How Can Cannabis Companies Value their Startups?
Ryan Allway
June 1st, 2017
News, Top News
The U.S. cannabis industry is expected to surpass $50 billion by 2026, according to Cowen & Co., driven by the legalization of recreational and medical cannabis. These tremendous growth rates have attracted many entrepreneurs to the space across a wide range of industry subsets, ranging from cultivators to technology provides. These companies often require a lot of capital to startup and grow, which makes valuations an important concept to grasp.
In this article, we will look at how cannabis startups can value their company and secure funding from investors to help increase their odds of success.
Startup Valuation 101
Startups are notoriously difficult to value since conventional measures aren’t very useful. For instance, an investor can’t conduct a discounted cash flow analysis for a company with only a few months of operational history. Startup valuations are much more a function of the quality of the founding team, intellectual property, and product-market fit than revenue multiples or price-earnings ratios that investors typically use to value a firm.
Startup founders should come prepared with some sales forecasts – even if they are difficult – with a focus on long-term growth rates. Often times, these forecasts are based on the growth of the underlying market (e.g. the cannabis industry) and lean on third-party analyst reports of subset growth rates. Founders may also look at competing companies’ growth rates as a basis for comparison and as a way to defend their growth estimates.
Once defensible revenue growth estimates are in place, founders must look at the multiples that other companies have been valued at to come up with a valuation for their business. For example, a dispensary that anticipates generating $1 million per year in revenue may find that other dispensaries have raised capital at 10x revenue, which implies that their company may be worth upwards of $10 million based on their revenue estimates.
Value Wizard to the Rescue
Value Wizard provides financial and valuation reports designed to help entrepreneurs secure funding from investors. Classic quantitative methods ignore intangible, but important, qualitative factors that drive success, such as market share, intellectual property, strategic partners, and product pipelines. Companies that rely on these methods often receive an unfair low valuation that reduces the chance of raising funds at a reasonable valuation.
Value Wizard was designed by Oaktree Ventures & VentureNet Capital Group,Inc. to provide a full and fair valuation based on classical quantitative methods plus the important qualitative factors. The goal is to help investors look beyond the numbers to see a startup’s true potential rather than its tangible valuation based purely on revenue and net income. These reports can be delivered to help entrepreneurs in multiple different scenarios when valuations are necessary.
Valuations are important in many different times during a startup’s lifecycle. While fundraising is an obvious scenario, valuations are also necessary for estate planning, tax planning, mergers, partner buyouts, trademark valuations, ownership changes, minority shareholder valuations, and for the pricing of stock option plans. Determining the right valuation is imperative for all types of startups after they move beyond a single founder.
Takeaway Points
Startup founders should be cognizant of the factors that come into play when calculating a valuation since it differs from traditional companies. In addition to fundraising, these valuations are important for many other types of corporate transactions. Investors interested in determining their valuation may want to consider Oaktree’s Value Wizard by downloading it on the Apple or Google app stores or calling 1-844-685-2348 for a free consultation.
This article was published by CFN Enterprises Inc. (OTCQB: CNFN), owner and operator of CFN Media, the industry’s leading agency and digital financial media network dedicated to the burgeoning CBD and legal cannabis industries. Call +1 (833) 420-CNFN for more information.
About Ryan Allway
Mr. Allway has over a decade of experience in the financial markets as both a private investor and financial journalist. He has been actively involved in the cannabis industry since its inception, covering public and private companies.
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