Interviews
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Getting in Front of Investors in the Cannabis Space: Q&A with DCM Ventures

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The cannabis industry is no doubt growing quickly, with research projecting that the global recreational cannabis market will reach over $31 billion by 2022. The CBD market, alone, is forecasted to hit $22 billion by 2022. With cannabis businesses now listed on both the Canadian and American stock exchanges, more access to capital and operations exists today than ever before. To put it simply, the cannabis market is on a trajectory of explosive growth.

Kyle Lui, Partner at DCM Ventures, among the first Sand Hill Road VC firms to invest in the cannabis space, recently joined Atrium’s Jason Kornfeld for a conversation around fundraising recommendations for founders in the cannabis space.

From building a clearly defined pitch deck to finding the right investors, below are some of the key takeaways from their discussion. Or you can listen to the conversation in its entirety here.

 

Q: Tell us a bit about DCM and what makes the current opportunities in the cannabis space so exciting.

DCM is a VC firm with over $4 billion under management. We have started to invest significantly in the cannabis space and recently held Silicon Valley’s first major Cannabis Technology Summit (CannTech) this past May. Our core markets are the U.S., China, and Japan, although the cannabis market in North America is substantially larger than any other market right now.

We’re incredibly excited about all that’s been happening in California over the past 18 months and the trend toward mainstream consumers. According to Wall Street estimates, California alone projects to sell as much as $11 billion in legal weed by 2030 . This has presented the opportunity to create new brands that are category-defining with which consumers identify. We’re also eager about the current trends in CBD, given that CBD is further ahead than THC in terms of federal recognition.

Right now, we also see a lot of opportunities around software investments and logistics. As the industry continues to grow, many cannabis companies don’t necessarily have access to the more traditional resources of non-cannabis companies, whether it’s financial services or logistics. Seeing how different cannabis companies are tackling the complexities of the market through industry-specific technology is a fascinating area of focus right now.

 

Q: One interesting thing about the cannabis industry is that people love to talk about it; yet, there’s a cloud over who’s actually openly investing in it. How can founders identify the right investors?

One thing I would recommend for founders in this situation is to create a list of about 100 potential investors. From that, write down why you think they would invest in the cannabis space, whether they’ve invested in it previously, or whether they’re simply in your network and looking to invest in you, as a founder (managed in an investor tracking sheet). I was an entrepreneur before joining DCM and would leverage my network extensively to find investors who I thought would be interested in the vision I had.

These days, there are a ton of cannabis conferences, but they tend to carry a lot of noise. You can actually find a lot of information online about people who have invested in the cannabis space or have expressed interest in it. One thing I can’t stress enough, however, is the power of the warm introduction—it’s always better than cold emailing. At its core, finding a way in through a warm introduction represents resourcefulness.

 

Q: How do you know if you’re getting in front of the right investors and, equally important, how do you identify whether it’s going to be a good fit?

There are a few tactics that founders in the cannabis space can do here. The first is to research whether the potential investor has invested in the cannabis space previously. The next is to find out if they have invested in any of the competition. While founders should steer clear of investors who have invested in competitive companies, they do want to find people who have invested in comparable companies and will understand the business model of the company.

After getting an introduction, use that opening as an opportunity to ask some further questions that can better qualify your potential investors. It’s important to get some of that qualification solidified before actually sitting down and investing an hour of your time.

These can be questions as simple as:

  • Have you invested in companies at my stage?
  • Have you invested in companies with my level of revenue in this particular market?

 

Founder tip: Know your audience.

This is especially true for founders in the cannabis space, which is highly specialized and unevenly regulated with a ton of investor attention. Consider building multiple versions of your pitch deck—for those familiar with the space and for those who need more market education. For the latter, the focus of the deck should be on market education, the progression of the cannabis space, and its opportunity. Meeting with an investor who’s already familiar with the space? You can skip most of those education slides and instead focus in on the opportunity.

 

Q: Let’s talk pitch deck: What do investors really want to see in that pitch?

