Investor Insight: David Friedman, Chicago, IL
He’s talking about the importance of a team, the art of moving aside, staying educated, trusting your gut feeling, and a whole lot about investing in the legal cannabis industry. Cannabis entrepreneurs and advocates alike will find something to hold onto in this interview with the compelling David Friedman of CFO Worldwide.
How did your entrepreneurial journey begin?
I graduated college in 1988 with a finance degree with the expectation of my family to take my CPA and go to law school. The week before I graduated I made the decision that I wasn’t going to do either. I had spent summers at my grandfather’s and uncle’s law firm while my friends were busy being lifeguards; I did tax extensions and I saw first-hand what these business owners were making and knew then that I wanted the autonomy to do my own thing. Both my grandfather and uncle encouraged me to do anything but go to law school.
I went to work in a family business for about a brief minute and then came to start my first company printing t-shirts. We grew that up to about $8M in sales and had several other companies built into that model. I sold out in 2001 when realized I was much better at starting and fixing companies than running them long-term.
Using my finance background and experience as a business owner, I started acting as an outsourced CFO for transactional finance (mergers and acquisitions) and ended up doing a lot of work in the financial turnaround of small companies. That led me to work with a couple of large family offices; I ran their direct investments and alternative finance groups where I’d invest their money in deals and then step in as CFO to watch the money. In 2006, I started CFO Worldwide and began to build out that model and move more towards the growth companies as opposed to turnarounds. Over the years, we added investment banking services and eventually began investing in businesses as well.
Both my grandfather and uncle encouraged me to do anything but go to law school.
What was the motivating factor for you to invest in the cannabis industry?
My ex-girlfriend, whom I’m still good friends with, and an investor in another CFO Worldwide venture had a son who struck out to Colorado to make his fortune in the legal marijuana trade. He ended up at O.penVAPE and she said to me one day ‘You have to figure out how we can make money in this space. If anyone can figure it out… it’s you.’ It peaked my curiosity and I began to study investment opportunities only to find a lack of information pertaining to such.
Since we already had a media business, we decided to launch MJ Investor News to cover the investment opportunities in the industry and develop and research. We would produce educational events and use that, not only to build a business, but to also find investment opportunities for CFO Worldwide. We are set to launch our first event, Marijuana Investor Summit, in April 2015! We are featuring a Shark Tank “Shark” as the keynote speaker who will also be sitting in on the live “Cannapitch” session where a panel of investors will have the opportunity to invest in pre-chosen companies who have been vetted by CannaFundr.
One thing many first-time entrepreneurs struggle with is raising money. How would you suggest someone to overcome this problem?
Don’t even think about raising money without a solid financial person on your team. Most companies start out with visionary, sales, product development, and maybe an operations person. If they are lucky, the operations person also handles their finances, but is completely unqualified. There is nothing that kills a deal more quickly than asking for money without first demonstrating that there is someone in place that can provide financial oversight. That’s basically how CFO Worldwide came to be as we sought to help companies raise money who did not have the credibility in that area to do so. You need solid financial projections, reasonable valuation models, and a realistic idea of WHY you need the money and how you will spend it to produce an ROI for investors.
What is the best advice to cannabis entrepreneurs when they pitch their project to you?
We invest in people not products. Give me an average idea with a rock star team over a rock star idea with an average team any day of the week. Assemble a team that can impress us with the ability to execute. At least someone in your team needs to have a successful exit in another business before we will invest. Invest at least some of your own cash, even if it is $10K, and find a way to have some skin in the game.
Most of all, have realistic expectations! If I see another pre-revenue, pre-money valuation of $10M by a team that has never had an exit – I am going to puke! Figure out how much you need to get to the next level and take as little as possible for your first round at a low valuation from strategic investors who can add more than just money. Build the value of the business and the strategic investors can then help you raise the valuation for the next round. Also, debt is always better than equity in the long-run, so consider different structures. Educate yourself and find out what your competitors have done.
Can you share your thinking on how to identify a company as a great opportunity?
Wow, tough question! I wish I could, but it’s a combination of a lot of things and in the end it’s a gut feeling that will really drive the final decision. As I said above, the team is the most important factor. There are so many opportunities in this space right now that all the ideas out there are almost all feasible. For us, we are focused on deals that are related to data and information or ancillary businesses that don’t touch the plant.
We also want to avoid the “me too” mentality. There are many of the same tech models around social networking and deliver apps, so I have deal fatigue around those. We also intend to rely heavily on CannaFundr to identify deals as well as remaining a part of The ArcView Group, which has given us access to the Who’s Who of the industry; best money I have spent in this industry by far.
How does the role of the founder evolve as a company goes from seed to early growth to later-stage scaling?
Great question! It depends on the team, the founder, and the business, but it is important to know what the goal is and to be realistic about it as well. I stepped in as CEO and Publisher for MJ Investor News, but I knew my tenure won’t go beyond 2015. I need to be replaced by an experienced publisher who can take the business to the next level and I know that I am not a long-term operational CEO. A lot of younger founders also need to know at what time they should step aside. Eventually, you need to go from entrepreneurial management to professional management and often time that means the founder needs to step aside and make way for an experienced CEO.
What is your new knowledge in regards to investing in the cannabis industry?
It’s wide open and there is a fairly long runway. Institutional investors and big corporations are still sitting on the sidelines and will be for another few years. Partially because of “optics” and partially because it is still federally illegal. That gives the average investor a chance to get into this space before it blows up, but it also means prudence is important.
In the dot com and real estate bubbles, investors were competing with some of the largest institutions and corporations in the world. Since they are still sitting on the sidelines, now is the time for smaller and/or private investors to get their piece of the action in the cannabis industry. Now is the time to get in the game because the big brothers with deeper pockets will eventually take over the space.
As an investor, what are some of the key things you wish cannabis entrepreneurs knew?
- The definition of a valuation.
- The fact that cannabis means nothing unless you have business experience
- That your team is far more important than your product.
What needs to happen in order to create a billion-dollar company in the cannabis industry?
Federal legalization. Period. I don’t see any business getting that large without federal legalization. There are too many barriers around banking and other resources that will make it impossible to really build a national brand. There are a few trying and doing well namely, Dixie Elixirs and ebbu LLC; both have promised to keep pushing, but in order to hit that number, they will need to be able to build a distribution model that allows centralized distribution and efficiencies you see in other industries. It’s all about logistics! Find a way to ship products legally over state lines and then you’ll have yourself a billion-dollar company.
Find a way to ship products legally over state lines and then you’ll have yourself a billion-dollar company.
How do you decide between shutting down, keep funding, or selling your start-up?
Well, usually you don’t have a choice between all three. If you are looking at number one or two, usually three is not an option. Selling is an important question. At this point in my career – cash flow is a nice model! I don’t always focus on a large exit. It’s important to know your goals before you start and benchmark against them. If you intend to exit when you can sell for $5M then know where you are.
As for folding or funding, that is completely subjective and once again comes down to the team. Do we believe in them? Can they make the pivot? Are they emotionally and financially invested in the business? Don’t be afraid to walk away if things are not working.
The key to success is failure. Any good entrepreneur will tell you that they learned from failure, not success. So, somewhere along the way, we all have to fail. We can’t be afraid to admit that and we have to then move on. The worst thing you can do in any relationship, business or personal, is hold on too long. It makes a bad situation worse and everyone loses in the end.