Keeping it moving because "unlike fine wine, deals don't get better with age" In each episode of the EduPod Series host Ross O'Brien and Maggie Kelly from Bonaventure Equity take deeper dives into the business and finance fundamentals discussed in their weekly interviews. In Part 2 they offer a high-level walk through of the pitch and diligence process. They discuss a number of related topics including researching and sourcing the right investor, identifying the gatekeeper and building a rapport, understanding the demands of the diligence process and the importance of the founder/investor (long-term) relationship. Visit www.cannabiscapitalpodcast.com for episode highlights and the readiness assessment worksheet. Hello@cannabiscapitalpodcast.com Produced by PodConX Cannabis Capital - https://podconx.com/podcasts/cannabis-capital Ross O'Brien - https://podconx.com/guests/ross-obrien Maggie Kelly - https://podconx.com/guests/maggie-kelly Bonaventure Equity - https://www.bvequity.com/ Cannabis Capital Resources - www.cannabiscapitalpodcast.com
Keeping it moving because "unlike fine wine, deals don't get better with age"
In each episode of the EduPod Series host Ross O'Brien and Maggie Kelly from Bonaventure Equity take deeper dives into the business and finance fundamentals discussed in their weekly interviews. In Part 2 they offer a high-level walk through of the pitch and diligence process. They discuss a number of related topics including researching and sourcing the right investor, identifying the gatekeeper and building a rapport, understanding the demands of the diligence process and the importance of the founder/investor (long-term) relationship. Visit www.cannabiscapitalpodcast.com for episode highlights and the readiness assessment worksheet. Hello@cannabiscapitalpodcast.com
Cannabis Capital - https://podconx.com/podcasts/cannabis-capital
Ross O'Brien - https://podconx.com/guests/ross-obrien
Maggie Kelly - https://podconx.com/guests/maggie-kelly
Bonaventure Equity - https://www.bvequity.com/
Cannabis Capital Resources - www.cannabiscapitalpodcast.com
BV EduPod Part 2
Ross O'Brien: . [00:00:00] Hello everybody. And welcome to another episode of cannabis, capital the podcast. I'm your host, Ross O'Brien venture capitalist, and author of the book, cannabis capital. How to get your business funded in the cannabis economy. And I'm as always here with my Intrepid co-host and colleague Maggie Kelly.
Hello, Maggie.
Maggie Kelly: Hi, RAs and welcome listeners. We are interrupting our regularly scheduled programming to bring you our edgy pod series educational podcast sessions geared towards new founders recently. And part one of raising capital. We gave you five steps to begin your capital raise journey. If you miss that episode, please check out.
And part two of the raising capital series, we peel back the onion to reveal nuances of the pitch and due diligence process. We ask that as you listen, keep in mind that deals are like snowflakes everyone's unique. In this episode, we'll share the general process and people involved to give [00:01:00] you a better idea of what to expect now onto the show. Okay. Ross welcome back to the podcast. I'm looking forward to this episode because this is where the rubber meets the road for entrepreneurs. They built a startup, they've hit an inflection point that only investment can solve for they've assembled a killer management team, and the founder is ready to commit to raising the capital they need. so.
let's get started.
Ross O'Brien: Well, not only is this another podcast, Maggie, it's an EDU pod part two. I'm so excited to be back with this topic. And if anybody wants to see the information from part one or anything, we're going to link to it in the show notes. So I think this is the right place to start. Let's get into the pitch.
Your ready to pitch your business. Congratulations. It's just as simple as [00:02:00] finding the right investor and they're going to give you all the money you need, right.
Maggie Kelly: That is not correct.
Ross O'Brien: Oh, well, you are, you are so right Maggie. That is not correct. So in the last episode we talked about how important it is to vet your investors and the suitability of the types of investors that you're going to be speaking to.
Y you're going to them, why you're raising capital and what the rationale is for how they're going to generate a return and how you're going to build an amazing company. These are all really complicated nuanced conversations that are largely symptomatic of many times, years of building the foundations of a hyper-growth or growth ready early stage companies.
