{"id":345,"date":"2021-08-09T10:07:47","date_gmt":"2021-08-09T10:07:47","guid":{"rendered":"http:\/\/CBMigAFodHRwczovL3d3dy5oYXJ0Zm9yZGJ1c2luZXNzLmNvbS9hcnRpY2xlLzMwbS12ZW50dXJlLWNhbm5hYmlzLWZ1bmQtb2ZmZXJzLXdpbmRvdy1pbnRvLXJlY3JlYXRpb25hbC1tYXJpanVhbmEtaW5kdXN0cnlzLWZpbmFuY2luZ9IBAA"},"modified":"2021-08-09T10:07:47","modified_gmt":"2021-08-09T10:07:47","slug":"30m-venture-cannabis-fund-offers-window-into-recreational-marijuana-industrys-financing-options-hartford-business","status":"publish","type":"post","link":"https:\/\/thcinct.com\/?p=345","title":{"rendered":"$30M venture cannabis fund offers window into recreational marijuana industry’s financing options – Hartford Business"},"content":{"rendered":"
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It wasn\u2019t long ago when people looking to spend tens of millions of dollars bankrolling cannabis entrepreneurs were frowned upon by society, not to mention performing an illegal act.<\/p>\n

But these days, as an increasing number of states legalize marijuana for recreational use, the financiers are people like Devin Schleidt, owner of Greater Hartford-based business advisory firm Schleidt Works, who is launching a $30 million venture fund to help seed up-and-coming cannabis businesses in Connecticut.<\/p>\n

Schleidt\u2019s fund, Connecticut Cannabis Capital LLC, will invest in prospective cannabis growers, dispensaries and manufacturers looking to get into the state\u2019s recently-established recreational marijuana market, which is projected to generate hundreds of millions of dollars in annual revenue.<\/p>\n

Such private funding could be the financial lifeline many cannabis entrepreneurs will need to launch their businesses in Connecticut, as more traditional methods of financing still remain elusive due to marijuana\u2019s status as a federally illegal substance.<\/p>\n

In the legalization law, state lawmakers also offered a sweetener to private investors, allowing them to use Connecticut\u2019s angel investor tax credit if they invest in social equity marijuana companies. There\u2019s also $50 million in state funding set aside for the Social Equity Council, which could help some startup cannabis companies.<\/p>\n

\u201cI know people [in other legal states] who have got licenses, but they still have difficulty raising money,\u201d Schleidt said. \u201cThere are a lot of people who come to me and say, \u2018Devin, I want to get into this industry, how do I do this?\u2019 \u201c<\/p>\n

The safest bets<\/h4>\n

Schleidt didn\u2019t disclose how much he\u2019s raised so far, but said he thinks he\u2019ll reach the $30 million mark within a year. He said he does business advisory work for several cannabis entrepreneurs in Massachusetts and that\u2019s helped him develop expertise in the kind of businesses in which he\u2019d feel comfortable investing.<\/p>\n

He said his strategy will be to invest in companies that have the majority of their funding in place and final licensing approvals from the state.<\/p>\n

The safest bets will be on operators who already launched a successful cannabis business in another legal state and would like to replicate that in Connecticut, Schleidt said. Most of his funding decisions will come down to the strength of the business plan and management team.<\/p>\n

\u201cSome of these are going to be successes, some of them are going to be duds,\u201d Schleidt said. \u201cMy goal is to place [investors\u2019] money with the least amount of risk.\u201d<\/p>\n

Credit union interest<\/h4>\n

While independent-minded entrepreneurs like Schleidt will offer cannabis companies a potential funding option, more tightly-regulated lending institutions remain more skittish about serving the industry.<\/p>\n

\n
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Bruce Adams<\/p>\n<\/p><\/div>\n<\/article>\n

Nearly all credit unions on Bruce Adams\u2019 radar are looking for ways to get into Connecticut\u2019s adult-use cannabis market in the coming months and years, when many expect to see a \u201cgreen rush\u201d of marijuana-related revenues, he said. Adams, president of the Credit Union League of Connecticut, said risk is the main factor that gives his members pause in working with cannabis businesses.<\/p>\n

Unlike banks, credit unions aren\u2019t regulated by the Federal Deposit Insurance Corp. (FDIC), which bans institutions from engaging with the cannabis industry. The nonprofit financial institutions are overseen by the National Credit Union Administration (NCUA), which released guidelines in 2019 allowing the industry to provide services and even lend to legally-operating cannabis companies. But credit unions that serve the industry have stringent reporting requirements and cataclysmic penalties for violations or mistakes, Adams said.<\/p>\n

Before NCUA gave its tacit blessing to marijuana businesses, the U.S. Treasury Department\u2019s Financial Crimes Enforcement Network (FinCEN) released a memo in 2014 saying financial institutions may serve the industry but must closely monitor those customers, and file frequent reports detailing the amount of account deposits, withdrawals and transfers.<\/p>\n

Even if a credit union makes an honest mistake in a filing, or fails to catch some type of illegal activity, it could lose its federal insurance, effectively forcing it to close.<\/p>\n

\u201cGiven how much reporting they need to do, the [credit union] literally may be hiring multiple new people to accommodate this new account,\u201d Adams said, adding credit unions will likely charge marijuana businesses higher fees and interest rates for the added risk. \u201cIf they mess up, it can cause the whole credit union to be shut down.\u201d<\/p>\n

