Get funded: 5 cannabis fundraising tips from Poseidon Asset Management

Emily Paxhia is co-founder and managing partner of Poseidon Asset Management, a California-based cannabis-focused investment fund that has been operating since 2014. In her own words below, lightly edited for length and clarity, Ms. Paxhia shares five tips every aspiring entrepreneur should consider before pitching or seeking cannabis business funding from a potential investor.

1. Do a basic competitive analysis

I am seeing a lot of ‘me toos’ in this space, and by that I mean a lot of people try to do the same thing. A perfect example would be in delivery. I see a ton of people just trying to get into the delivery space, which has not really been a proven successful model in this industry at all.

You need to at least take a look at the market to see what you’re up against in terms of competition and people’s ability to underestimate the competition in this market

That is one of the things I see most frequently. We are seeing a lot of that, people coming into the space and saying they are the first when really they aren’t.

The expenses around everything from extra legal work to more expensive insurance to banking. In this industry, everything costs more.

2. Do not feel obliged to wait for legalization

If you are well-positioned to capitalize once the laws do change, then [seeking funding] is something to think about now.

But, one caveat to that, and also one of the biggest gaps I’ve seen in this most recent crop of cannabis entrepreneurs is that they’ve almost taken for granted that legalization will be happening and will continue at its current pace. I have been disappointed to see how uninformed they are about the challenges posed by the regulatory framework and the potential for this all to work backwards.

3. Read the regs and play politics

I would highly recommend that founders do the legwork to understand the regulatory environment and understand some of the ways different regulatory environments have rolled out in the past because some of those missteps we will see again and again and they will impact the ability for a business to scale and will impact the modelling of those businesses.

I had a meeting with a founder the other day and I was shocked to learn he did not understand how far we are with the federal banking regulations (i.e. SAFE Act)

You have to become incredibly engaged politically, it is a necessity in this space. It is table stakes, but if you’re good at it and you can get the right people, it is an edge. A competitive edge, for sure.

I would also, if I were them, definitely be asking investors which policy groups they contemplate to be the most effective. 

4. Do not raise more than you need

I would be very careful about that first raise. Don’t over-raise. Raise enough to get some key metrics up on the board or proof points. Raise enough to get that and then do your higher round.

Then you can start looking more at sources such as VC funds, because then your timeline and your return profile look better.

Some of the best operators I know in this industry have actually raised less capital than some of the others. You’re seeing the big headlines about Tilray and Aurora doing all these layoffs, but to those companies, capital was a commodity. It made them not as judicious about the spending and the way they thought about allocating resources because they didn’t think about when the capital markets would turn off.

5. Pitch the right places at the right time

If you are pre-revenue and really, really early or still at the concept stage, in this industry I would look at the angel investor network, I would look at family offices and high-net-worth individuals. That can be patient capital. They don’t have a timeline for a fund or a target return profile persay. 

I would look for patient capital in the beginning. I would look for good advisors in the beginning. And on that Series B round I would be looking for a group that may follow on your Series A and you can quickly round that out once you identify the lead, or that might want to continue to lead rounds for you. I’d want to make sure those people can come back.

Then, if you’re looking at funds, I would probably look for funds who are trying to add value beyond just the cheque. They can help you optimize or expand your network.

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