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How to Value - and Raise Capital for - CBD Businesses

Posted by Celia Daly on Feb 26, 2020 11:34:09 AM

Somehow, the secret got out. You know what secret I’m referring to - the one about CBD and hemp being the next big thing.

But you knew that already, obviously. Probably because you’ve been to a store - literally any store - in the last year. You can even get your CBD fix at the bookstore. 

And with all that hype, the obvious happened - CBD and hemp businesses started popping up daily, chasing the massive opportunity of a novel industry. But, what sets these businesses apart from one another?

As investors in the CBD and hemp space, this is something we’ve been obsessing over. In an industry so new, with such little consumer understanding and thus, differentiation, how do you value a CBD company? And who do you bet on?

For the sake of the industry and entrepreneurs everywhere, we’ve pulled together some of the key points related to valuing, and raising capital for, CBD and hemp companies. 

The hard truth

Over the last 18 months, valuations have dropped for both CBD and THC businesses as interest has slowed. This is primarily due to the collapse of the public THC and CBD markets that we saw in mid to late 2019. 

To give you an idea, in early 2019 valuations were around 5-8x revenues, which was supported by public market valuations, despite being a bit illogical. In contrast, trends are now closer to 4-6x revenues for CBD/hemp companies and lower for THC. 

Investor expectations

Despite the cooling off of the markets, there are still plenty of investors who see the potential upside of getting involved early in a new market. These investors are generally looking for a 3x return of capital in 3-5 years. They also expect that any companies aiming for valuations in the top end of the 4-6x revenue range should be generating ~$50M in annual sales, with a 40%+ gross margin and 25-50% yoy growth. 

If it’s not clear yet, sales is the name of the game. Investors prefer products with daily usage, opting to place capital into “needs” versus “wants”. They’re looking to understand the longevity of the business, asking questions about repeat orders and customers. 

What you can do

Sell. Sell, sell, sell. Revenues are the key here. Sell into more doors and then do better there than your competition. Demonstrating traction is the key to raising capital. 

Work on margins. Cutting down on your cost of goods sold and becoming leaner demonstrates a key differentiator in the industry. Investors are far more likely to bet on companies that can build profits to reinvest into sales and marketing and, once again, boost revenues (I know... dead horse..)

Focus on B2B. Many companies are opting for a B2C approach through online sales. However, what the data indicates is that’s not where consumers are purchasing products and requires an unparalleled level of consumer understanding. So if you’re opting for online sales, be prepared to demonstrate your thorough (and measurable) understanding of your customer.

Topics: Investing, cannabis business, cannabis investing, valuations, valuing investments, funding