Of all the patterns that have developed in the cannabis industry over the past few years, perhaps none have proved more intriguing than funding. Few have followed the developments more closely than Jeffrey Barnett, co-founder and business development director at Suite 420 Solutions. The company, which not only provides funds but also helps entrepreneurs navigate the financial world and develop a strong return on investment, represents his eighth launch as an entrepreneur.
“My partners and I have started multiple successful businesses, most in highly regulated industries,” said Barnett. “We have definitely walked in our clients’ shoes and can empathize with their challenges to find ways of supporting their ideas. We understand the frustrations of starting a business and the many roadblocks along the way, including sleepless nights worrying about how we are going to pay our employees and keep the operations running. We take pride that we don’t provide just capital; we also provide our experiences and connections.”
So, what does he think about the state of investment, looming challenges, and the industry’s future? We asked, and he answered.
Last year was tough for many cannabis companies, and 2020 looks like it could be challenging, too. What advice would you give entrepreneurs about raising money right now?
Every year is potentially challenging in business. 2020 will be even more challenging than probably any year in modern history, given the impact of COVID-19. There are so many things outside your control, so focus on what you can control like improving efficiencies and lowering costs.
Investors are looking for well-run businesses, even more so today than in previous years. 2020 definitely will be the year of cash flow and crisis management. Due to the current situation, everyone will be looking for additional capital, so our advice is to make sure your company stands out. What stands out in this industry? An intense focus on profitability.
What are some of the biggest mistakes companies make when seeking financing?
At the top of the list are not following good accounting practices and lack of thorough knowledge about the company’s financials and what they mean. Business owners should know and be able to explain what is on their income statements and balance sheets every day. They should be able to provide a clear path to how and when they will achieve profitability and what it will take for them to get there.
How important is finding the right fit, and how can entrepreneurs (and funders) determine what’s “right?”
Matching a company’s goals and financial outlook with a funder’s expectations is extremely important when raising equity capital. Equity gives a person a voice in how a company is run and the decisions that are made, regardless how much equity a person holds. The wrong fit is like a cancer inside a company. Debt capital is less important. You have to follow the agreed-upon rules, but lenders don’t have any say in how you run your business, or they have very little.
Where is the smart money going, and why?
We are very bullish on new indoor cultivations, especially in states that have controls in place for the number of licensed cultivators in their state. We are also optimistic about vertically integrated businesses that grow, process, and retail their products. Another area of interest is cannabis companies focused on and successful at creating a brand. Both CBD and hemp have a bright future; however, the saber-rattling by the [Food and Drug Administration] makes them more difficult [than cannabis] at this time.
How might full federal legalization change the financing landscape?
There definitely will be more competition when federal legalization happens. Most of our investors have asked us this question. Our view is that most banks, even if they could lend in this industry, have such a small “credit box” of what they look for in a client that a vast majority of the industry wouldn’t qualify. Of course, we will adapt to market changes, focusing on building our brand as the go-to cannabis finance company.
I would guess legalization will happen sometime in the next ten years. I think it will depend on who controls Congress more than who controls the White House. Whenever it happens, we will continue to provide financing for the industry.
What main things should investors look for in a company?
Strong management, an executable plan, a unique selling proposition, well-thought-out numbers with a reasonable path to profitability, and a good [brand] story.
Is there a formula or recipe for how much money to seek when starting a cannabis company?
It would be great if things were that simple. We look at approximately 200 companies per year seeking growth or operational capital. Although there are some common threads, everyone is unique and has a different situation. A general rule of thumb is to ask for the least amount you need to execute on your plan. Make sure your plan is well-thought-out and makes sense.
What do you see in the near term and long term for investors?
I am so excited about being part of this industry, mostly because of the positive impact it has had on my life. When I found myself seeking relief from pain, traditional medicine offered only opioids as a solution. For a variety of reasons, this would have been a death sentence for me. I will always be grateful for the life this industry has given to me, and the fact it has allowed me to be a better man and father. Consider me an evangelist for the industry.
I love the entrepreneurial spirit that has lit a fire all over the world. Everyone in this industry is motivated to change the world for the better. Because of what we as an industry are doing, people are able to live better lives with less pain, suffering, anxiety, and addiction. This is just the beginning of incredible change, and it is an honor to be a tiny part of it.
Barnett’s Rules: The Dos and Don’ts
- Know your numbers.
- Be humble and willing to discuss not only what is positive about your company, but also any shortcomings.
- Listen and learn.
- Attend a meeting unprepared or impaired. You would be surprised how often this happens.
- Think you have all the answers.
- Be dishonest about anything regarding yourself or your company. Everything will come to light when a financing company performs its due diligence. It’s always much better to be upfront about something than to try to explain it away after it’s discovered.
Debt vs. Equity
Both debt capital and equity capital are viable funding options. Each has its own benefits and drawbacks.
Debt capital usually takes the form of a short- or long-term interest-bearing loan. Debentures, a subset of debt capital, are unsecured loans backed by general credit instead of specified assets. Debt capital doesn’t dilute a company’s ownership, but interest must be repaid before dividends are issued to shareholders.
Equity capital, usually called shares, doesn’t require repayment. Instead, equity investment gives the funder an ownership interest in the company and often a voice in how the company is run. Companies must be able to produce healthy stock valuations and dividends in order to acquire—and keep—equity funding.