What is a Capital Raising Strategy and Why Should You Have One for Your Cannabis Startup?

By Nicolas Arkells, JD, MBA, CSO of Wrazel

A capital raising strategy is a long and short term plan to determine who, what, when, where, why, and how your company will obtain the outside funding needed to be successful. There are basically two approaches that can be utilized in planning for your capital raise. You can attempt to raise all the money needed in one round or plan on setting up multiple rounds. you will then need to coordinate with legal counsel regarding what type of securities regulation will work best to perform the raise.

Why You Shouldn’t Try to Raise All of it at Once

Trying to raise all the capital that will ever be needed in one round is tempting for many founders because of the simplicity it offers. In theory, it means that once the capital raise is concluded, the founders can focus on running the business instead of participating in further capital raising activities. However, in my experience, this “go broke or bust” strategy is almost never successful.

Early stage companies are usually unable to rationally sustain the business valuation needed to successfully accomplish this approach. Further, this approach will ultimately cost you more in equity than a multiple round capital raise because your company’s bargaining position is at its weakest in the early stages. Investors also tend to have many concerns about the venture being extremely high risk at an early stage, which is why it is very difficult to raise capital for a newer company. Investors also tend to favor the accountability and control that comes with multiple rounds because capital is only released in tranches based upon achieving pertinent milestones.

The only startups that tend to successfully raise a large amount of initial capital in the cannabis space tend to have substantial tangible assets and/or celebrity founders who usually have an extensive track record of prior successful exits. In most cases, early stage venture valuations simply cannot sustain a “go broke or bust” approach to the capital raising process. Having a considerable capital infusion all in one round also tends to produce tremendous waste and inefficiency as seen in some of the larger publicly traded cannabis companies.

Raising Capital in Multiple Rounds

Although more challenging, taking the time to establish a well-planned multiple round capital raise tends to yield the best results in the shortest amount of time. This type of strategy also prepares you at the onset of the typical investor situation where the investor tends to commit only a smaller amount of capital for their first investment into your company. The investor will then invest further capital in larger amounts and sometimes even bring other investors into the deal once they are satisfied that your agreed-upon milestones can be achieved. Doing conventional multiple round strategies also means you can raise more capital with less dilution to the founders’ ownership stakes because each subsequent capital round gives you greater leverage in your investor negotiations as there is less perceived enterprise risk.

The Different Stages of a Well-Planned Capital Raise

As your company advances into each round of its capital raise, different capital sources will become relevant. The diagram below shows what funding sources are the most appropriate at each round. There are of course exceptions to every rule, but time is something startups never have very much of, so it is critical to be as targeted as possible when determining what sources to pursue. The diagram purposely excludes capital aggregators such as investment banks because they do not manage any funds, instead they pursue these same sources on your behalf. ❖