So I can't tell you too, how many pitches I get all the time. That just aren't a good fit for us. The place that I would start and word of advice, show everybody out there is make sure that you're talking to the right event. So it states right on our website, we invest in healthcare oriented cannabis businesses [00:03:00] at the seed series or series a and all the time.
I get presentations for companies , that aren't even in the cannabis space. So, the times I can tell you about seeing a presentation for a blockchain company or a FinTech company, that's doing a $50 million series D. That doesn't make a lot of sense. I mean, it's the wrong sector, the wrong stage and the wrong check size.
And all of that information is right on our website. So this really speaks to a shotgun spray and pray approach, which right out of the gate is a turnoff for investors.
Maggie Kelly: I agree, Ross, we get a lot of emails where I scratch my head and say, okay, you found us on our website. You found my email, but you did not find our investment strategy. So listeners, we covered this in part one, but it bears repeating do your research. So Ross, let's talk about a key person in this process, and that is a role that we affectionately term the gatekeeper.
Can you describe who the [00:04:00] gatekeeper is and what is.
Ross O'Brien: Sure. I think this is really important. And again, it goes to understanding the type of investor that you're reaching out to and how you're communicating with them. In certain circumstances, gatekeepers are somebody who is a personal advisor to, or assistant to or operations person that supports the investment decision maker in funds.
A lot of times that can be analysts. With angel investors. A lot of times it can be a family member. And one of the things that's really important to understand. Particular and talking with angels is, as we spoke about in the last edgy pod, angels are investing their own capital and the decision very much involves family members.
And most importantly, a spouse, if the husband and wife's making an investment, you can be certain that they are talking about it because they're putting their money into your company as an investment and looking obviously for a return. But we're there [00:05:00] taking that risk and you can be certain that they're having conversations that you're not a part of.
So being sensitive to who you're communicating with, why you're communicating with them and understanding that the decision maker has a whole network of people around them, that's going to help inform their decision.
So the takeaway is when you're communicating with gatekeepers, they're giving you an access point to the decision-maker, but how you interact with them, how you build rapport and a relationship with the gatekeeper is largely going to inform their willingness and how they communicate to the decision-maker or the investor or the other people on their team.
Why they should spend time and pay attention to your investment opportunity over the thousands that there'll be getting over the other investment opportunities that they'll also be assessing. You want somebody to be an advocate for you in your business, within their organization. And that starts with building rapport, being, having a lot of humility and really being respectful of the person that you're.[00:06:00]
And being respectful of their time. When you send somebody an email, it's putting something in their to do list that they have to go and do. If your email has reams and reams of information that you expect somebody to read, you are asking somebody. aggressively telling them they need to stop what they're doing and read all of your stuff.
Be succinct, be direct. All you're looking for in the initial outreach is establishing your credibility, establishing that there's somebody that they want to get to know that you're somebody that they want to get to know and should get to know. And you're not trying to get the cell in an email outreach or an initial conversation with a gatekeeper.
What you're really trying to do is just check that box that you can move to the next step in the process and not be a hard, no.
Maggie Kelly: Exactly it don't view this email as the end all be all. It is just [00:07:00] trying to get a meeting. So I will tell you from experience that if you are emailing me in a succinct manner, it still might be a no.
you still might not be a fit, but. You have saved me time reading your emails. So now I have time to communicate back with you, tell you what I liked about your cold email, tell you what didn't work.
And while it still might be a polite decline, at least you're getting some feedback back that has helped.
Okay. So let's say you get the green light from the gatekeeper, and now you're scheduled to pitch your business. Ross, how many pitches would you estimate that you've heard in your career and what are some of the common best practices and what are some of the common mistakes that you see?
Ross O'Brien: Well, Maggie, I think I couldn't even put a number on it. It's innumerable the amount of pitches and look, the good news is for me and in my role there's a lot of data points that I [00:08:00] look for very quickly, that the unfortunate thing is, is with the volume of deal flow that any investor takes a look at our job is really to find all the reasons to say no, And if we can't find any reasons to say no, then we can move the investment into the process and expand the team and take a closer look quick, no is largely valuable to an investor from time management and cycles.
