CANNAINVESTOR Magazine March / April 2017 - Page 128

Where the money comes from.

In order to properly utilize this great source of funding, cannabis entrepreneurs need to understand the private equity model. The question most frequently asked is always where the funding is originated. Private Equity firms usually raise capital from high net-worth individuals or large financiers that do not directly want to invest in companies. This includes organizations like New York State Teachers’ Retirement System (NYSTRS), California Public Employees Retirement System (CalPERS), and Non-Profit Foundations. These entities want stable growth in their funding, which is why instead of directly funding companies (which may fail), they prefer to invest in the private sector. Private Equity firms then invest the money in multiple companies, which diversifies the funding of these entities, thereby adding stability to it. So when private fund returns are strong, a lot of workers, teachers, and pensioners benefit.

How Private Equity firms are changing the cannabis industry.

Private Equity firms do not just give money to a company and let them do what they want. Since they make such a sizable investment, they also focus on ensuring that the fund is managed and disbursed properly. This may sound problematic, but it is just what the cannabis industry needs. P/E players are known for their use of earnings before interest, taxes, depreciation, and amortization (EBITDA) multiples as a rough approximation of value and a tool for disciplining management. This makes some entrepreneurs uncomfortable as they may feel like the Private Equity firm is taking too much of a short term approach.

It is also good because this is what the cannabis industry needs. Right now there are a lot of cannabis entrepreneurs who don’t really have a proper business plan. We definitely need a more professional and structured approach in this sector. In order for this industry to become a multi-billion dollar market, it must be integrated with corporate value builders. It needs attorneys, accountants, distribution channels, sales managers, HR, payroll representatives, and other professional trades to operate more of a corporate structure. After all, this is what the government wants to see in order to legalize it on a federal level, and to have a grounded assembly to collect taxes.