First-person account from the front lines of the marijuana industry
by Brad Zerman, CEO and managing member of the Illinois dispensary Seven Point
I started thinking about how to enter the medical cannabis business in Illinois back in March 2014 when a friend asked me about the prospect of utilizing debit and credit cards for payments in his potential cannabis venture.
I was already familiar with the marijuana industry through my ATM services company, which works with cannabis dispensaries in Colorado and other markets, but became intrigued with the idea of actually operating a dispensary myself.
Intrigued, I began posing questions to people on various aspects of the industry, and somewhere along the way I became totally absorbed in investing all the time and resources necessary to be in the dispensary business in Illinois.
I took about three months off work from my current business to go all-in on this idea. I had my nose to the ground working on all aspects of the program. Word spread, and people started asking me about it. At this point, I was so committed to the idea that the multiple tasks of the bigger project took precedence over raising capital. I was just too busy looking for potential dispensary sites and doing the work that goes with it.
I put potential investors off as long as I could since I had not yet solidified any locations. I just could not bring myself to take their money without a location secured for an application. And I really did not have time to answer a lot of questions pertaining to valuation, future estimated profits, wholesale pricing, retail pricing, customer base, etc.
In July, though, I put together the terms of an offering with some close friends who have a great deal of finance experience. Our goal was to make the investment relatively affordable and attractive while providing me with the needed funds to create the dispensary and absorb some losses while the registered patient count remained low.
We decided on trying to raise $1 million per dispensary registration obtained. Investors would initially put up a few thousand dollars each – which was at risk in the event we did not obtain any dispensary registrations – with a commitment to invest the rest if registrations were awarded to us by the state. The terms of the deal were structured so that all investors were fully committed to invest in whichever dispensary registrations were awarded, up to a total of two. If we won licenses for three dispensaries, investors would have had an option to invest in the third or allow me to raise additional capital and dilute their shares.
Ultimately, my corporate attorney assisted with the offering memorandum and LLC operating agreement. A friend of a friend stepped up to help me with the real estate, and both ended up investing. Another friend and ATM customer of my primary business came forward to invest after seeing and hearing about my activities.
Finally, the remaining initial “pre-application deadline” investor came in through one of my local consultants. He was a total stranger. With the fourth investor and some of my personal savings I was able to meet the minimum cash threshold required by the state to apply for the licenses.
The risks were high: We invested approximately $200,000 in the application process for the three locations we applied for – all of which would have been wasted if we weren’t chosen by the state. I raised about $20,000 of that from the four investors.
We also would need significant additional capital if we were to actually win any licenses, so raising more money was the next big task after submitting our three applications.
Fortunately, as the media started writing more about Illinois’ medical marijuana program – and quoting me as an applicant – more friends, friends of friends, acquaintances and strangers called to invest.
I emailed all those that had expressed interest in investing. Some immediately responded, while others called asking questions about valuation and profitability, as one would do for a real estate deal. I was very effective in pinpointing the serious investors. These were investors that did not ask a lot of questions because they understood that while there were inherent risks in the investment, this business is ground-floor and new territory for Illinois.
The investment offering was a big success and sold out within a week or two following the submission of our applications to the state. Each month since we submitted our applications, I have received several requests from investors and potential investors to assist with this project.
The great news is that we were successful, winning tentative approval for a license in Oak Park, Illinois.
I am closing this round out now – having raised about $900,000 total – with the possibility of offering another round once we are further along in the project.
Additionally, during this important time where Illinois businesses are readying to open, I will be evaluating the prospect of raising additional capital in order to make strategic investments in other dispensaries and/or cultivation centers in Illinois. I am serious about the industry and have an eye towards applying for additional business licenses in other states.
Going forward, I plan to utilize the same proven financing strategies that worked for me the first time.
Brad Zerman can be reached at [email protected]