Everyone faces challenges, but it’s how you face those challenges that makes the difference between you persevering and becoming successful or failing and buckling under the pressure. Fred Gross, founder of ManhattanCanna LLC, is one of those who made the right move, had the right perspective, and used positivity and the power of flexibility to power through and become the successful investor he is today! You learn something from every investor we highlight and we ensure that this peer into how Fred thinks, will open your mind that much more.

How did your entrepreneurial journey begin?

I began as an entrepreneur about 12 years ago when I became a hedge fund manager. After graduating from business school at NYU in December 2001, I was left in a rather troubling situation; I had an MBA degree in Finance and Economics and there was a job market implosion in NYC due to the 9/11 attacks 3 months earlier and all job prospects I had been exploring were put on “hold” because of it. I realized quite quickly that I was going to need to change my career path – a desk job as an associate in finance was not going to happen.

Using my previous experience as a sell-side foreign exchange derivatives trader, I decided to try my skill-set and strategies I had developed on the buy-side. It was not an easy adjustment but one that I am extremely proud of and that taught me the importance of “re-inventing” myself. By 2003, I was working for a volatility based hedge fund in Fort Lee, NJ as a proprietary trader. By 2005, I had developed and implemented a strategy that was focused on convexity and skew. In 2007, the strategy produced a return of over 300%. In 2008, the strategy produced a return of over 75%. In 2010, I launched my own fund, with three partners, called VS Capital Partners. After 2.5 successful years, the implementation of Dodd-Frank had devastating effects on the OTC derivatives market. As a firm we quickly recognized this, along with the investor base beginning to squeeze portfolio management fees. VS Capital Partners closed in December 2013 and it was time to re-invent yet again. This time in the exciting space of private equity cannabis.

I realized quite quickly that I was going to need to change my career path – a desk job as an associate in finance was not going to happen.

What was the motivating factor for you to invest in the cannabis industry?

In a world of uncertainty, record-breaking high equity prices, an extremely strong dollar, and very low interest rates; I see no space out there as exciting as this, in terms of exponential growth over the next 5 years.

One thing many first-time entrepreneurs struggle with is raising money. How would you suggest someone to overcome this problem?

Crowdfunding on CannaFundr!!! In all honesty, this is an extremely difficult challenge, especially in the cannabis industry. Hiring sales and marketing is expensive and getting accredited investors to invest at minimums of say $50-$100k is very challenging. CannaFundr gives investors the opportunity to get their “feet wet” and gives entrepreneurs the opportunity to tap into smaller amounts of investment capital without having to administer up to 100 investors.

What are the key reasons why startups fail?

The number one reason why most start-ups fail, in my view, is their inability to execute. Start-ups need to remain focused, lean, flexible, and need to stop being stubborn on offering terms and finding strategic partners as investors – not just investors who want to make money. I have seen so many fail by constantly changing their pitch, their strategy, hiring too quickly, not going after the right investor pool… the list goes on and on. There needs to be a goal, a strategy, and a team able to execute on that.

Can you share your thinking on how to identify a company as a great opportunity?

This is a difficult question, especially in the cannabis space where valuations tend to be quite high, no pun intended. I believe that there are two components to a great deal:

1. Who the people are that are involved? What is their pedigree? Who have they surrounded themselves with?
2. What is the valuation and does it make sense – I want to see companies that can scale – quickly and efficiently. SCALE is key for me as an investor.

When a company is dealing with internal issues due to disagreements between multi-partners, what role and procedures do you play to save your investment?

I personally like to “make the peace.” My typical strategy would be to speak to the various partners individually and then come up with a game plan in having a group meeting. I see too many investors throw fuel into the fire. I tend to have the opposite approach and make people see that owning a % of something great is ALWAYS better than owning a % of nothing.

How do you build a sustainable competitive edge?

It isn’t easy, especially with two young children. I believe that it is critical to have people around you that are knowledgeable, trustworthy, and give honest opinions. You are only as good as the people you surround yourself with. In the cannabis space I have surrounded myself with some of who I believe to be the best of the best.

In the cannabis space I have surrounded myself with some of who I believe to be the best of the best.

As an investor, what are some of the key things you wish cannabis entrepreneurs knew?

You aren’t worth as much as you think you are and if you aren’t lenient on terms, you will not get the right strategic partners as investors. It is critical to form partnerships in this industry. We are all in this for the long haul and we all need each other as colleagues, mentors, and yes, even friends.

What needs to happen in order to create a billion-dollar company in the cannabis industry?

A true billion-dollar company in this industry, right now, is going to be hard to recognize. Due to varying state laws, banking regulations, federal law, etcetera, it is going to have to be a company that has the resources to scale quickly using branding, licensing, and IP from state to state.

How do you decide between shutting down, keep funding, or selling your start-up?

The writing is usually on the wall. You have to look at the cash bleed and what the investor base is telling you. This is where strategic partners are so helpful. To keep funding a business that is failing is such an enormous mistake and too many entrepreneurs drink their own Kool-Aid and do so. Having the right partners in place, the right metrics, and knowing when to “stop out” is crucial.

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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.

What are the key ingredients in building a successful start-up?

People, product, and process. Stolen from “The Profit” by Marcus Lemonis; No reason to improve perfection – That says it all!

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.

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His first investment was in himself and that turned out to be a very well-played move on his part as that led him to develop CannaFundr, a revolutionary crowdfunding platform for cannabis businesses. His name is Randy Shipley and he was gracious enough to give us a peek inside the twists and turns that make up his intellect and have left behind quite a track record of success.

