By Becky Olson
More than half of existing marijuana businesses are seeking additional financial backing or plan to do so later this year, while most cannabis firms preparing for launch need capital as well, according to data in the newly released 2015 Marijuana Business Factbook.
So how much do executives with these companies think their businesses would be worth in 2017 if they were fully funded today?
Marijuana Business Daily analyzed valuation growth estimates from 151 marijuana companies that are seeking funding and applied to take part in a mock investor pitch event at the Marijuana Business Conference & Expo.
Entrepreneurs revealed in their applications how much they think the overall valuation of their companies would increase within two years (their “valuation multiplier”) if they had all the capital they’re seeking right now.
Infused products companies are the most optimistic – some might say unrealistic – of the bunch, with executives predicting on average that their valuations would increase 18 times over two years. On the other end of the spectrum, dispensaries that applied for the pitch events predicted much more measured growth, with the typical projection coming in at around three times their current estimated valuation.
The estimates are just that: projections by company executives about how much their businesses might grow. But they provide insight into the expectations and optimism of startups just getting off the ground and mature companies looking to expand, as well as a look at whether entrepreneurs are grounding their projections in reality.
Here are some other insights gleaned from these companies’ applications for the pitch events:
Infused Products Companies
Edibles and infused products manufacturers applying for the pitch session are forecasting an extremely rosy future.
Their average current business valuation is $460,000, despite the fact that 89% of the firms haven’t started operations yet. They also predicted on average that the valuation of their companies would balloon 18 times if they had all the funding they need.
They are currently seeking an average of roughly $1 million – a much higher figure than in the recent past, when mom-and-pop infused products operations dominated and often could launch with just tens of thousands of dollars in capital.
Nearly 90% said they have formal written business plans, but 56% have never pitched investors before.
With the elimination of vertical integration requirements in Colorado and increasing clarification on the regulatory environment in states like Washington and Oregon, wholesale cultivation is a burgeoning part of the industry in several big markets.
It’s ripe for startups: only 7% of pitch session applicants said they are currently operational. Entrepreneurs are seeking an average of $785,000 in funding.
Many are planning large operations, with several reporting a desire to expand into extraction or set up 10,000- to 30,000-square-foot cultivation sites.
Retail (MMJ Dispensaries and Recreational Stores)
Most applicants noted their desire to move beyond simply selling cannabis and create more of an experience for the consumer. The hope is that patients/customers will spend quality time at the establishment, rather than dropping in simply to make a purchase.
But it isn’t cheap. At $4.4 million, retailers have the highest average current capital requirements of all marijuana sectors.
Aside from the costs associated with elevating the bar when it comes to the customer experience, dispensaries and rec shops face much higher application, licensing and regulatory fees than they did two or three years ago.
They estimated on average that their current business valuation to be roughly $830,000, a figure they expect would increase about three times if they had all their capital needs right now. Just 59% have formal written business plans and only 35% have pitched investors before.
With states starting to mandate testing and consumers taking an increasing interest in the potency, purity and quality of their cannabis, there is no shortage of opportunities for these businesses.
Testing labs are seeking an average of $936,000 in current funding. with 60% seeking funding in return for equity only. Their estimated current valuation is $2.1 million on average.
Along with testing labs, this sector is one of the more technology- and equipment-heavy in the industry. These companies have the second-highest current capital requirements at $1.4 million. Nearly 40% are seeking interest-bearing business loans – which is good news for equipment makers willing to offer financing.
They place their current business valuations at $2.6 million. Almost 70% have formal written business plans and 54% have pitched investors before.
These businesses are by far the most numerous, accounting for 62% of the pitch slam applications. Because these businesses don’t directly handle the plant itself, they present a less risky entrance to the industry for many entrepreneurs.
They are seeking an average of $1.1 million, and 47% are already operational. At an average of $7 million per firm, companies in this sector have the largest average current business valuations.
Just over 60% have pitched outside investors in the past, making them generally the most experienced marijuana entrepreneurs in seeking financial backing.
Whether just getting into the industry or looking to expand established operations, it’s important for entrepreneurs across all sectors who are courting investors to have well-founded business plans and financial projections.
Becky Olson can be reached at [email protected]