Marijuana businesses seek alternatives to debt financing in slow capital market

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Illinois craft marijuana producer Cannect Wellness raised $7 million in its second equity funding round, executives told MJBizDaily.

According to finance experts, capital raises in the cannabis sector have been slow over the past year, due, in part, to the expense of debt financing.

Cannect Wellness’ latest funding round brings the company’s total equity financing to $14.5 million as it continues to expand both operations and product offerings, adding edibles, pre-rolls and solventless concentrates to its existing product line of flower, live resin and Secret Sauce, a concentrate consumed with vape hardware.

“We want to bring in new genetics and grow new strains and expand our offerings on flower,” Gabe Singal, Cannect Wellness’ co-founder and CEO, told MJBizDaily.

Plans for funding

The $7.5 million that Cannect Wellness raised during its first funding round was used to build out the 22,000-square-foot facility it owns in the Chicago suburb of Franklin Park and to launch its first products, which are carried in marijuana stores throughout the state.

The craft grower plans to use the second funding infusion to increase its production capacity and double the size of its 26-member team.

Cannect Wellness also plans to launch new brands and evaluate other expansion opportunities, although the company does not plan to expand into other regulated markets.

“We’re all-in on the Illinois market,” Singal said.

“We want to expand what we’re offering as a cultivator and product manufacturer and double down on what we’ve already done in Illinois.”

Challenges to raising capital

Cannect’s latest funding round comes from a diverse group of investors, including both new and existing backers, Singal told MJBizDaily.

The federal prohibition of marijuana stops many banks and traditional lenders from providing funding to marijuana businesses, which are not eligible for loans from the Small Business Administration.

Tracy Gallegos, a Las Vegas-based partner and leader of the cannabis team at the Duane Morris law firm, said plant-touching companies find raising funds difficult because capital sources have seen how challenging and expensive it is to operate a successful cannabis business.

“Whether they are receiving equity or providing a loan, capital sources have taken off the rose-colored lenses they had on a few years ago,” Gallegos told MJBizDaily.

“There’s a lot more due diligence that is being conducted; lenders are requiring corporate restructuring in some cases, and deals are becoming much more document-intensive.”

Now, instead of “handshake” deals, investors and lenders require much more documentation, which can be intimidating for early stage marijuana businesses that don’t have experienced professionals to review documents for them.

“It becomes a lose-lose situation, which is why we’ve seen so many licensees in bigger markets like California shutting down,” Gallegos said.

Singal said some of Cannect’s investors were interested in investing more in the company, so it made sense to open a second funding round that allowed a group of them to acquire additional equity.

One limited-liability company with about a dozen members invested the full $7 million, he added.

“Debt is quite expensive at the moment, and our goal has always been to limit the amount of debt that we carry,” Singal said.

Finding an investment match

The type of investment vehicles cannabis companies use largely depends on geographic location and whether they’re startups or operators with a track record of success.

“I’ve seen a lot of companies – both startups and established companies – seeking funding from family and friends, self-funding if they have the resources or debt financing,” Gallegos said, noting that debt financings have slowed because of high interest rates.

“Now that rates are starting to come down – and if they are decreased as much as economists believe they will decrease by the end of 2024 – I suspect that debt financing will become a popular option again,” she said.

Although there have been short bursts of optimism, the anticipated rescheduling of marijuana hasn’t made raising capital any easier – and the approaching election has slowed fundraising activity, Gallegos said.

“There will always be some companies seeking capital regardless of economic conditions, but we’re not seeing the type of capital raise activity we were seeing a few years ago,” Gallegos said.4

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Large companies raising debt

Frank Colombo, managing director of data analytics and investment banking at New York-headquartered Viridian Capital Advisors, said that while 2024 hasn’t been an outstanding year for capital raises, they’re up 226% because of debt issues of greater than $100 million.

Cultivation and retail account for 50% of capital raises, which is directly related to the prospect of marijuana being rescheduled, Colombo said.

Last year, there were no equity raises larger than $100 million, according to Viridian Capital Advisors.

“From 2022 on, more than 80% of all financing for licensed cultivators and retailers has been debt,” Colombo said.

“Eighty-six percent of all capital is for public companies, and almost all of it – 98% – is debt.”

Margaret Jackson can be reached at margaret.jackson@mjbizdaily.com.