Member Blog: Reflections On Banking Reform For Cannabis Operators

Isn’t it crazy to think that the legal cannabis industry could be worth $57 billion by 2030? Or that nearly half of the country’s adult population (49%) has tried marijuana, the largest number ever recorded.*

At the time of this article, nineteen states, two territories, and Washington D.C. have legalized cannabis for adult recreational use. With more than two-thirds of U.S. states that have legalized the sale of both adult-use and medical cannabis and nearly half the population of potential cannabis consumers – it’s safe to say the cannabis industry is thriving.

But can it continue to grow without banking reform?

Cannabis businesses have a hard time accessing traditional banking options because the plant is still federally illegal. This means that banks are hesitant to work with cannabis companies for fear of retribution from the federal government.

This lack of banking options creates a difficult environment for cannabis businesses to operate in. Since they can’t deposit money or write checks, they have to operate on a cash-only basis, which can lead to security problems.

Cannabis operators also have a hard time securing financing because most traditional lenders are unwilling to work with them. This leaves them struggling to get the capital they need to grow and scale their business.

When cannabis businesses lack financing options for basic business growth, a banking system more ideal for cannabis operators is needed.

The Federal Law Guides Everything

Despite the growing opportunities in the cannabis industry at the state level, many prospecting business owners are stalled by a lack of capital. Businesses in the cannabis industry might celebrate legalization in their respective states but still deal with the challenge of accessing banking services.

Cannabis dispensaries that run cash-only operations are forced to confront security challenges in a new way. Online ordering, credit and debit card processing, taking business loans, and accessing other revenue-driving financial services are denied to cannabis businesses due to their federal status.

This shows an immediate need for financial reprieve in the cannabis industry.

Getting Financial Reprieve

The House of Representatives has passed several bills supporting the cannabis industry. Some of these bills include:

Bill to decriminalize marijuana
The Marijuana Opportunity Reinvestment and Expungement (MORE) Act
Legalization of adult-use cannabis
Legislation for medical marijuana programs
Legislation to reduce barriers to cannabis research
Approval of measures for adult cannabis use

One such bill that focuses on banking reform is the Secure and Fair Enforcement (SAFE) Banking Act, which aims to reduce the banking services challenges in the cannabis industry. If the SAFE Banking bill passes in Congress, financial institutions can open their services to cannabis businesses without the fear of violating anti-money laundering (AML) laws.

In return, cannabis businesses reduce the risk of theft and employee welfare by transitioning from cash-only services to banking services. However, this financial reprieve doesn’t address the cannabis tax code that prevents cannabis businesses from deducting business expenses from the gross income as per the Controlled Substances Act

Nonetheless, the SAFE Banking bill is a step in the right direction. The remaining concern is whether these financial reprieves will pass in the Senate and legalize cannabis businesses at the federal level.

Another financial option expected to reform the cannabis industry is crypto. The authenticity and security of blockchain currencies like Bitcoin are becoming a lucrative consideration for financial reprieve in the cannabis industry.

Currently, there are cryptocurrencies like PotCoin and CannabisCoin mined to cater to various needs within the cannabis industry. However, the uncertainty in the crypto world makes it challenging for the cannabis industry to settle on using crypto as a financial banking solution.

Granted, some crypto technology like blockchain technology is used to transact sales in the cannabis industry, where buyers make cashless payments, and the dispensaries convert this into crypto. But these transactions are not fully transparent.

Notwithstanding, there is hope for the cannabis industry as the number of banks willing to work with cannabis businesses increases. This could result from the increasing support of cannabis banking reform at the state and Congress levels.

But Is The Banking Industry Prepared For This Reprieve?

Financial institutions are gathering more courage when working with the cannabis industry. In 2021, 755 banks showed working relationships with cannabis clients. However, this comfort is more prevalent at the state level than at the federal level, where cannabis is yet to be legalized.

But since support from the federal government is anticipated, banking institutions must equally prepare for the capability to host cannabis businesses legally. Banks must stay compliant with the anti-money laundering (AML) laws.

Banks should conduct due diligence on cannabis businesses that want to use their services. Since federal legalization of cannabis is still pending, some cannabis operations might be illegal. Therefore, it is prudent for banks to start preparation by ensuring any new partners are not lawbreakers.

