I recently had the privilege of listening to Richard Gesteland, the author of Cross-Cultural Business Behavior, speak to a group of entrepreneurs interested in exporting their businesses outside the U.S. One of the concepts Richard discussed was the difference between relationship-based business cultures and those that are more deal-focused. As I listened to him explain the various ways people from these cultures perceive and do things, I realized that this same culture clash is at the heart of a transformation going on in the Cannabis Industry right now.
Because of the prohibition against Cannabis, the initial business culture for this industry was mainly relationship-based. What this means is that people would vet one another. Because the end product was illegal, there was no legal framework to protect against fraud or shady dealings, people in this business had to carefully assess whether or not they wanted to do business with someone before actually engaging with anyone. The best way to avoid getting screwed was to gather references from others who had dealt with a potential partner and spend time interacting with that potential partner, to gauge their trustworthiness. Many deals were done verbally, after a long “dating period,” because there was no legally enforceable way to make sure the other party would perform.
Relationship-based people look for long-term partners. They are looking to “get married” to someone they can trust and rely on to meet their business needs. Due to the fractured legal state of this Industry, doing business from this perspective is still wise, and many old school entrepreneurs coming from the gray market side of things are most comfortable with this style.
Deal-focused business culture assumes that the deal is everything, and while a certain amount of due diligence is expected, it does not require personal interaction between participants for the business side of things to occur.
The industry, however, is growing exponentially, and with that growth comes a whole new style of business culture, flowing in from the tech, pharma, life sciences, and agricultural sectors. This deal-focused way of doing business requires a high level of trust between participants and is largely based on the rule of law. Deal-focused business culture assumes that the deal is everything, and while a certain amount of due diligence is expected, it does not require personal interaction between participants for the business side of things to occur. Too much fraternizing is viewed as wasteful and indulgent. Results are the goal, and deals are structured to maximize efficiencies.
While it could take weeks or even months for a relationship-based person to decide whether or not to sign a contract, deal based folks focus on the terms, not the people involved. Once those terms are agreed upon, that contract gets signed. With the right legal frameworks in place and an agreed upon price and delivery schedule, deals can be done in a matter of hours, not weeks or months. The disadvantage of this style is that there is far less loyalty between the parties. Vendors and suppliers are viewed as interchangeable, so long as they meet price, quality, and delivery criteria. People who are used to this style often perceive the old school, a relationship-based way of doing business in this industry as “unprofessional,” which can lead to hurt feelings and lost opportunities.
This clash of cultures is glaringly obvious in Cannabis, and is an especially difficult one to navigate for entrepreneurs coming to the industry from the outside. Neither way is better, or worse than the other. They are different styles and being aware that these two very different styles are at play in this industry can mean the difference between a wonderfully productive business relationship and a stillborn sale.
The relationship-based vs. deal-focused distinction also provides a handy way to examine the dichotomy between the investor viewpoint and that of the entrepreneur.
Despite the fact that they are savvy business people who understand the efficiencies of a deal-focused style, investors are relationship-based. Their experiences have led them to believe that betting on the jockey leads to a far better chance of return than betting on the horse. They want to understand the team behind the company and gain a sense of whether or not that team can perform before they put their money into a company. Failing to recognize the need for a “dating period” when wooing investors (particularly angel investors) is an all too common mistake made by entrepreneurs.
Entrepreneurs, on the other hand, tend to be deal-focused. They think of investors as just as fungible as the money they provide. They forget that many investors can bring a whole slew of intangible assets to a company, from useful contacts to years of expertise in certain sectors to leading a syndicated funding round. Investors can become your best friends or your worst nightmare, so even if you are deal-focused, making room for some relationship-based thinking is definitely a great way to round out your entrepreneurial toolbox.