Market Overview

The State Of Cannabis Funding: 'You Cannot Just Go Down To Your Local Bank'

The State Of Cannabis Funding: 'You Cannot Just Go Down To Your Local Bank'

Cannabis is illegal on a federal level, and that makes securing funding difficult, to say the least.

That said, some avenues have begun to open; while it remains a challenge, the cannabis industry is starting to find routes to secure legitimate funding.

Opportunity Cost For Cannabis Capital

Willie Gabriel, founder of Newport Beach, California-based Wallwood Capital Group, places the blame on federal banking restrictions.

“You cannot just go down to your local bank and apply for any type of financing,”

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Gabriel said his company and others in the cannabis space are providing a solution.

“What is happening is that private funding sources are stepping in to replace the traditional banks and capturing a risk premium due to this restriction. It all comes down to the opportunity cost of capital in terms of 'where I can get a higher return for the perceived risk?'"

Flowhub founder and CEO Kyle Sherman said rapid industry growth has not led to venture funding options, even for cannabis tech companies offering ancillary services.

"Raising funding is still a challenge because traditional venture capitalists are still unable and hesitant to place bets on cannabis due to federal law," he said.

“While ancillary businesses don’t actually touch the plant itself, we can see that the stigma surrounding cannabis is still heavily prevalent, especially in business."

Flowhub leveraged small, cannabis-specific funds in its early days, Sherman said.

No Legal Consistency

Barry Gainsburg is an attorney with experience in the cannabis space as well as the SEC and contractual law.

The maturing cannabis market is governed by disparate laws, he said.

"Because there are no uniform federal regulations, there are particular risks — such as out-of-state ownership restrictions and ever-changing state laws — to contend with."

The 2018 Farm Bill did provide greater clarity, lower risk reduction and improve business funding access, Gainsburg said.

Ancillary businesses, including seed-to-sale tracking technology providers, are finding avenues for funding, an assessment that stands in contrast to Sherman's take.

Financing Tips From Flowhub

Sherman offered a number of ideas for companies to consider before choosing a deal or investor.

He recommends conducting a diligent deep dive of potential investors, including meeting the investor in person if possible.

The CEO also said potential investors should be kept in the loop on business activity.

“Give yourself a strict deadline, then make a plan with milestones you need to hit in order to reach your goal. Make sure to produce some level of demand as well. You need to time investor meetings so that there is a bit of a competition around the fundraise," Sherman said.

A network of brokers is critical, said Wallwood Capital Group's Gabriel.

"Everybody wants to deal with a direct funder. Unfortunately, they do not know them, but through this broker network, you can find the best lender for the company's specific scenario."

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