This means checking for legalization and registration licenses and conducting due diligence on employees and angel investors. Business transactions are also an excellent indicator of whether a cannabis business is involved in illegal activities.

For instance, a cannabis business in a state that frowns upon international shipments shouldn’t have any international transactions. Avid AML monitoring controls should quickly identify legitimate cannabis businesses.

In a nutshell, every business that partners with a cannabis business should be prepared to support its decisions with factual claims. In case of any suspicious activity, the bank should be ready to give an account of their due diligence procedure and the findings.

Creating relationships with federal regulations is also prudent since they help make the regulation process easier. Regulators also help ensure that banks remain compliant with the Federal cannabis laws, which protect their banking operations.

Cannabis business owners must also prepare for the possibility of using open and traditional banking services for their operations. If, or when, cannabis is Federally legalized, the cannabis industry will streamline its operations throughout the U.S.

This means added investments in research, cultivation, marketing, production, and sales of cannabis and cannabis products, whether medicinal or recreational. And the added boost of a legal banking system would further increase employment and boost the economy.

Cards On The Table

Does the cannabis industry need a banking reform? Absolutely. The challenge, however, is that, despite the willingness of the House of Representatives to support the SAFE Act bill, among other proposed banking reforms for the industry, approval in the Senate is still in question. Cards on the table, bank financing in the cannabis industry will propel businesses into more growth, which, in turn, should pragmatically influence the overall U.S. economy. But this starts with active congressional action.

FAQs

What is the current cannabis banking system?

The current cannabis banking system is not ideal for cannabis businesses because the lack of Federal legalization keeps banks from offering traditional banking services to cannabis businesses for fear of violating anti-money laundering (AML) laws.

What are the challenges of using non-FDIC banking options?

Non-FDIC banking options are not secured by the FDIC, meaning businesses that operate under these banking services are not protected by the Federal laws against theft or failure.

What can a banking reform do for the cannabis industry?

A banking reform allows banking institutions to offer cannabis businesses the same banking services they offer other businesses, like capital loans, online bill payments, and debit and credit cards.

Joshua Gilstrap is the Marketing Manager for e2b teknologies, in addition to his marketing responsibilities Joshua leads business development for e2b teknologies emerging Canna Suite product line. A business graduate with a focus in marketing from Miami University in Oxford, Ohio, he joined the e2b team in the Fall of 2019. Josh brought with him a wide array of business and practical experience in planning and execution. Since coming aboard he has led multiple project’s including website hosting and theme standardization company wide, marketing automation streamlining the efficiency of the customer journey, and sales automation where he is changing the conversation from promotion to education, from pitching to catching, and from push to pull in order to keep up with the shifting tides of a digital transformation.

Member Blog: Pitch Deck Creation – Attracting the Right Investors

David B. Wilkinson, Co-Founder of The Hemp Business Advisors, Inc

Although it should have taken only a few weeks, it took three months for our team to craft one of our most successful pitch decks. Why? This was an extremely complicated cannabis organization with a holding company that had ownership in numerous LLCs, various product brand companies with varying financial needs. Eventually, all of the complex components were streamlined, and the investment package was simplified, resulting in a stellar pitch deck that was pre-approved for $20.5m. But how was this accomplished?

The Three Key Pitch Deck Secrets

There are three main secrets that we have found when reviewing, revising, and creating pitch decks across the cannabis industry. Below are a few concepts we consider when crafting a fundable pitch deck for clients:

The Investor’s Criteria

Depending on the amount of funds that a company is seeking to raise and the ROI structure, each entity is placed into one of two categories: a. Angel/VCs or, b. Investment companies/family offices. Once determined which category you’re in, you’ll have a greater understanding of your target audience. Unfortunately, after interviewing over 300 cannabis companies, we’ve learned that most pitch deck creators do not know who their target market is, and therefore are unclear in their pitch deck offering. Rather than presenting yourself, your company, and your idea to an investor, it’s vitally important that you know the criteria each investor wants to see before crafting your pitch deck.

For instance, we recently reviewed an amazing cannabis pitch deck that was seeking $65M for its first phase to gain seed capital. Since the company is pre-revenue and the proof of concept still being developed, in our three-page analysis we stated that the wording would need to be geared toward an Angel/VC audience since they did not fit the Investment Company criteria.

