Capitalizing on Cannabis Capital
How cannabis businesses can best attract investment opportunities
In an earlier post, we considered five trends in the 2019 nutraceutical market. Each trend represents both opportunities and challenges, and we promised to look more closely at many of those. “All things cannabis” was one of the 2019 trends we identified, and it’s hard to overstate the importance of that trend within the large nutraceuticals industry.
As the industry continues to gain significant (and legal) footholds in both Canada and the U.S., one trend-within-the trend is the growing interest of investors in the cannabis industry. And while there are obvious opportunities within this trend, there are challenges as well—mostly surrounding the underlying workflows, processes and financial management systems needed to attract, impress and reassure equity investors. Let’s review the state of cannabis investment today, and then consider four key operational elements investors look for and savvy cannabis companies are striving for.
Cannabis goes corporate
There are now dozens of publicly traded cannabis companies and the best are already worth billions. More than 50 U.S. cannabis companies are now trading on the Canadian Securities Exchange (CSE) as they race to raise capital to scale their operations. Meanwhile, Canada’s largest cannabis firms found their way onto the New York Stock Exchange (NYSE) and Nasdaq in 2018.
2018 was a very busy year for Canadian cannabis companies, as Altria (makers of Marlboro), entered the Canadian cannabis market with a major investment in Cronos Group, a cannabis company in Toronto. Constellation Brands (parent company of Corona Beer) put $5 billion into Canopy Growth, a publicly traded Canadian cannabis company. And Molson Coors, yet another brewer, formed a joint venture with a cannabis company in Quebec.
The writing is on the wall: small-, medium- and large-sized cannabis businesses will continue to be acquired by bigger companies, whether by choice or simply to gain access to the capital required to survive. Interest from investors can sound ideal to many small and growing cannabis firms, but in order to appeal to investors—both public and private—they must demonstrate a certain level of maturity, both surrounding production and in terms of their accounting. What are investors looking for?
- Investors want auditable financials
Cannabis and nutraceutical companies seeking equity funding must be scrupulous in their accounting. Investors want to see that their targets have the financial and operations reports that allow them to deeply understand a business in familiar, industry-standard formats, and from an accounting system that is secure and auditable.
Entry-level accounting applications do not provide the strict accounting controls and audit trails that businesses seeking outside investment need. Many do not promote or enforce business process controls throughout your operation, including ensuring compliant separation of duties. It also doesn’t provide your management team with deep financial and operational performance visibility critical to achievement of your shared objectives to increase market share, revenue and profitability.
- Investors need to know you can grow
Investors need to know they can grow a company. Cannabis companies seeking equity investment are wise to adopt a financial management solution that can unequivocally handle that growth in smart, compliant ways. Investors want to know their investment targets have the infrastructure to grow and generate a return on investment that meets their expectations.
Many smaller companies and startups start with an entry-level accounting system. They are perceived as easy to implement and easy to use. However, as you grow, and your business requirements get more sophisticated, you’ll likely run into the frustrating limitations of such a system. Our clients relate stories of time-consuming consolidations, inter-company transaction processing limitations, slow and unreliable reporting, error-prone manual processes and security issues. The fact is, entry-level applications simply aren’t designed to provide the robust financial-management functions a cannabis business preparing for or receiving equity investment needs.
- Investors demand a safety protocol
Recalls are bad for business. Not to minimize the very real risk to human health, but a recall event is enormously costly for an organization, both in terms of financial losses and damaged reputation. In a relatively new industry like the cannabis industry, it’s safe to say that regulators will be keeping an especially watchful eye.
Entry level accounting systems are simply not designed to provide the detailed level of tracking and quality control cannabis businesses need. Only a robust ERP solution designed for the process manufacturing/nutraceutical industry can offer the tools necessary to show investors—and customers—that your organization takes safety seriously.
- Investors want actionable insight
Investors love reports. They want insight into every aspect of your operations. Access to timely relevant data—sliced and diced, detailed and consolidated, enables you and your investment partners to make the right decisions that result in repeatable, profitable growth. Robust and flexible reporting tools providing visibility necessary to navigate market changes, understand performance and make course corrections as needed.
Entry-level software users often export data to spreadsheets in order to filter and calculate data sets against operational data. Obtaining reports such as profit and loss by location or revenue by employee are difficult, if not impossible. These applications simply cannot offer a sufficient depth and breadth of insight into the financial and operational aspects of your company to satisfy investors that you’re a worthy target and to keep you profitably on track once you receive that investment.
Even if your cannabis/nutraceutical business is not seeking investment capital, it’s wise to put the people, processes and technology in place to ensure you’re not only on strong footing now, but you have the capacity to grow, pivot and adapt with the market. Caron Business Solutions works with nutraceuticals ready to claim their share of the lucrative market. Contact us to start the conversation.