John SchroyerMoney is on the minds of many executives in the cannabis industry, as many sources of capital have dried up this year and the marijuana trade stares down the barrel of a possible recession.
That reality was reflected in the speaking lineup at the Las Vegas cannabis conference MJBizCon this week.
“There’s no question that there’s significant headwinds. Just in the last three quarters, the Fed has raised interest rates by 300-plus points,” said Steve Ham, managing partner at Altmore Capital, who spoke at the conference Tuesday. “It’s time to tighten up your belt. You need to think about getting to the other side of the river. Inflation is hitting everyone.”
On top of that, investors are getting more savvy about the cannabis industry overall – and asking tougher questions of entrepreneurs than they used to, said Arun Kurichety, COO and general counsel at Petalfast, after a panel moderator cited a report that nine-figure capital raises in cannabis are down by 78% this year.
Which begs the question: Where and how can cannabis companies get cash to tide them over if they need it?
The answer: Wherever they can. And a lot of those available funds are convertible debt with expensive terms.
“A lot of the deal terms are a lot more tough for the company side, and lenders and investors have more of an ability to exert leverage,” Kurichety said.
That’s led to less favorable deals for cannabis industry borrowers writ large, many of whom aren’t in a position to repay expensive loans, he said.
But for some companies, loans are still a better option.
“Debt is like dating, whereas equity is like marriage,” quipped Sahar Ayinehsazian, a partner at the cannabis powerhouse law firm Vicente Sederberg, arguing against marijuana companies selling equity stakes for a short-term financial boost.
But, she admitted, debt lenders are much more readily available than equity financiers.
Entrepreneurs can also take more creative approaches to accessing funding.
One option for cannabis companies that hold state or local licenses, Ham said, is using the business license itself as collateral for a loan.
Other options include sale-leaseback deals if a company owns property, noted Sherri Altshuler, a partner at Canadian law firm Aird Berlis.
And the Department of Energy is overseeing PACE (Property Assessed Clean Energy) financing loans, said Steve Lustberg, the managing partner of Upwise Capital, which has already been taken advantage of by several large multistate cannabis companies.
What might not be a great idea, according to several speakers? Taking the company public as a way to raise capital. Doing so often creates more burdens that typically outweigh the benefits for marijuana businesses.
Industry outlook
Most speakers also were pessimistic about the chances of federal reform legislation – particularly the SAFE Banking Act – opening the financial floodgates for the industry as well, with most giving the bill at best a 50% chance of becoming law in the near future.
“If we don’t get (the SAFE Banking Act), we’re not getting anything for quite some time” from Congress on marijuana reform, predicted Colin Brown, chief legal officer at The Parent Company. “If it happens right now, it’s the worst possible time … with the economic backdrop we have going on. But beggars can’t be choosers.”