The Graphic Design

The quality and layout of the graphics used within your pitch deck cannot be understated. In fact, the quickest way to end any form of communication with an investor is to present a low-quality pitch deck with pixelated graphics, photos without uniformity, or those that lack a modern feel. We know many companies that decided to save money and “wing it” only to discover that seasoned investors make lightning-quick decisions based on the quality of what they see. The secret? Ensure that the quality of the deck matches the size of the raise.

The Blending Formula

What is the primary purpose of a pitch deck? Is it: a. Educational, b. Motivational or, c. Financial? The answer is, of course, all three. However, very few companies know how to skillfully blend these components together effectively and in proper proportion. The majority of pitch decks only focus on thoroughly educating the investor, droning on and on, page after page, citing the facts and statistics of the industry. Competitive advantage, product efficacy, and detailed projected growth charts and graphs are better left in the business plan. Seasoned investors are masters in their industry and are looking for a pitch deck that lightly educates and motivates them through interesting concepts that make financial sense.

In Conclusion

The purpose of a pitch deck is to be a visual representation of the company’s integrity. It reveals a true picture of the value that the team places on the future success of the company. Although it’s now easier than ever to gain funding (especially thanks to tokenization), the first step is to craft a pitch deck that attracts the right investors who will want to fund your cannabis dream.

May this be your year to accomplish all that you and your company could imagine.

David B. Wilkinson is the Co-Founder of The Hemp Business Advisors, Inc., and the Founder & President of The Investment Training Institute, LLC. For over 20 years he has been providing executive coaching across various industries but his passion for the Cannabis plant and the people who are connected in this space, are his target audience. He also speaks at conferences across the U.S. on funding, pitch deck creation and other types of business topics. He is directly involved in vetting cannabis companies who are looking for funding and trains business owners how to gain capital effectively.

The Hemp Business Advisors, Inc., was founded in Fort Collins, Colorado in 2018 and has been a platform for connecting companies across the cannabis Industry, creating dynamic business curriculum that is tailored to the needs of the industry and providing online and live presentations that motivate, inform and equip business individuals who are seeking to increase their company’s financial growth.

Committee Blog: Fundraising Basics in the Cannabis Industry – Part 2

by Deborah Johnson, MCA Accounting Solutions & James Whatmore, MAB Investments
NCIA’s Banking & Financial Services Committee
Part 2 of a 3-part series

In our first part of this blog, we discussed the very beginnings of a company; an idea, gathering a team around you, self-funding, opening a bank account and forming an LLC or incorporating. Now you are ready to take a big step, bring on some more people, purchase more equipment and explore partnerships. You have a path with real milestones. This is the time to plan a funding strategy.

If you are not plant-touching, or you are directly ancillary, you might be able to secure a bank loan or an SBA loan. As the SAFE Banking Act is being considered in Congress (at time of writing) the reality of greater access to cannabis banking services may be getting brighter. However, traditional banking sources may still be an issue. These challenges have blended into some ancillary activities. There are a few other debt instruments including venture debt, an accounts receivable (AR) line, or an asset loan. Some of these instruments can be originated with specialty firms or other investment sources.

“While debt has traditionally been scarce in our industry, the relatively recent arrival of lenders has fortunately changed the construct of cannabis company balance sheets. Industry normalization, low rates, relatively high equity capital costs and supply-demand imbalances have attracted capital pools into credit and provided companies with the ability to further normalize their blended cost of capital,” said Sumit Mehta, founder and CEO of Mazakali and chairperson of NCIA’s Banking & Financial Services Committee.

Recently Harborside Inc. (CSE:HBOR) (OTCQX:HBORF) in California landed a historic $12 million revolving line of credit with a bank, marking the first time a cannabis touching company has secured this kind of access. Granted it is secured, but it is a commercial loan from a traditional lender. If you have real estate involved many investors will do a sale leaseback on the property to provide some liquidity. Equipment may also secure a loan; this is often a choice to outfit a capital-intensive production. When evaluating your debt options consider what is happening at this point in your life cycle. For an early-stage company, a revolver may not be the right fit; however, having the right equipment getting you to revenues might be worth investigating.