If there's something glaring and clear that we can understand is not a fit. And like you said, man, we do try a lot to give, feedback and constructive feedback. And in particular, somebody has been thoughtful in the process and , we have a ton of relationships with entrepreneurs that we've never invested in that can turn out to be referrals, can turn out to be great people to work with the companies.
It's all part of , the network effect of building all these relationships. So, I think one of the things that I tend to look for right out of the. Are any immediate just overly [00:09:00] optimistic or unrealistic expectations as it relates to valuation growth metrics, revenue, exit strategies, et cetera.
If somebody comes out of the gate with a massive valuation on the company, and it's a series seed series, a like we invest, that's going to be a red flag. And a lot of times we'll just quickly look to that and say, look, this entrepreneur has unrealistic expectations. It's not worth their time or ours to try to bridge that gap.
Another one is looking at. And this is a massive miss , for entrepreneurs when they do this. If I see a presentation that tells me what our return is going to be as an investor, that's a major red flag for a couple of reasons. One as a founder, you should never put in writing what you think the return is going to be for an investor.
These companies have a higher probability of going to [00:10:00] zero than they do meeting what your objective is. Have a very high failure rate. And it's our job as investors to put an assessment, a risk assessment on the company say, does this business have a realistic probability of succeeding? And if it does, how do we think we can create , liquidity and extract the value as investors based on the capital we put.
So if I see a presentation says, oh, you're going to make two times your money in three years. Like, well, Hey, that's just amateur. So this is a founder that, that doesn't know the landscape. The it's not exactly thoughtful, right? Because we know for absolute certainty that it won't happen the way they predict it.
And nothing happens the way that nobody has a crystal ball, right. Financials are always wrong. But it's about what is the Delta between the projection and the expectation and reality, right? If it's 10% different, , that's an [00:11:00] entirely manageable situation versus a 200% difference. And the third piece is if you put, Hey, you will make your money.
You'll double your money. In two years to, to an investor, they will always be able to pull that out. We keep everything in our funds and we'll always be able to pull that out, go back and reference it and say, Hey founder, you told us this is what was going to happen and why hasn't it happened? So you're just setting yourself up.
I know why founders do it. They're doing it because they want to show that this is a great investment and they want to be at the top of the list. But there's other elements of the company that we need to understand. First, for example, the team and the people. And so that's one of the best practices that I've seen in presentations.
The sooner you can get to who the founders are, who the founding team is and why this is the right team to run this business, or to make this business a success, everything else you tell me in the presentation, after that all believe through that [00:12:00] lens of, okay, this is a high quality management team, right?
A team that works well together that potentially has history together that has some successes that's, bridging gaps and plugging the holes in the team with advisers. And showing that there's an infrastructure and that they can execute then everything else you tell me after that we'll have more credibility.
Right? So a couple of pitfalls. I see founders a lot jump into, Hey, we are going to give you this kind of return. It is sufficient to say management believes at some point in the next three to five years, we'll have enough value in this company that we're going to sell it to a strategic or. That checks the box that we're on the same page, that there is a plan to have a liquidity event.
What that liquidity event is how much money we make as investors. What our return is, is complete speculate. So be very wary of putting that in, be wary of putting in extremely high valuations or setting terms for the [00:13:00] transaction. I'm less concerned about transactional terms initially talking to a company and more concerned with what's the team and how's the business being built.
So if I'm asking you what the valuation is, that's probably a good sign, right? Because I wouldn't be asking if I'm not thinking about if there's a structure that could be put together. And then the thing , that I find most consistent is an overemphasis on market and opportunity Maggie. So I find a lot of presentations have slide after slide of.
Market research and addressable markets and global trends and predictions. And it's, it's a bigger number multiplied by a bigger number. And if we only just get 1% of that bigger number, this company is going to be worth hundreds of millions of dollars. It's all kind of theoretical and it's all sort of.
Amateurish. Right? Like, but like that's kind of the board game of business. Like we're talking about the [00:14:00] real, like actually getting into the real fundamentals of getting into a process over the next, five to 10 years to build a company. And if you think I'm investing because you need to convince me of the opportunity.
