In part one, we discussed the importance of scalability and unit economics, as well as strong leadership, regarding your cannabis company’s financial readiness.
In this article, we’ll discuss two other facets that signal your company’s financial readiness: strategic growth and market opportunity, and asset strength and differentiation. Read on to improve your chances of securing funding.
As before, we will refer to “cannabis company financials” as “cannabis financials” throughout for the sake of brevity.
Strategic Growth & Market Opportunity
In an unpredictable industry, investors are looking for any measure of certainty you can give them. To chip away at that glacier of unknowns, you should have a data-driven growth plan that outlines a realistic strategy for capturing market share and expanding operations. Having such a plan will bolster your cannabis financials in several ways. This growth plan signals to investors your company’s chances of surviving by evaluating your SWOT analysis (strengths, weaknesses, opportunities, and threats) and your KPIs. Your company needs KPIs in place, but it also needs to show there is a “strategy in place driving the capture and analysis of these KPIs.” According to CohnReznick, a company that helps organizations optimize performance, manage risk, and maximize value
This growth plan also indicates you have done your due diligence regarding market analysis, such as identifying licensing opportunities — a major consideration in the cannabis industry, where licenses are expensive, scarce, and complex. As part of this market analysis, you should demonstrate that your business has identified a large addressable market: in other words, a market segment where the potential total revenue is substantial and the customer base is large. This is where the data comes in. Your data-driven growth plan will indicate the total addressable market’s (TAM) size and potential for growth. Your TAM should also be broken down by segments, such as medical or recreational, and other relevant components.
As BSDA, a cannabis analyst company, notes, your TAM is crucial to investors, as it shows your growth potential. BSDA also notes that calculating a TAM is paramount for risk and opportunity analysis, forecasting, and benchmarking.
A data-driven growth plan is essential, no matter where your cannabis financials sit in the supply chain — from cultivation to retail. This plan will demonstrate to investors that you have done your homework and are a business worth looking into.
Asset Strength & Differentiation
Your asset strength refers to your cannabis financials’ ability to meet all financial obligations, attract investment, and weather financial downturns. This strength is largely determined by the sum total of your tangible and intangible assets, including facilities, brand, licenses, and intellectual property. Your cannabis financials’ defensible assets — also known as defensive intangible assets in accounting — will be of particular interest to investors, as they go hand in hand with differentiation. These defensible assets comprise patents, proprietary processes, and branding elements that insulate your company’s market position. As the accounting term suggests, these are defensive tools that separate you from the competition rather than directly generating revenue.
Patents, for example, are a tricky subject in the cannabis industry, as the plant is federally illegal. However, this hasn’t stopped cannabis and hemp businesses from securing patents, as MJBizDaily, a leading cannabis business publication, notes. Moreover, as Harris Sliwoski, an international law firm, explains, patents are becoming ubiquitous in cannabis financials because they create barriers preventing other businesses from using your company’s advantages. The law firm also says that patents can be bundled into portfolios for sale or licensing, or simply used to increase your valuation during acquisitions or investment rounds.
Some of these patents include cannabis strains, cannabinoid compositions (unique formulations of cannabinoids such as THC, CBD, and CBG), extraction methods, infused products, breeding methods, and testing and safety equipment. And these are just a few of the many patentable opportunities in the cannabis industry. As Cannabiz Media puts it, patents are “great opportunities to show investors you have an ‘undisputable competitive advantage,’” demonstrating you have created something “completely novel” with government protection, which could give your company a significant edge for decades.
Conclusion
Many companies in the cannabis industry are looking to secure additional funding. We exist in a small pond with many fish, all competing for the scarce amount of food that’s doled out. While securing every advantage is a necessity — and a topic that could fill a book — a good start is focusing on scalability and unit economics, and demonstrating strong, experienced leadership. In addition, your cannabis financials must include a data-driven plan that exemplifies your strategic growth and market opportunity, as well as displays asset strength and differentiation, which can take the form of defensive intangible assets such as patents.
At BTA Cannabis CPA Tax, we’re happy to do our part in ensuring your financials are sound, that you adhere to relevant compliance requirements, and that you are aware of any regulatory fluctuations that may impact your cannabis financials.
