Stop! Before you decide to give any money to your buddy’s marijuana start-up, here are 4 things to consider.
Cannabis and CBD are the hot industries in the U.S. and Canada, both expecting to be a $25 billion market by 2025. There are more than 30,000 marijuana businesses employing over 225,000 people with the average store grossing in excess of $2.5 million. With all the buzz, it seems like almost every friendly gathering now features at least one canna-business pitch from a friend: “For only $5,000, you can get in on the ground level in this amazing opportunity!”
Before you jump in, here are the 4 things to consider before investing.
Only invest money you can afford to lose
Investing does not mean giving away your money, rather putting it to work to potentially earn more money in the future. This distinction is important and implies that you have to be careful about jumping into the industry. Jan Hendrickson, a former U.S. Bank executive, says, “All start-ups are risky. Only put in what you can afford to lose and understand your return will take up to twice as long as you think, and will likely be smaller. Plan for that.”
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Remember, before they hit it big, Walt Disney, France Ford Coppola, and George Foreman all went bankrupt in early business.
Alternatively, if all you want to be is a good friend, cozy up to the idea of not getting your green back, but do make sure you get something else in return, like free products or a lifetime discount at the business in question.
Know the market and the business plan
While an idea can often sound innovative, the path to execution is what’s critical for success.
Michael Leen, who has founded and sold a clothing company and a sales company shared “Before you invest, do you know the market, and do you understand the business plan?” If you don’t understand the core of the business plan and the expectations, you could run into a rude awaking. Is it trying to solve a problem or is responding to a consumer need? Do your own independent research on similar businesses, the competition and the market.
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A well-developed written business plan should include a rough roadmap of what future milestones to expect as a function of your funding. These expectations will increase accountability if the business deviates from its plans.
Add in cannabis’s federal illegality and complicated state-by-state legal landscape, and you have compounded risk. Cannabis business has higher costs and no tax exemption. Is the funding of the plan realistic? A good rule of thumb is that it will take twice as much money and twice as long to recoup.
You should consider if your friend’s cannabis startup is able to uniquely address an existing problem and if not, it might not be the a sound investment.
Know the management team
Diane Czarkowski, a founding partner at Canna Advisors, shared, “Has your friend ever started a business before? This is not an industry for first-time business owners. It is challenging to be a start-up and being a start-up in a start-up industry is even more complicated.”
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“And that’s the thing,” adds Javier Hasse, managing director at Benzinga Cannabis. “Starting a successful business is easier said than done. Even the best though-out business plan is virtually worthless if not accompanied by strong execution. Entrepreneurs need to be equally able to stick to their plans when needed, and to change their plans when warranted,” Hasse, author of the best-selling book “Start Your Own Cannabis Business” explains.
How organized are the founders, do they have the skills and persistence to complete the project, how well (and often) do you communicate with your friend, and can they share both good and bad news — these are all things to consider before you write the check.
When and how do you receive a payoff?
“You should have a clear understanding of how your investment is returned to you. Is it from profits or do they plan to sell and you get portion of the sale”? Says Noa Kahner, founder of Kahner Global, who runs a successful series of investor conferences in the U.S., Canada and the United Kingdom.”
It is easy to get caught up in the excitement of building a company, but make clear how your investment is going to grow and how to cash out. Since most start-ups fail, if the new business you decide to invest in succeeds, make sure you know how you’ll get your money.