Cash Burn or Trust Earn: The Cannabis Investor’s Dilemma

This year has been ensnared in a financial bear hug nobody ordered, and the cash tides won’t turn unless we smash some barriers.

Sure, you can pass the buck to recession or play the waiting game for Uncle Sam’s move. But let’s get this straight—blame-shifting and thumb-twiddling are not chapters in a leader’s playbook.

As dynamic as cannabis can be, the relentless regulatory chokehold and non-stop taxation make thriving, let alone surviving, a Herculean feat.

Countless operators have folded, while others scrounge like starving dogs in a once-promising garden now reduced to barren soil.

A lot of people were burned during the “Green Rush.” Now, frustration and confusion are the prevailing sentiments—two words you never want in the same room as your investors.

So, what’s the playbook for Investor Relations (IR) in this tight spot? How can we march forward with unshakable confidence and integrity?

The velocity of trust

Here’s the law of motion: Trust propels everything—people, enterprises, and even governments. With that in mind, stalled trust is akin to stalled progress.

In cannabis, trust is scarce. And this “trust tax” is prevalent in all sorts of ways: regulatory overreach, cutthroat competition, and an oblivious public missing out on the plant’s benefits.

Let’s not kid ourselves; investors are skittish. Until cannabis is rescheduled or descheduled, Wall Street will keep its distance. Trust-building needs to be this industry’s North Star, and the clock’s ticking.

Radical transparency in IR

Embellishments, skewed truths, inflated numbers—those are yesterday’s tactics. In today’s trust-starved market, you’ll want to be as transparent as a glass house. Emily Paxhia of Poseidon Investment Management—one of the industry’s leading investment firms—drives the point home perfectly.

“We’ve always taken a full transparency approach to investor relations as fund managers in the industry,” Paxhia said. “People are very curious to learn more about cannabis, so it’s a great opportunity to educate and inform them about what’s going on in the market, but it’s also important for us to be very open and honest about what we think is happening in the funds and in the portfolio companies.”

Paxhia noted how Poseidon tends to increase communication cadence during difficult times, such as their monthly webinars, because these are the most important times for investors to understand the external forces at play.

Sometimes that means ruffling a few feathers when sharing points of view about the political landscape around cannabis or even the broader economic or political landscape as it exists and the trickle-down effect it could have on the industry, Paxhia said. “But we just also believe in being radically honest about what we’re seeing. We really do believe in trying to be as active and direct as we can in our investor relations strategy as fund managers.”

Untangling the web

The complexities of cannabis and the industry as a whole are confusing to the average investor, and confused people rarely say yes to something they don’t fully understand.

“Communication is definitely key, the fact that it’s a new industry and there’s so many questions surrounding it—not only on an investment level or an asset level—these are products that most people haven’t really had to think about,” said Tyler Gilliam, assistant vice president at Rainbow Realty Group. “You have to understand that it’s a new industry, and people are learning things about it every day. And you can’t take for granted what people might not be aware of.”

Addressing various complexities and making sure current and prospective investors can easily understand what’s going on will only become more paramount in the eventual wake of legislative change at the federal level.

“Every time SAFE banking gets mentioned in the news, people have questions, and cannabis stocks will go crazy,” Gilliam noted. “[In September] the idea of rescheduling cannabis came up and the entire industry went a little crazy because nobody fully understood what the implications of that would be. And so communicating with our investors about the landscape as we understand it is really important.”

Pitching home runs versus cash flow

Most high-net-worth investors are looking for home runs. While bunts are more of a sure thing, these people are not interested in deals that will only net them a couple hundred thousand dollars.

But here’s where the rubber meets the road: How many home run investments are really home runs if they can’t sustain positive cash flow?

“Now people are talking about cash flow because before it didn’t matter,” said Brian Kuo, chief financial officer & cofounder at PDX-Tech/Vape-Jet. “They were just talking about EBITDA (earnings before interest, taxes, depreciation, and amortization), but that doesn’t really tell you enough about what’s happening with the company. What really matters is the cash flow and are you able to continue to grow because of that. Because the moment it’s gone, you’re out of oxygen and you’re bankrupt.”

Kuo’s wisdom here is the marrow of the whole endeavor. It brings everything back to trust. If you can secure a home run investment but then squander it, you’ve played yourself. More than that, you’ve played your investors, and you’ve scorched the very Earth you’re trying to grow on. Investor trust isn’t just about getting capital; it’s about how responsibly and effectively you use that capital.

Your chief financial officer is your co-pilot in this enterprise. Kuo advises founders to “lean on them to understand what your cash looks like every week and every month. Because when you’re struggling to pay your bills, it becomes a game of how can I keep my cash going? And who can I pay a little slower? Who do I need to pay right away to make it so I can keep going, and who do I need to collect from right away? So the whole thing is you have to look at your cash flows. And you have to look at a cash flow projection.”

In a world teetering on the edge of trust, establishing positive cash flow isn’t just good business—it’s a lifeline to investor trust. By managing your resources wisely, you’re sending a signal louder than any marketing campaign or snappy investor pitch: We’re here for the long haul. We respect your trust, and we won’t betray it.