Industry & Investment

Due Diligence: Tips For Investing In A Cannabis Startup

August 21, 2017 / By 3C Team

There is no doubt that investing in a new company is risky business. With a very high failure rate for cannabis startups (at 97% as compared to 75% for other industries), it is essential for investors to do their due diligenceĀ  before investing in a cannabis startup. If you can handle the financial risk, consider these 7 basic tips for investing in a cannabis startup:

Investing In A Cannabis Startup

Research The Management Team Of The Cannabis Startup

Knowing and trusting the people that will execute the plan and operate the cannabis startup is even more important than understanding their business model and their unique value proposition. Don’t be afraid to ask a lot of questions and take notes. Without an intelligent, charismatic and business savvy CEO and a solid management team, even the best business models have little chance for success.

Understand State and Local Regulations

Is the cannabis startup you are looking to invest in compliant with the myriad local and state marijuana laws? Do you understand the potential risks of investing in an industry that is currently illegal under federal law? With an experienced cannabis attorney on your side, along with a cannabis consultant who can properly vet the cannabis startup, you can rest assured that you are not breaking the law. Take time to understand the laws in your city and state, and make a point to fully understand all of the regulations that could potentially impact investing in a cannabis startup. While some laws are ambiguous, or even contradictory, you will be glad you did your research to better understand the cannabis business landscape.

High Failure Rate of Cannabis Businesses

As we mentioned earlier, investing in a cannabis startup is pretty risky. There is a lot of excitement in the marijuana community right now with cannabis becoming legalized in many states throughout the U.S. In addition, the global movement to legalize marijuana is picking up steam as Canada, Germany and other countries have legalized medicinal marijuana. As the cannabis industry grows to maturity, large amounts of capital will be invested. Some investors will lose most or all of their money while others will enjoy fantastic returns on their investment. Just like investing in stocks, commodities or futures markets, you must understand the risks before you invest.

Evaluate The Local Market

If you are considering investing in a startup dispensary, for example, research the local market to understand the demand for cannabis in the town where that business will be operating. Is the physical location desirable for this type of business? Is the market saturated? How have other cannabis businesses been treated by local authorities? Research marketĀ demographics, understand consumer psychology, and assess the uniqueness of the cannabis products the business will produce and/or sell.

Consider Forming A Partnership

In order to reduce risk consider partnering with one or more cannabis investors you know and trust. Make sure that your partner is trustworthy and has a solid investment and financial history. Splitting the risks and rewards can be a wise decision. As they say, two heads are better than one. Be sure your partner is in it with you 100% and is willing to contribute to their share of doing due diligence as well as their financial commitments.

Support The Cause

Even if you’ve never consumed cannabis in your life it is always good to be in full support of whatever you decide to invest in. You don’t need to know the difference between indica and sativa, but you do need to know that you are committed to the cannabis industry and it’s success as a whole. Don’t take on a project without knowledge or concern for the bigger picture.

You may have already decided if investing in the marijuana market is a good choice for you or not. If you do decide to invest, remember to do your due diligence before investing in a cannabis startup. In order to minimize your risk, do as much research as you can, and consider hiring a professional consultant to help you vet the business. There may be things you wouldn’t even know to ask or to look for. In the case of investing, you probably want to minimize the surprises.

There is a lot to consider whether you are new to investing in cannabis businesses or an expert in the field. Don’t let the high failure rate dissuade you. Marijuana investment opportunities are expanding worldwide and there is real potential to capitalize on this rapidly growing industry.

Do you have someone you can trust to help you vet a cannabis startup prior to investing?

Disclaimer: 3C Cannabis consulting makes no guarantee of you getting a positive return from any investment in a cannabis startup.

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