As an investor in the cannabis industry, we often get asked by entrepreneurs what they can do to stand out in the industry. So, we’ve put together a short list of things investors look for when evaluating deals.
If only we could list this one three times… Perhaps the most important element when evaluating deals is the team. After all, your idea is only about 10% of potential success and execution is the other 90%.
When looking for possible investments, investors are looking first for multiple founders. Even if you’re a child prodigy, starting a venture-backed, rapid-growth company on your own is cruel and unusual punishment. Fundraising and running a company are both full-time jobs (and by full-time, we mean 80 hours/week), so its important to have people equally as talented and focused by your side who you can trust.
In addition, investors look for experienced founders. In an industry that moves as fast as cannabis, spending time trying to get up to speed on how to do your job could be the difference between success and failure. That’s why investors want to see founders who have worked in similar spaces before - ideally launching and selling successful businesses in the past. While you may not have extensive cannabis experience, you cannot afford to hire a CTO who has never done anything technical. Instead, seek out team members who can aid the company through their own prior experience.
When embarking on an entrepreneurial endeavor, the one constant should be the problem the business is solving. Often, entrepreneurs become too tied to their solution, making it hard to pivot, which is almost a guarantee in the world of startups.
Investors in early-stage companies understand how solutions evolve and change over time as the market opportunity becomes clearer. Without a strong problem to act as an anchor, the business risks losing its way and going down paths that yield little to nothing. In fact, as investors, we are quite wary of businesses that are too tied to a specific solution as it represents a risk of missing the market’s needs, wasting funds and not knowing when to call it quits on a bad idea.
Understanding your market, its size and its timing is absolutely fundamental to a successful business venture. Be thorough and intentional about the market research you preform, and become familiar with the coming trends. An entrepreneur who is truly an expert in their market is a far better investment than one who does not because if there’s one thing investors hate, its guessing. The more facts and quantitative data you can gather to prove your market, the more attractive of an investment you become.
Traction can be a tricky term. We’re defining it as revenues and speed of customer acquisition. Investors look for businesses that have customers who are actually willing to pay for their solution or product as it signals an actual product-market fit. Sure, your research is great, but proving people care enough to pay for it is ten times better.
Investors also want to see how fast the business can reach certain “sweet spots” with regard to recurring annual revenues. Typically, most investors find $40,000 per month in recurring revenues a great place to start, as this forecasts around $500,000 in recurring annual revenues. Of course, these figures are only approximate, and vary depending on the stage of the company and the firm’s investment interest. For CanopyBoulder, we have interests in pre-revenue companies with a proven market and solid team.
Type of Business
Investors will ask entrepreneurs about their exit strategy. For venture capital firms and most angel investors, they are looking for rapid-growth businesses with a 5-7-year ROI. If you want to run a lifestyle business that pays you a regular salary and employs a few people, that’s great. But, an investor won’t see the return or make sense of the deal. In such a fast paced and growing startup scene, investors typically look for a 10x return by acquisition or IPO.