What Angel Investors Are Looking For in the Cannabis Industry

Angel Investors

Year-to-date, the quantity of capital invested in private companies has materially increased, representing 31% of all capital invested within the cannabis industry.

Over the past ten years, the startup nature of the cannabis industry has attracted the angel investor as a key source of early-stage capital for emerging private cannabis companies.

Although angel investors generally provide smaller amounts of capital than family office or fund investors, the role of the angel investor within the cannabis industry is critical. This text examines the angel investor in cannabis and how this type of investor has evolved.

An angel investor is usually a private individual who provides capital for a business startup seeking its first round of funding.

This sort of funding usually takes the form of equity or convertible debt. It is considered the riskiest type of capital due to the very early stage nature of the companies they invest in.

The 12 Business Sectors of the Cannabis Industry and which of them Attract Angel Investors
In November 2014, Viridian published the primary cannabis industry report that identified the 12 business sectors of the cannabis industry.

In January 2015, we launched the Viridian Cannabis Deal Tracker, which tracks and analyzes all capital raises and M&A transactions across these 12 sectors and provides proprietary data on deal structures and terms.

Also read – Are Marijuana Stocks On Cash App?

By digging into our Deal Tracker data, we found that five sectors have attracted angel investors within the main.

The five sectors that attracted angel investors were:

Consulting Services
Consumption Devices
Infused Products
Miscellaneous Ancillary

What factors permit companies in these five sectors to attract angel investors?

Low Capex: Startup companies in these sectors require relatively low capital expenditures and, as a result, lower amounts of startup funding. Since angel investors generally provide lower amounts of capital than family offices or funds, these sectors are ripe for angel investment.

No State or Federal License Requirements: These five sectors don’t require state or federal licenses which are very expensive and time consuming and sometimes require “at-risk” capital. This compares to sectors that do require complex licensing arrangements like Cultivation & Retail and Biotech.

Low Start-Up Costs: Companies in these five sectors have low start-up costs enabling angel investors to supply the necessary startup capital.

“Mom and Pop” Businesses: Consulting companies, infused products companies, and advertising companies are often started without large staffing or office requirements, lending themselves to angel investors.

Also read – Why is Aurora, Canopy, and Sundial Growers’ share all down today?

Public vs. Private Cannabis Companies and therefore the Impact on Angel Investors
According to the Viridian Cannabis Deal Tracker, in 2021, public cannabis companies attracted 83% of all capital invested within the cannabis industry 2021 vs. only 17% for personal cannabis companies.

This was the water line for public companies since we analyzed this in 2015. This meant there had been fewer opportunities for angel investors who, by definition, invest in early-stage private companies.

However, through the week that ended July 15, 2022, the quantity of capital invested in private companies has materially increased, representing 31% of all capital invested within the cannabis industry, providing greater opportunities for the angel investor.

Why this turn?

Public Cannabis Stock Prices Are Down: the typical cannabis stock ETF is down over 50% YTD, meaning that there are more investor outflows from public cannabis stocks.

Private Cannabis Valuations Are Down Even Further: This has driven more angel investor interest from those early-stage investors eager to invest in the industry and seeing less expensive entry prices.

More States Enacting Medical and Recreational Cannabis Programs: This suggests more early-stage, private cannabis investment opportunities in these states.

Due Diligence for Angel Investors

At Viridian, our principals have been advising, financing, and buying/selling emerging growth companies for over thirty years.

Within the cannabis industry since 2014, we’ve reviewed over 2,500 business plans, business models, and financial forecasts and are involved in hundreds of millions of dollars in financing and M&A transactions.

We take due diligence seriously—across management, operations, financials, reputation, and knowledge.

Management Experience: In a relatively new industry like cannabis, direct, legal business experience within the industry is rare.

We glance for prior success in startups where management has founded, scaled, funded, and exited businesses.

Funding Runway: Investors must be cautious about the funding needs of a company they’re looking to invest in and whether the financing they’re participating in provides the required financing.

Also read – Nasdaq News: Medical Marijuana, Inc. CEO on U.S. Cannabis Market

No investor wants to be a part of an ” underfunded ” company and will have to raise additional, potentially dilutive, capital soon.

Financial Forecasts: a corporation that an investor is looking at must have a set of high-quality financial forecasts that are well thought out, detailed, accurate, and understandable. This reflects a management team that’s experienced and focused on their business.

Forward Thinking: A startup company goes to need several rounds of growth capital. Angel investors must remember the potential dilution and negative effects of “next round” financings.

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