How I … Funded My Cannabusiness: First-person accounts from the front lines of the marijuana industry

, How I … Funded My Cannabusiness: First-person accounts from the front lines of the marijuana industry

Dr. Lakisha Jenkins, CEO of the holistic health nonprofit Kiona Foundation

When I considered introducing medical cannabis into my holistic health practice, I decided that the cooperative business model was a viable option not only in structure, but also in financial stability.

For the Kiona Foundation, introducing an agricultural cooperative provided a revenue stream to help assist us with maintaining the financial support services we provide to the cancer survivor community, but also allowed us to introduce medical cannabis as a service by providing a legal business structure that was acceptable according to guidelines in California.

A cooperative is largely self-funded. This was very important to us, being a 501(c)(3) nonprofit organization that receives most of our financial support from the general public. One of the seven cooperative principals specifically highlights the need for “economic participation” from its members. In its most basic terms, this means that members provide the basic capital to startup and operate the coop. The cooperative self-financing approach has a primary foundational focus on providing services as opposed to making a profit. Members invest to be able to use a cooperative or to access its benefits, not to get a return on their investment per se.

At its core, a co-op is a business. It is subject to the same needs and demands of any business: co-ops require sufficient financing, careful market analysis, strategic and comprehensive planning and well-trained, competent personnel. Co-ops are not immune to the market and economic forces that cause small businesses to struggle and fail.

The cooperative business model has been challenging by way of introducing its concepts to those not accustomed to operating within the confines of that system, but also rewarding as it has provided both the financial stability and legal protection for us to serve the medical cannabis community in the State of California.

Garett Fortune, managing partner at packaging firm FunkSac

We founded FunkSac in December of 2013 and we have learned a lot of lessons along the way, especially in funding and banking.

Our initial funding has been from local angel investors as well as investors through The ArcView Investor Network, which hosts a “Shark Tank”-like event for cannabis industry investors and entrepreneurs. In this dynamic industry speed is crucial, and with conventional banking off the table, angel investors seem to be able to work a lot faster than groups or funds.

The main thing we have learned is to always have a Plan B, C and D. Often when raising capital through investors that are not local, you will find it takes longer than expected. It is always a good idea to be engaged with multiple investors in case various issues arise. Secondly, ensure you find the right type of investors for your business and team. Money is not the only focus – investors should also bring other assets to the table, such as business or industry experience, expertise and additional resources.

We have also learned that the evaluation process is a two-way street , meaning that you need to evaluate investors as much as they evaluate the company and your team. Make sure it’s a good fit for you.

Finally, know your numbers inside and out as well as your business because the questions are coming and investors are savvy. If you don’t know this information like the back of your hand, it could sink a deal or turn off a potential investor.

Bill Hayes, serial cannabis entrepreneur

Getting your share of the cheese in an emerging industry can be difficult but it isn’t impossible.

I started my first medical marijuana business in 2010 with $78 in funding available – a typical grass-roots “marijuana activist” bank account. Arizona had just passed a voter initiative for medical marijuana use by less than five thousand votes and I had spent every penny I had available promoting the initiative because I am a Crohn’s patient and would benefit directly if it passed.

I registered a simple dot-com with GoDaddy and created Arizona’s first online platform for patients and caregivers to connect with each other. Being one of the first names people know in a new medical marijuana state can make or break you, and the name Arizona Cannabis Society became a pillar in the Arizona MMJ community quickly.

I then started a vapor lounge franchise, modeled after what I saw in Canada and a few places here in the United States. The investors were all pulled from a social media advertising campaign that cost me $5.11 to run. I raised $10,000 in 48 hours. That is pretty good ROI if you ask me.

Being self-taught in business generally means making mistakes. So take this tip from me, based on a consistent mistake I made along the way: Understand every word on every line in every paragraph of a contract. If you don’t, hire an attorney to understand them for you. This especially applies to contracts with investors. Words are very important. Don’t assume you know their meaning, and check for definitions in everything you sign or commit to.

Joseph Friedman, chief operating officer of PDI Medical

Remember, things are not always going to go as planned, so always have a Plan B and sometimes a Plan C.

When I first began forming a dispensary application group in Illinois, my Plan A partners were George, a lawyer/CPA, and Carl, a pharmacy owner in Chicago.

At our first meeting, George asked how much skin I was willing to put into the project. I had already put significant time and effort establishing myself in the industry. I thought my sweat equity had significant value. My low-ball response nearly ended the meeting before it even got started. George explained that comparable financial contributions were essential to form a fair partnership. He also demanded majority ownership. I upped my ante to keep our group intact, however George’s majority ownership demand concerned me.

All the while, I was loosely keeping in touch with another interested group, my Plan B.

Eventually, the financial impact of IRS’s 280E penalty caused George and Carl to pull out. Within a week, my Plan B group was formed. Our first challenge was funding the cost of three applications. The three members of our Plan B group could not raise all the capital required. We met with several potential investors/partners, and luckily we found a major benefactor.

A condition of the deal was to include his son as a managing partner. This seemed reasonable. The son was passionate about the MMJ industry and showed promise of becoming a valuable partner.

In retrospect, this arrangement was a major pitfall. The son lacked business savvy, experience, and was unreliable. He became a liability, and we have kept his involvement limited.

The remaining capital was raised through the issuance of convertible promissory notes. Each non-voting investor received a complete investor packet containing forward-looking pro-forma statements. The relative risks and rewards of the investment were also included.