CANNAINVESTOR Magazine September / October 2016 - Page 84

#3 A company that understands the macro picture and emerging market dynamics.

Being smart at cannabis isn’t going to cut it. If a company does not have a grasp on the dynamics of an emerging, highly regulated market, then you are in for a rocky ride. Cannabis is essentially a commodity that is currently enjoying a pricing profile that is designed to compensate people for the risk of being locked up in prison. I think we would all charge a pretty penny for absorbing that risk on a day-to-day basis. That is going to change, and what will take it’s place is commodity pricing, price volatility due to greater price elasticity and an huge increase in supply, the emergence of brands, and the entrance of big players in industries like tobacco, beverage, food, and basically consumer goods of every variety. If a company is not looking down the road at how it will address these systemic challenges then it may stumble its way to success with an absolutely incredible product, but that is a big risk to take as an investor. You should be looking for a team that has a grasp on the macro picture, as well as deep expertize in their own domain, or you should make sure that there are advisors and board members in the picture who can add that perspective to the company.

#4 A collaborative approach to terms

It’s not fair to expect cannabis entrepreneurs to think like early stage investors, or to be familiar with the conversation that is a necessary part of any seed investment. They have often not built their skills in an ecosystem that weaves together the investment and founder community in the way tech has done. They may well come from an activist or black market background. They may be incredible technicians or retailers or whatever, but, for most cannabis entrepreneurs, this is their first experience raising money. You are in a position to add value in this department to a company that you believe is promising.

If you can offer a clear set of terms that you would want to see added to a convertible note or other agreement that will actually be helpful to a company that feels like you can be trusted to support the negotiation in that way. They no doubt have an attorney who can advise them away from predatory terms, but it may be up to you to frame up the offer and then collaborate with them on getting to terms that work for both sides. This is actually a great exercise for as an investor, because you quickly learn if you are working with people who are teachable, open to your input and receptive to your expertize. Your job and responsibility is to take the high road, and make sure that you present a balanced offer that recognize the value on the other side of the table. Doing deals this way may seem counterintuitive, but it works, and it forms the foundation of a strong, transparent and collaborative relationship between you and the founding team. You are not looking for a company that necessarily understands how to come up with the perfect term sheet, but for one that will collaborate with you in creating that together.

84