I mean, we already have a fund that invest in cannabis. If we're spending a lot of time talking about our predictions on how big the market is we're not having the right conference.
Maggie Kelly: Right. So listeners, that is a lot to unpack. So. For a future EDU pod series, we will be taking a much deeper dive on how to pitch and what to include in your presentation and what not to include. Ross gave you a lot of tips there. So I highly recommend you go back and listen to that sequence from start to finish more than one time.
But again, we'll do a deeper dive on how to pitch and what to include in your presentation and a future. So
for the purposes of this episode, let's now say that the pitch went extremely [00:15:00] Well, The company, the management team all appear stellar at face value. Now we enter the preliminary due diligence period for founders. This is where your openness and willingness to communicate honestly will serve you. The investment firm will move into due diligence and take a deeper dive into the people, , your company, your addressable market.
They will collect your financial information for previous years. They will independently research your market and competition. They will verify the claims you make in your materials. This process can and should take weeks, if not more. So Ross, what would you add here? Because you've been through this process numerous times.
I mean, it, it is what you have your team do, so we know who we're investing in. How would you describe the diligence process to those who have never experienced it before? And what do you look for from founders during this period?
Ross O'Brien: So [00:16:00] I would say something that one of my mentors said to me early on in my career deals are not like a fine wine. They don't get better over time and it is a time-sensitive process. And there's a lot of information to be shared. I would say I am always shocked at how. Quickly, sometimes other investors make decisions or the lack of diligence that they go into.
And when we start working with companies and saying, Hey, we've hired a consultant that has technical skills to evaluate the science. And sometimes the founders are surprised. They're like, oh, well, how long is that going to take? , we have to make informed decisions , and if you're building a scientific company, then obviously we need to evaluate the science and I've got a couple of degrees, , but none of them are PhDs.
Right. So, you want to find the right people with the right skill sets to help you evaluate the business. So be thoughtful, responsive, and proactive with third-party consultants and people that are brought into the process. [00:17:00] I would also say that. In the venture industry, we talk about a deal that has hair on it.
Right. And this is something in front of that. There's always , some concern with the company though, warts , on the deal, this kind of thing, right? Every company has got a story. No company is perfect. And I would say that it's most important as an investor. For the founders to be highlighting some of these potential pitfalls early on in the process.
And it's not because we're going to say no, we're not going to move forward in the process. But if I find something out on my own that you otherwise haven't communicated to me, it's not that it might be something that's a deal breaker, but if it's, but if it's discovered, if it's discoverable and I wasn't prepared to see that by the founder, it makes me wonder what else they're not.
And I think it's just really important to put all the cards on the table and it's going to be a really intensive process and a lot of work to go [00:18:00] through together. You're building a longterm relationship. The negotiation is still happening during the diligence phase. This is something that's really important to us.
And I think all the founders out there should really, sort of follow this process that before you get into the deep dive or what we call confirmatory due diligence, which means that we've already checked the boxes , that there's customers there. Right. So that's a great example.
You brought that up, Maggie, talking about customers and competition. So when we put a term sheet together, we'll say, okay, there's customers, potentially customers out there, for example, right. Well, I'm going to want to go to. . It's just natural that if there are people that are buying the product, I'd like to hear from them, then I'll typically ask the founders, look, make some introductions for me, we'll package it in a way that it's not.
A concern most you'd be shocked about how many customers of companies that actually like talking to investors and telling them why they like the company. But we want to hear that anecdotal information. So we want to confirm that, it's not good enough to say, oh, we have customers.
Okay, great. And the times that, we see things like, [00:19:00] oh, we've got contracts. The contract's actually not a contract. It's a letter of intent, or it's not even a letter, a tent, it's like a memorandum of understanding and it's, oh, it's something we could potentially go do that we've gotten a non-binding agreement that might happen at some point in the future.
It's not the same story that we're getting upfront. So you want to go confirm that, which means that you need to have the structure of the transaction defined in the term sheet before you go into that diligence phase. Because we don't want to do is go through that process with each other and really, get.
Full understanding of each other and the business to find that there's a disconnect on some of the terms that you can't get to after all that work. I know that's a lot of information
Maggie Kelly: a lot of
Ross O'Brien: gone. I've gone off script and I.