There are also grants available. Especially with COVID-19, many local jurisdictions are providing small business grants, or you might find one aligned with your demographic or target market niche. Many startups find an accelerator or incubator to help both fund and scale the company. In cannabis, the accelerators have historically been targeted to the ancillary market. Several exist, including Canopy Boulder, Momentum, Gateway, Hood Incubator, The Initiative, Cannabiziac, and even traditional market accelerators such as Y Combinator are addressing the needs of the cannabis market. Accelerators will invest in the companies they are providing guidance to and are generally hosted over a short period of time like 3-4 months, whereas an incubator provides resources, networks, and services over an 18+ month time and might charge a fee to participate. This early mentoring is a great resource for social and personal capital as well. If you have participated in an accelerator or incubator environment you should be exposed to early-stage investors; if you haven’t been exposed to them, this is the time for a solid PowerPoint deck and to polish your presentation.

Next on the list are angel investors. Angels are those individual investors that provide early-stage funding for a startup usually in exchange for convertible debt or ownership equity but are not locked into a funding structure. Banks make loans, angels can do as they please. They can be sophisticated or unsophisticated as they technically just need to qualify as an accredited investor. Most are drawn to investing in something familiar, so either they have a direct professional background in your industry or have felt the pain point you are addressing personally. Some want to roll up their sleeves and be engaged in helping your company grow, others just want to diversify their investment portfolio and take a more passive role. They can invest in the idea and direction of the company and a good angel will understand the timing of the investment. This means that early-stage investors like angels and funds should understand that this is a long-term investment that might take 5-8 years to see liquidity.

The greatest challenge to an entrepreneur is where to find them. Sometimes it’s as easy as looking around your network. With some work you can attract attention to your business idea by either presenting/speaking or pitching at a conference. Over the years, many opportunities to do so have developed. NCIA hosts CannaVest and Cannabis Business Summit, one of the longest running is The Arcview Group, Benzinga, IC3 by IMN, CWCBExpo and many cut their teeth at MJ Biz. Angels are individuals, but often belong to a group of angels to assist with deal sourcing and due diligence. With the normalization of cannabis, you can find many groups via the Angel Capital Association. We’d suggest reviewing market transactions and see who is announcing that they secured funds and with whom. You can find this information through keywords and press releases, consolidating sites such as New Cannabis Ventures or Viridian Capital Advisors, or even Pitchbook. This is the hard part of fundraising: connecting with the right investors.

You can also gain exposure to investors by sharing your expertise. Whether it’s articles on LinkedIn or podcasts and panels, exposing your knowledge of your niche is critical to gaining their confidence in your ability to execute. The conferences above may host your presentation as well furthering your investor engagement. One word of caution, there is a new platform being used by millions – even though it’s still in beta – called Clubhouse. There have been many people that are running pitch rooms on that platform and they are running up against the SEC and rules for fundraising. We encourage an extra dose of caution when pitching where you don’t understand who your audience is and if they adhere to qualifying factors. Many times, the later investors (Series B or C rounds) have to do a lot of work to clean up the cap table from earlier investment rounds. That can be a hurdle that an investor might walk away from. So, the more you can do to assure you are running a clean and efficient fundraising round, the better.

Given that we are in the cannabis industry, it is of particular importance to be an advocate. Access to this plant is still restricted for many, people are still going to jail or are still in jail, and businesses have a disadvantage to all other industries given the repercussions of federal illegality. So being an advocate, aligning and engaging with advocates like the National Cannabis Industry Association (NCIA), Marijuana Policy Project (MPP), Students for Sensible Drug Policy (SSDP) and others, can also expose you to investors who recognize your understanding that there is much work to be done to assure fair access. Expertise, Advocacy, and Engagement will build your social capital. The early rounds can hinge on these factors. While you will need a proforma, other financials and a solid plan, an angel is investing in you as much as in your current project. With enough social capital, your relationship with the early angel investor will survive major setbacks.

Once past these early rounds, your focus will turn to more formal investment groups and businesses in private equity, venture capital and then the public market. Currently those companies touching the plant are able to be hosted on the OTC (over-the-counter) market or the CSE (Canadian Stock Exchange) with a growing number of ancillary companies listing on the traditional exchanges. Here there will be a deep dive into the numbers and execution, pre/post revenues with a clear runway to real revenue. This requires an adaptive corporate culture with some loss of control expected.

In our final piece of the series, we will review crowdfunding, tips on angel and fund investors, and types of funding.

