Emily Fata

Emily Fata

Founder at Diagon Ventures
Emily has worked as a bridge between entrepreneurs and investors in the cannabis industry since 2013. She approaches projects with a deep sense of curiosity and intuitively transforms data and financial projections into stories.
Emily Fata

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Have you ever heard of an entrepreneur raising millions of dollars and assumed they had something you didn’t? Perhaps you thought they had more money, a killer network, or a genius technical co-founder?

I’ve helped cannabis businesses raise millions of dollars over the past five years, and I can tell you that these assumptions aren’t always true. I’ve also worked as an analyst at a private equity firm, which means I was the gatekeeper to businesses seeking investment. I wasn’t an elusive genius—just a 24-year old crunching numbers on Excel, trying to identify businesses that fit our fund’s investment mandate.

Today, I want to demystify the capital raising process and break it down into simple steps. Keep in mind that most investors and funds have a simple goal: they want to turn $1 into $10.  Your job is to prove to an investor that you can do this for them. Capital raising comes down to building a solid vision, taking some risks, and doing a lot of hard work. If you want to expand your business and start raising some cash, here are three steps to follow to summit that elusive mountain!

Step 1: Identify your vision and start building it

Ideally, you’ve already gotten to work on building your company. An investor isn’t a white knight on a horse who is going to build your business for you. Investors want to see a track record—maybe a license (to sell or grow cannabis), a minimum viable product, or a source of cash flow. It’s critical to demonstrate that you are already building this company and they’re just going to be an ally along for the ride.

What is your bigger vision for the company?  Identify the potential market size and how you will jump from where you are now to the business you want to be. Do you want to expand to a market in a new state? Produce 100,000 units of a product to sell to a distributor?  Do you see potential to build out an additional 10,000 square feet of cultivation plant canopy and sell more product?

Don’t try to raise capital from an investor unless you are very clear on this jump from Lily Pad A Lily Pad B and why money will be the speed boat that takes you there. Capital raising is not the best move for every business; there nothing wrong with slow and steady growth bootstrapped from your sales!

Next, get clear on what you want from an investor and what you’re willing to give up. Are you willing to give up 40% of the pie? Or does parting with even 5% of your dream make you feel squeamish? Do you want a well-connected partner who will make introductions, but also might hound you with suggestions on a weekly conference call? Or would you rather pay a high interest rate to someone who sits in the backseat and lets you make the decisions?  Think about what you want from your business and then determine if you want to sell equity or debt and how much you’re willing to sacrifice. Be clear on your own values and what you are trying to build from your business.

Step 2: Prepare investor package

Once you’re clear on your vision, it’s time to prepare the materials to illustrate your investment opportunity. This means creating a market analysis, financial projections, and a pitch deck or executive summary.

First, we have to crunch the numbers. Keep in mind, we are convincing an investor that we can turn $1 into $10, so we need to show them the business’s future cash flow and when they are going to get paid back. In order to create a financial model, it’s essential to gather a lot of assumptions and data points to puzzle together potential revenue and operating expense projections. We want to give an investor reasonable estimates for the revenue, operating expenses, and cost of goods sold that can come from this business.

In the movies, there will often be a great scene where an investor randomly shouts out how much money they’ll give a business for their company. This is good for entertainment (spreadsheets aren’t that interesting on the big screen) but it’s not necessarily so realistic. We’ll use the financial projections to create an estimated valuation and then begin to negotiate the equity or interest rate (I would say the exception is in the tech world, where Facebook can shell out a billion dollars for the hottest new app.)

Next, we have to put these projections within a compelling story. Most investors are busy and don’t want to see your whole 20-tab excel model at the beginning. Make the pitch simple and easy for them to digest. Create a pitch deck that summarizes the investment opportunity, the vision, the jump from Lily Pad A to Lily Pad B, and how much money you expect to make from this investment. Get in touch with for guidance on this process.

Step 3: Begin investor pitches

Many people focus so much on “knowing” an investor or having the right connections. I don’t want to knock on networking, but investors are looking for good investment opportunities as much as entrepreneurs are looking for money. It’s a symbiotic relationship and if you have nailed down steps 1 and 2, you bring a lot of value to the table. There is a big difference between being Joe with an idea and being an entrepreneur who has invested in a vision and plan of action.

Cannabis is a niche investment network, which has its pros and cons. Most venture capitalists and banks won’t touch cannabis, but there are a lot of investors who are specifically looking for opportunities within the industry. Be patient and keep building your business and polishing your vision in the interim. Don’t expect magic overnight— most of my clients have taken between 6 and 12 months to close on funding.

I am linking a few resources here and here and here to identify investors focusing on cannabis. Network as much as you can—I’ve always been surprised who comes out of the woodwork and ends up having a rich uncle trying to get into cannabis. Be careful about general solicitation and equity exchanges for services. (i.e. don’t post on Facebook that you are looking for investors) and make sure you’re familiar with the risks of pitching to unaccredited investors. [1] More info on this in the footnotes.

And lastly, don’t be discouraged. I just had coffee with a Canadian cannabis VC fund and told them about some projects I am working on. Unfortunately, they’re only looking for very specific opportunities that will complement the other investments in their portfolio. It’s not personal and it doesn’t mean that your business idea sucks. It’s just not the right fit for that investment profile.

Good luck! And if you’re ready to move on to Step 2, get in touch! I am rooting for you.

Emily

[1] Accredited investor a) earns more than $200,000/year or )$300,000 if filing jointly) in the last two years and reasonably expects to earn that this year or b) have a net worth exceeding $1MM Regulations are much more lax when exclusively targeting accredited investors.

Also, research Regulation 504 (D), which applies to transactions in which less than $1MM in securities are sold. These types of capital raises are exempt from disclosure requirements & a Private Placement Memorandum. Regarding posting on facebook, in general, Online Securities Offerings are not legal without a broker-dealer.