How did your entrepreneurial journey begin?

My first endeavor was in 1988 when I invented a board game called Crosswords that sold over 50,000 copies and was turned into a game show on CVN, a home shopping network. I became involved in numerous startups in the telecom industry, becoming the first sales manager and first sales hire with Williams Telecommunications where I assisted in launching 4 different product lines. In 1998, I became Chief Revenue Officer for Carrier Access Corporation and led them from pre-IPO revenues of $6M per quarter through to their IPO quarterly revenues of $48M in 18 months. I have had involvement in many companies in their early stages and enjoy building organizations and revenues.

What was the motivating factor for you to invest in the cannabis industry?

I was fortunate to have been involved early on in industries that saw high growth: Telecommunications deregulation and the internet; actually was using the internet at Western Union for electronic mail in the early 80’s, before Gore even thought about inventing it.

I was one of the first to launch software for building crowdfunding platforms and as I looked for an industry that I felt had an opportunity to be a dominant crowdfunding player in, the cannabis industry was a very logical choice. So, my first investment was in myself and I launched a company in the industry. I am actively seeking investment personally in states that are not yet fully developed in their regulations and laws. I am not interested in dispensaries as a stand-alone investment, but feel they are excellent as one component in an integrated model.

I am actively seeking investment personally in states that are not yet fully developed in their regulations and laws.

One thing many first-time entrepreneurs struggle with is raising money. How would you suggest someone to overcome this problem?

Work hard and don’t be afraid to boot strap your company. If, as an entrepreneur, you can build a company to a stage where you have a product and customers that are buying it, it is far easier to raise capital at a much better valuation. You also have to be aware of your strengths and your weaknesses and build a team of founders/partners that offset any weaknesses you have. Investors will invest in strong teams that have an ability to execute across the many various functions of the business – so make sure you have your bases covered.

What is your best advice to cannabis entrepreneurs when they pitch their project to you?

Be prepared, have a realistic business model, and have a realistic understanding of your market and your ability to scale. I see so many pitches where the revenue growth forecast is ridiculous; it may look good in your spreadsheets, but it is an early warning sign when I see companies projecting millions in revenues in their first year.

Can you share your thinking on how to identify a company as a great opportunity?

It starts with the people and their ability to identify and articulate a solid market opportunity. They must not only understand and articulate how the company will make money, but they must also show the investor how and when they believe they will create a return on investment for the investor. I also spend a lot of time learning about the founder’s track record, ability to lead a team, passion to succeed, and aptitude to take action in challenging situations.

What are the key ingredients in building a successful start-up?

Hard work, long hours during the infant stage, dedication, ability to work with others, and the ability to learn from mistakes and listen while learning from others. Building a successful company starts from the top and is a domino effect from there all the way to the bottom. The founder has to continuously motivate and push the team to stay on track of the company’s vision in order for success to prevail.

How does the role of the founder evolve as a company goes from seed to early growth to later-stage scaling?

First, I think most successful companies have more than one founder. There may be a key founder, but successful companies typically evolve from a team working together. Second, most people need to realize when they have reached their limitations, they need to let loose with authority and responsibility and delegate as well as they can. This starts from the seed stage and stays true throughout.

What is your new knowledge in regards to investing in the cannabis industry?

This industry is VERY different and requires the investor and the entrepreneur to look at it differently than any other opportunity. The industry as a whole is a lifestyle business that can create exceptional cash flow. So instead of thinking about “exits”, everyone has to plan around cash flows.

As an investor, what are some of the key things you wish cannabis entrepreneurs knew?

Entrepreneurs need to know how to properly value their company and take a realistic look at their market opportunity. An example is this: Recently, I came across a company that had a single product they were selling. There was no intellectual property for the product and very little barrier to entry for others to compete. They had done a great job scaling revenues to $1M+, but their product was not much more than a rice steamer for pot and they wanted a valuation of $50M. I could start a product line in competition of them with a $500K investment and own it all. Another company that crossed our bow was a company that had been in business for 4 years and had seen revenues decrease each year since their start. They wanted to raise $1M and had projections to grow from less than $400K to over $10M in their next year; even though they had never done more than $700K previously.

What needs to happen in order to create a billion-dollar company in the cannabis industry?

In the restaurant industry, I think they say you should start with 2 billion dollars. I prefer to think of what it will take to get a company to $100M valuation – or a 10X growth from current valuation. For more companies to reach valuations like $1B, we need to have regulatory relief at the federal level to allow more companies to go public at earlier stages. This has started happening with the JOBS Act that I hope will continue over the next few years. As we move closer to having marijuana declassified as a schedule 1 drug and combine that with companies being able to raise capital for expansion and use their public valuations for acquisitions, we will see companies reaching that valuation. I saw this in telecom, where I was fortunate enough to be involved with a great team at Carrier Access where we had a $2B market cap on the NASDAQ.

For more companies to reach valuations like $1B, we need to have regulatory relief at the federal level to allow more companies to go public at earlier stages.

How do you decide between shutting down, keep funding, or selling your start-up?

All of these are pivots – changing the course of your business. Shutting down is the easiest – it usually happens to businesses as they simply run out of capital. Keep funding – a company should always be in funding mode whether it is external or internal investment. Deciding when to sell may be the toughest, but it is usually easier when you can count how many islands and private jets you can buy. Seriously though – selling is tough, but more enjoyable than shutting down!

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