Maggie Kelly: Yeah, it's going rogue everybody. So not to be doom and gloom after all of that information, but it's important to remember that no can and often does come at the end of the diligence period, and that could be for any number of reasons, making it this far. And the [00:20:00] capital raise process is commendable.
However, and it's just. So if it's a no ask for reasons why it's a no you're willing, willingness to ask, learn and take the criticisms will speak volumes about your maturity as a leader, depending upon the relationships that you've built throughout this process, you may retain important connections that could lead to new opportunities.
And those may come in the form of mentorship and introduction or a referral to affirm that might be a better fit or funding one day down the road, But what, if you come to terms with the investment firm, everything is glowing through the diligence period, and there's clearly an investment decision being made in your favor.
So now what Ross, what comes in.
Ross O'Brien: just, I would say one of the things that's most important to recognize is that the closing of the transaction is only one step. I find that founders and investors don't [00:21:00] spend enough time historically, in my experience talking about what happens after the check is written. So, there's going to be governance and the definitive agreements.
And for us, , if we're taking a significant part of the round, we want to be on a board and we want to define what are the expectations of the board? What's the governance of the company, what are the decisions that the management team needs to make without, needing to come to the board and then what are the decisions that we need to have The informed about so that we can have a seat at the table so that these decisions aren't made without the investor's best interest or in counter to what we thought the company was going to be doing.
So it's an alignment of the business plan, but it's really governance. And when you get into, managing investor relations, look, I heard somebody one time, say something great. They said, everybody's a passive investor until things go south. And look, we know things will go sideways at some point, that's the one guarantee in all of this, is that something unexpected will happen if you're consistently and professionally communicating [00:22:00] with your board and your shareholders, when those things come.
Everybody will rally around you and find a way to navigate through what the challenges are. Many times put more capital in if that's what's needed , and come up with solutions as opposed to sort of a pens down, crisis. So it's really thinking about how are you going to handle those situations with each other in the future, and what happens post-closing in terms of governance and communication, and , how the business plan is going to play out.
Maggie Kelly: So Ross, you make a point here and it reminds me of another conversation we had with patron to cite him once again, Paige and Chang I'm co-founder and CEO of T check.
But that when you're going through this process with an investment firm, It's not only the capital raise that you need to be thinking about and the term sheet, but it's also the relationship that you have with that particular firm, with the investor that will sit on your board. The relationships that you build are very important and you need to think, is this someone I think has words were, is this [00:23:00] someone that I would be married to because that's essentially what it's like.
This is a long standing commitment and this is a partnership. And. Do you want to go through sickness and health with this individual? And that's just something to keep in mind throughout this process.
Ross O'Brien: And I would also say Maggie in the spirit of the edge you pod, the divorces in business are very, very messy.
Maggie Kelly: All right. All divorces, messy.
Ross O'Brien: I've only been through business divorces. So.
Maggie Kelly: That's another edgy pod series, much, much farther down the road. So I think what we'll do is wrap it up here, listeners. This was a lot of information to process and Ross. I really appreciate you pulling back the curtain on raising capital. So again, listeners, this has been a very high level walkthrough of raising capital.
Numerous books have been written about the topics that go into much greater detail. [00:24:00] I will never tee you up so well again,
Ross O'Brien: That
Maggie Kelly: but I'm so glad that you mentioned it,
Ross O'Brien: That was perfect. Yeah. I wrote a book on this very topic. Crazy, right.
Maggie Kelly: All right.
I'll hold down, settle down. I'm not going to do it again. So we would like to give away a copy of Ross's book, cannabis, capital, how to get your business funded in the cannabis economy. If you email us@helloatcannabiscapitalpodcast.com by Friday, October 22nd, to enter the giveaway, we'll randomly select three lucky winners to receive a signed copy.
So that's. At cannabis capital podcast.com. Email us by Friday, October 22nd, to enter the giveaway and we'll randomly select three lucky ones.
Friday, October 29th.
Okay. Well listeners, we thank you for joining us for part two of
the raising capital edgy pod
series.