started on about $200,000, that kind of money doesn’t speak very loud in today’s market. Many companies set aside upward of $500,000, or more, solely in an effort to win a license. That’s in addition to funding the infrastructure it takes to launch a successful business.
When Scott Reach, founder and owner of Denver-based Rare Dankness Industries, began the quest to build his 54,000-sqaure-foot grow facility—which opened in 2016—his mission was to raise $6.5 million in capital to fund the project, he told attendees at the 2021 Cannabis Conference in Las Vegas.
“What I found was the amount of money I was looking for versus the amount of equity that I was willing to give up didn’t really equate,” he said. “So, I was able to find a lender that would do a $6.5-million loan for about 9% [interest], and that started us out on our road for the initial build.”
About two years later, Reach found himself trying to raise another $2.5 million with a different investor. “Initially, it was just who had the money and who’s going to show me the money,” he said. “As time went on, vetting those investment people became very important.”
The industry may be a victim of its own success, as booming business attracts what Reach said are “people looking to make a quick buck,” who don’t actually care about the industry and are looking to take advantage of less business-savvy growers, Managing Editor Brian MacIver reported in 2016.
As the saying goes, not all money is good money. Just finding someone who signs checks that clear is no longer the standard. Bringing an investor to the capital table who is also a solution-maker when problems arise down the road is where the conversation has steered.
But not all aspiring cannabis business owners can strike deals with those types of investors.
When the team at Eastcoasterdam Gardens set out to secure funding to construct a cannabis cultivation facility in Massachusetts, Joseph Lupo, the company’s co-founder and director of cultivation, found many of the deals from potential investors demoralizing, Senior Digital Editor Melissa Schiller reported earlier this month.
Lupo’s solution was a crowdfunding platform called Mainvest, which utilizes social media to allow small businesses to raise capital from their local communities. As of this month, Eastcoasterdam Gardens was nearing the $250,000 goal line for its first-round goal.
For larger, more established companies, going public and sale-leasebacks are other strategies, Editor Michelle Simakis wrote earlier this month.
But the wonderful thing about the cannabis industry is the people who have found pathways to success are often willing to help guide others through their footprints.
Christine De La Rosa, CEO of The People’s Ecosystem, a California-based cannabis operator, said her company struggled to compete with the funding efforts of similar-sized businesses during a 2018 capital push, Schiller reported this week. “We are 85% BIPOC- and women-owned, so we have less access to capital than most people do,” De La Rosa said.
In March, De La Rosa launched The People’s Group to fund start-up, operating and growth capital for other Black, Indigenous, People of Color (BIPOC)- and women-led companies in the space. “It’s all the things I wish I’d had when I was raising capital for my company,” she said.
But that’s not to say that raising capital shouldn’t be merit-based, where those with the best business plans reap financial backing for the foundation they’ve worked to build.
When it comes to raising capital, those seeking to enter the cannabis space deserve the same opportunities as other marketplaces—a fighting chance to succeed.
-Tony Lange, Associate Editor
