Investors interested in getting into the cannabis industry have the option to place money into the public markets or directly into private companies. And, while the appetite for each is personal, the reality is that investors who take a risk on directly investing into companies have a greater potential upside than what public markets can offer. But getting it right is the key.
Experienced angel investor, Jeanne Sullivan, has learned the hard way. Her career in venture capital began in the early days of tech, which is now paralleled by the emerging cannabis industry. Over her 25+ years of experience in venture capital and evaluating deals, Jeanne has made mistakes, learned from them and succeeded multiple times over.
Recently, Jeanne joined the CanopyBoulder Investor Hub to talk about the 5 major mistakes that she not only saw investors make, but that she herself has made. We’ve adapted her talk and included these landmines to avoid below:
Throw money at deals they know nothing about
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New industries are a hotbed for investors looking to get in on the ground floor and maximize their upside. However, new industries also means investors are evaluating deals in spaces with little to no understanding of the market, the nuances and the long-term potential.
The urgency that many investors feel about new industries and markets can create a “fear of missing out” which leads many to blindly place capital, occasionally resulting in a bad bet.
Jeanne has seen this first hand with the tech industry and again with the cannabis industry. She, like other investors, has made the mistake of jumping too quickly with too little information. To remedy this, she recommends investors actively learn about the industry. By listening to those knowledgeable about the space, attending events/conferences, reading voraciously and consulting experts along the way, investors can minimize the risk.
As for where to get that information, consult Jeanne’s list of resources. As well, Investors can register for the CanopyBoulder Investor Hub and Arcview’s bi-weekly informational webinars for expert opinions and updates.
Way over-pay on valuation
Many investors have been down this path, especially when a hot deal is on the table. In new industries, and with early-stage companies, it can be hard to fairly estimate the value of a company. Jeanne’s recommendation is for investors to spend significant energy on the exit potential of that company. To do this, she recommends looking at comparables when possible, as well as consulting with investment bankers and others to grasp the realistic multiples and exit potential.
Not understand the profile of the CEO
Savvy investors who evaluate many deals will eventually see the opportunities in the industry. While this knowledge likely makes investors more successful, it can also create blind spots.
Many investors see the potential opportunities for companies they’re evaluating - but does the CEO see them too? Jeanne stresses the importance of understanding the leadership team’s vision for the company. Perhaps your vision for the company is the most profitable move, but if the team executing strategy doesn’t agree, it doesn’t matter.
Jeanne suggests spending time getting to know the working style and overall values and vision. As well, she recommends consulting references not with the goal of “finding” something, but more to understand the full picture of the leadership team.
Create draconian terms
When the economy is headed into a downturn, as it seems to be doing now, investors can be tempted to require draconian terms on their investments. While it’s important for the risk to match the upside, Jeanne warns investors against creating too draconian of terms for fear of unwanted consequences.
For example, Jeanne points to liquidation preferences which could put investors ahead of the founding team, reducing the incentive for the team to hit milestones. Instead, Jeanne recommends terms that create a win-win scenario. For example, she points to using company milestones to set terms, ensuring investors are always thinking about the consequences of terms on the productivity and drive of the leadership team.
Keep throwing money at the company
This is perhaps one of the most tempting mistakes investors can make. Especially for angel investors, it can be painful to watch a company you’ve placed capital into sink. But it’s important to remember that successful investors feed their winners and starve their losers. If a company can’t get traction with $1M, will another $100k really get them there?