When it comes to crafting the right pitch deck, I would suggest first taking a step back and objectively asking whether your pitch deck clearly outlines what your company does or is planning on doing. I review thousands of decks every year and you’d be surprised how many of them don’t make it clear in five, 15, or even 50 slides what the company is actually doing or what makes their company differentiated from the competition.

Your pitch deck should very clearly outline:

  • What you do.
  • Why you’re different.
  • What the opportunity is.
  • Why your team is uniquely positioned to go after this opportunity.

Those are the questions that investors are thinking about when they’re reviewing a pitch deck: why this team, why this company, why this opportunity, and why this market.

 

Founder tip: Nail your elevator pitch.

The number one thing that you need to nail is your 30-second elevator pitch. I call it that but it really depends on how much time you have. There are actually two versions of it—and neither are truly 30 seconds. In 10 seconds, describe your business in a way that is very easy to digest. The second version is closer to your minute pitch with three to four talking points that augment your 10-second pitch. Start with your longer pitch and adjust the time as you need to.

 

Q: If a founder was looking to pitch to DCM, what would you recommend that they need to know?

DCM has been in the venture business for a long time and we’ve worked with a lot of folks in that time. Generally speaking, anything that comes in as a warm introduction tends to get more of our attention than a cold email or online submission. While we screen every cold email that comes through, it simply tends to be a lot of noise there.

Also, given that we’re an early-stage venture capital firm, most of the capital we deploy tends to be generally technology-focused and in the seed, series A, or Series B stages. With the cannabis space, there’s a lot of investment happening at the cultivation level and multi-state operators are really focused on getting licenses and expanding into more states. The companies we invest in have some sort of technology component, whether that’s around payments, software, or an approach that changes the consumer experience.

Lastly, it’s important for founders to think about whether they can build a big enough company and big enough brand before full federal legalization happens—when mainstream companies will be looking to get into the space. As a founder, you might have a solid idea with some decent traction, but how can you convince an investor that you can scale your company in a short amount of time to get ahead of full-scale legalization down the road?

You’ll either need to make yourself a desirable acquisition target or have the brand traction you need to compete with the bigger players in the future. Those are the things we evaluate when looking at potential investments.

 

Founder tip: Differentiate.

One of the challenges in the cannabis space is that investors are looking for companies where the product is differentiated enough from the generic version that cannabis companies would select this vendor over another vendor. Consider a CRM, as an example. Amid full competition, why would a cannabis dispensary select your cannabis CRM over Salesforce? Cannabis tech companies need vertical-specific features that are clearly differentiated that probably will take some time to build.

 

For more, listen to the full discussion in this webinar recording.

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Jason is a corporate attorney in Atrium’s General Counsel Group specializing in the representation of start-ups and emerging growth companies throughout various stages of their life cycle including corporate formation, structuring and governance matters, commercial transactions, venture capital financings, and mergers and acquisitions. He represents many startups across industries with a special focus on cannabis. Previously, Jason worked in the San Francisco office of Covington & Burling. As a startup and venture capital lawyer, Jason works to reinvent the legal services industry by offering technological efficiency and transparent pricing to clients. Outside of the office, Jason can be found skiing, surfing, or traveling. Jason graduated from the University of Southern California’s Gould School of Law and received his Bachelor’s at The University of Colorado Boulder.

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Kyle is an entrepreneur and product guy. As a Partner at DCM, Kyle helps entrepreneurs scale their companies and focuses on consumer internet, SaaS, and financial technology. Kyle’s investments include Lime, Eaze, hims, DocSend, Shift, Grin Scooters (Grow), TravelBank, Mendel Health, Wrike (Acquired by Vista Equity Partners) and Tapingo (Acquired by Grubhub). Kyle also served as a board member for BitTorrent (Acquired by Tron) and SavingStar (Acquired by Quotient/Coupons.com), and is actively involved with SoFi, SigFig, and Matterport.

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