Trust but verify<\/h4>\n

Paul Dunford co-founded North Haven-based Green Check Verified to help more traditional financial institutions feel more comfortable serving cannabis customers. His company audits marijuana businesses and verifies whether they\u2019re operating within legal bounds.<\/p>\n

\n
\n

Paul Dunford<\/p>\n<\/p><\/div>\n<\/article>\n

Dunford said he\u2019s seen increased interest among financial institutions, including banks and credit unions, in Green Check\u2019s services since Connecticut legalized recreational cannabis.<\/p>\n

\u201cWhen you legalize adult use, you get this explosion of licenses, this explosion of commerce,\u201d Dunford said. \u201cYou get this market opportunity that is really bright and vibrant.\u201d<\/p>\n

But lenders have little interest in taking a chance doing business with someone who lacks a good track record in previous ventures, he said.<\/p>\n

In addition to the regulatory risks, lenders can\u2019t use a cannabis company\u2019s product as collateral, and pot shops aren\u2019t eligible for bankruptcy protection. Further, most financial institutions simply don\u2019t know how to gauge whether a cannabis business plan is likely to succeed.<\/p>\n

\u201cThere are no underwriting models,\u201d Dunford said. \u201cA financial institution that does not understand the cannabis industry really doesn\u2019t know where to start.\u201d<\/p>\n

For all these reasons, Bob Lickwar, a CPA and partner in the Farmington office of accounting and consulting firm UHY LLP, questions whether newer entrepreneurs who don\u2019t already have strong investor backing will be able to access loans and other financial services.<\/p>\n

\n
\n

Bob Lickwar<\/p>\n<\/p><\/div>\n<\/article>\n

UHY also operates in Michigan, which has a legal recreational market, and credit unions there that lend to cannabis companies offer interest rates upwards of 15%. Traditional bank loan interest rates typically range from 3% to 13%, according to credit reporting agency Experian.<\/p>\n

\u201cWhile there\u2019s a bucket of resources out there, will they be available to everyone looking to enter the market?\u201d Lickwar asked.<\/p>\n

Other financing options<\/h4>\n

When debating and writing the cannabis legalization law, legislators grappled with the likelihood that independent entrepreneurs would run into difficulty finding capital, said state House Majority Leader Jason Rojas (D-East Hartford), who was instrumental in passing the law. That\u2019s why they included access to the angel investor tax credit, and provided the Social Equity Council with a $50 million fund.<\/p>\n

How that pot of money gets used will be determined in the months ahead, but some could be set aside for social-equity startups or an incubator program.<\/p>\n

Meantime, the angel investor tax credit applies to Connecticut-based investors who put money into cannabis ventures categorized as social equity businesses. It guarantees these investors 40% of their money back in the form of a tax credit.<\/p>\n

That could incentivize investors to seed cannabis companies, Rojas said. But he acknowledges independent cannabis entrepreneurs will still face strong financing headwinds.<\/p>\n

\u201cI think there\u2019s a recognition that someone has to have some resources on the table to access the cannabis market,\u201d Rojas said. \u201cThere are only so many things we can control through the law.\u201d<\/p>\n

Jason Ortiz, founder and immediate past president of the Minority Cannabis Business Association, said he expects social equity businesses and smaller entrepreneurs will have to raise most of their money through friends and family, and look for angel investors to put them over the top.<\/p>\n

He doubts financial institutions will pay much attention to the smaller players, but is bullish on the tax credit\u2019s ability to incentivize investors.<\/p>\n

\u201cMost of the public and investors understand the financial opportunity in this,\u201d Ortiz said. \u201cMost people don\u2019t question whether it\u2019s possible to make millions of dollars selling cannabis.\u201d<\/p>\n","protected":false},"excerpt":{"rendered":"

It wasn\u2019t long ago when people looking to spend tens of millions of dollars bankrolling cannabis entrepreneurs were frowned upon by society, not to mention performing an illegal act. But these days, as an increasing number of states legalize marijuana for recreational use, the financiers are people like Devin Schleidt, owner of Greater Hartford-based business advisory firm Schleidt Works, who is launching a $30 million venture fund to help seed up-and-coming cannabis businesses in Connecticut. Schleidt\u2019s fund, Connecticut Cannabis Capital LLC, will invest in prospective cannabis growers, dispensaries and manufacturers looking to get into the state\u2019s recently-established recreational marijuana market,… <\/p>\n","protected":false},"author":1,"featured_media":346,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"","fifu_image_alt":"","footnotes":""},"categories":[2],"tags":[],"class_list":["post-345","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-featured"],"jetpack_featured_media_url":"https:\/\/thcinct.com\/wp-content\/uploads\/2021\/08\/30m-venture-cannabis-fund-offers-window-into-recreational-marijuana-industrys-financing-options-hartford-business.jpg","_links":{"self":[{"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/posts\/345","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcomments&post=345"}],"version-history":[{"count":0,"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/posts\/345\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=\/wp\/v2\/media\/346"}],"wp:attachment":[{"href":"https:\/\/thcinct.com\/index.php?rest_route=%2Fwp%2Fv2%2Fmedia&parent=345"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=%2Fwp%2Fv2%2Fcategories&post=345"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/thcinct.com\/index.php?rest_route=%2Fwp%2Fv2%2Ftags&post=345"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}