Whether you’re a startup looking for pre-seed funding or a multinational company seeking Series C+ funding, your cannabis operation will need capital at some point. If you want growth and scalability, you will need more capital. When you hit those fallow periods common to cash-only businesses — and the accompanying unpredictable revenue streams — you’ll need access to capital. However, the competition for this capital is like a family of six kids vying for the last pork chop: it’s a fierce struggle where only the hungriest and most prepared will get what they want. Read on to learn about three red flags that scare off cannabis investors — and how to fix them.

Lack of Transparency and Poor Documentation

As we discussed in our article on not being investor-ready, transparency is paramount in the cannabis industry; it signals to investors that your business has a feasible plan. If your business cannot or will not provide clear data about its operations, financials, or compliance status, you are broadcasting a red flag to would-be cannabis investors. Essential to this transparency is due diligence. As the law firm Harris Sliwoski warns, if a seller can’t adequately answer due diligence questions, speeds through the closing process without adequate disclosures, or fails to provide complete records, they’re essentially warning investors to stay away.

Fortunately, the solution is obvious. Be prepared for due diligence: have organized, current financial records; initiate disclosures, including tax filings, licenses, and compliance documentation; and make sure investors have enough time to review your materials. Nothing screams “suspicious” like rushing someone.

Compliance Failures and Regulatory Risks

Does your company have a compliance plan ready? Is the plan missing or including expired licenses? Does your business have a history of regulatory infractions? Then, congratulations — you have just created a sizeable red flag to deter investors. Legitimate investors don’t respect (and likely won’t fund) a business that operates with ambiguity or isn’t shy about taking shortcuts.

Besides shortcuts, missing or expired licenses, and regulatory infractions, investors are going to scrutinize your compliance history in other matters. According to the law firm Clark Hill, this includes ensuring that “the appropriate legal entity is holding the type of license that is required,” as well as putting under the microscope “founders and operators of that business and the direct or indirect ultimate equity owners of that licensed entity” to verify compliance and discern any risks that could result in the operator losing their license.

Still feel like adhering to all compliance mandates isn’t strictly necessary? According to attorney Aaron Pelley, most of his company’s business comes from litigation, and it’s “stupidly expensive.” Pelley says, “The cost of having proper things set up in place, having the proper documents, having the proper contracts so that they’re airtight… it’s to a factor of like a hundred sometimes of how much you could have saved.”

Pelley warns that $3,000 in legal work could become $250,000 in litigation expenses. An investor isn’t looking to fork over money that is just going toward your legal fees.

Again, the solution is not complicated. Don’t cut corners. Make sure your licenses are up to date. Consider hiring a chief compliance officer. Ensure your operation is compliant with all local, state, and federal regulations. If you follow these compliance must-haves and avoid taking regulatory risks, the future will look a little brighter for securing that much-needed funding.

Unrealistic Financial Projections and Overpromising

Unrealistic financial projections do not earn you any favors with potential investors. Pitch decks that are zealously optimistic do not sway them either. Unfortunately, unrealistic financial projections have become something closer to the norm rather than the exception to the rule, so don’t fall prey to this mistake and potentially ward off the cannabis investors you may badly need.

Further, do not overpromise to would-be investors. Confidence is key in life, but overconfidence — or undue optimism when it comes to financial projections — can cost your business credibility, scare off cannabis investors, and potentially expose your operation to a fraud investigation.

The solution, again, is straightforward. Set realistic growth expectations. Ensure financial projections are conservative and reflect the current market situation. Do not make promises that you cannot support with hard data.

Conclusion

You are all set to realize your dream of opening a cannabis business. Or maybe you are just looking to take your company to the next level. You want to stay competitive, or you’re simply cash-strapped. For these reasons (and many more), you will need additional funding. It’s not going to fall from the sky. And worse, you’re far from the only game in town looking to secure funding from limited sources.

Don’t commit easy blunders like being dodgy when it comes to due diligence. Have your documentation airtight. Be relentless with compliance; know without a doubt that your licenses are current. Avoid regulatory violations like your life depends on it — the life of your business might. Set prudent financial projections and eschew overpromising. Being mindful of these red flags doesn’t guarantee you will get the necessary funding, but it increases your chances — and any advantage in the hypercompetitive world of cannabis is essential.