Member Blog: Top 3 Reasons Cannabis Angels, VCs, & PEs Use Data To Analyze Deals

by Henry Finkelstein, CEO and Founder of Cannabis Big Data

Key Highlights:

For cannabis investors focused on private companies, larger deal flow means better investments
Vetting cannabis companies is complex, time-consuming, and expensive
Using a data-driven deal analyzer automates top-level due diligence, resulting in more deals processed, better fits, and overall higher returns

The emerging cannabis industry is in a state of rapid growth – over 30% compound annual growth rate (CAGR) for the next 5 years – and investors are starting to really pay attention. Angel investors, venture capitalists, and private equity groups are raising funds dedicated to cannabis and they’re starting to grow their portfolios.

To make smart investments, investors of all shapes and sizes need to review a large volume of deals to find the best picks that fit their investment strategy, often referred to as their investor or portfolio “thesis.” But wading through all those decks and conversations can be very difficult and draining.

Investors (and businesses) lose time, energy, and money qualifying and chasing poor fit deals

Cannabis investors spend tremendous amounts of time and energy talking to and qualifying potential deals, only to realize much too late in the process that this company is not a good fit. Although every conversation yields an opportunity to learn, some conversations are much more interesting and productive than others. In the worst case scenario, investors don’t realize the deal is a dud until after deploying capital, resulting in direct portfolio losses.

No one, neither investors nor businesses, wants to waste their precious resources on deals and discussions that will go nowhere. More importantly, these wasted resources result in overall market friction that reduces the rate and acceleration of industry growth as well as investor return on investment (ROI). Double whammy!

So any investor that can review more deals faster, and quickly isolate the most relevant opportunities to pursue further, has a considerable advantage in snapping up the best investments before others get a chance.

Maximizing cannabis investment ROI requires a data-driven deal flow

From our first-hand experience raising capital, as well as second-hand experience talking to investors, one of the biggest challenges is quickly and efficiently identifying a good match on industry vertical, business focus, traction, and values. Beyond these foundational considerations, the next round of challenges revolves around product-market fit, growth potential, and deal terms.

Simply put, there is a standard list of 15-20 questions that every investor should ask a prospective investment (and every company should ask a prospective investor). But these questions can drag on for multiple discovery conversations or documents, ultimately wasting time and energy on both sides.

Some investor platforms, such as Leafwire or Arcview, ask a small set of these questions to help grease the wheels. Cannabis Big Data uses a deal analyzer that algorithmically matches investors & potential deals based on self-reported preferences. Think of the tool like Match.com for investor deal flow with a compatibility score based on profile overlap.

Regardless of the platform or format, investors that have an automated, dynamic way to speed up their deal flow will be able to review more deals faster and find the best companies that fit their thesis. It also means investors have more time for due diligence on the highest value deals, ultimately resulting in higher portfolio returns from investing in stronger, more aligned companies.

For entrepreneurs, a standardized set of investor questions means more time and mental space to focus on developing their product or service and growing their customer base. For the industry, accelerating investment due diligence means less friction in the capital markets and happier humans doing more meaningful work with more time to care for themselves, their customers and their families.

Bonus concept: data-driven investors empower long-term success with historical machine learning & predictive modeling

Beyond the immediate and impactful value of a data-driven investor thesis to save time, energy, and money for both investors and businesses, there is also a longer term impact and benefit to cannabis capital bearers.

Over time, cannabis investors can run historical correlative analyses identifying the core considerations that are most likely to impact success and, most importantly, returns on investment. Said in the lexicon of a data nerd, this is a machine learning protocol and predictive model with historical data-driven deal assessments as a training dataset. In plain English, this is a computer algorithm that looks back in time, figures out what worked and what didn’t work, and applies those lessons learned to the matching score for future potential deals.

Overall, what’s true for companies is true for their investors: those most adept at activating their data will quickly dominate the market. So investors need to consider an automated deal analyzer to save time, energy, and money in the short-term while also get smarter picking the best bets that yield the highest returns in the long-term.

Henry Finkelstein, CEO & Founder of Cannabis Big Data, empowers colleagues and clients by spinning data into gold with intuitive, actionable insights. After working in e-commerce, consulting, healthcare and government contracting, Henry saw the opportunity to create a modern-day data toolkit for cannabis businesses that connects the data dots with one-click reports & dashboards that help companies earn more and stress less.

Henry’s person-centric approach to the power of data is summed up as “Let’s count what counts & celebrate our successes because the only relevant data is actionable data.”