Alternative Finance for Alternative Beer

Posted on February 3, 2012

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A brewery may start with a passion for beer, but money is needed to get that beer made and consumed. The past few years has seen an incredible expansion in the craft beer industry and it does not appear to be slowing down, at the end of 2011 there were 915 breweries in planning.1 Paradoxically the growth in the craft beer industry is happening at time in which financing has been tight for small businesses, for either an initial loan or an extension of existing credit. So where is the money coming from to finance this growth? The beer industry breeds innovation and this is being brought to bear in the alternative financing that breweries are using to raise money.

Crowd-funding for small businesses has grown greatly in the past few years – crowd-funding is where a group cooperatively finances a project. Kickstarter is perhaps the most widely known crowd-funded site. On Kickstarter, instead of getting equity (ownership) in the project/company investors get tokens of appreciation for each level of investment that they partake in. For example, a new brewery will ask for a level of funding and has different levels at which people can give, if you give them $5 they will send you bumper sticker, for $10 you get a t-shirt, etc. ,  $100 they will give you a permanent mug at the brewpub, each level builds upon the preceding levels and it is contingent upon the funding goal being reached. A project must be fully funded for any of the funds to be received, with each project being at a different level, one project might be for the whole brewery while another might just be for the funds needed to get a permit. A search for “brewery” on the Kickstarter site produced 48 results; of these 48 results, 40 were closed projects, with 23 being unsuccessful, 17 receiving their full funding, and 8 were open [date: 2 February 2012].2 This equals a 42.5% success rate for closed projects, which, for these purposes, is close to the 44.5% overall success rate for Kickstarter projects.3 Aside from the gifts, donors often invest because they believe in the mission of the project. However, for many, the individuals who believe in the mission, they also want to contribute to the company and get a piece of it, they want equity.

With new models of crowd-funding there have also been concerns over the legal gray areas. In early 2011 Fargo Beer Company used ProFounder to raise $41,000; however, ProFounder has recently had to change its business model. 4 ProFounder used to provide crowd-funding services and now provides tools to guide small businesses, this is the result of an SEC request to stop operating without a broker’s license.4 In addition to the current legal issues, there are those who are concerned that investors may not realize the inherent risk in any investment or that fraudsters make take advantage of the new market – which is inevitable. The size of the project using crowd-funding is not limited to the small or craft beer industry, in June of 2011 a duo raising funds to buy Pabst Brewing Co. was also issued a cease-and-desist by the SEC, interestingly, they had already raised $280 million.4 The current laws are likely to change in the U.S. but in the meantime, breweries are finding other ways to funds.

In the United Kingdom BrewDog rose funding through direct equity offerings. What makes BrewDog’s offer unique, not only within the beer industry but within the investment industry as a whole, is that the shares were offered directly to the public yet are not available on a publically traded stock market. So why would people buy shares which they cannot trade? The answer to this might be found in the name of the program itself: Equity for Punks II (this is the second round of offers, thus the II). Aside from being given lifetime discounts on beer and first pick at specialty brews, these investors are buying into an idea and community which they support. Unlike earlier examples, BrewDog is an established brewery with a loyal following–  established being relative as it has been around since 2007 and had already been involved in a number of craft beer controversies – and will be using the funds for expansion. So why are other small businesses not following this financing model? Likely because it does require an extra level of legal and regulatory requirements, BrewDog had to get approval from the UK’s FSA and trading was through ComputerShare, and a large enough interest from investors to make it viable.

With the innovation and tenacity found in the beer industry, industry players are like to be visible in the changes that will result from changes in financing and technology, aka the current level of restricted financing and the internet. It is only a matter of time before funding models change. A bill has already passed through the House, H.R. 2930, which will give much greater leeway to crowd-funding. Whether it gets through the Senate in its current state, H.R. 2930 speaks of the movement towards change.


Additional Thoughts
Within the beer industry, it will be interesting to see if the expansion of craft breweries – in number and production volume – becomes a proof of concept, better enabling traditional financing and alternative, or creates a fear of a craft beer bubble. Perhaps it will be something more nuanced.

In addition to alternative financing, the craft beer industry is also witnessing unique partnerships for knowledge sharing, access to distribution systems, and economies of scale, all topics to delve into further later.

 
Notes
1 Brewers Association, “Preliminary End of Year Brewery Count is 1,949” 19 January 2012. http://www.brewersassociation.org/pages/community/ba-blog/show?title=preliminary-end-of-year-brewery-count-is-1949
2 http://www.kickstarter.com/projects/search?term=brewery
3 Kickstarter Stats http://www.kickstarter.com/blog/2011-the-stats
4 Wall Street Journal, “Crowd-Funding Brings Unease,” Angus Loten, 17 November 2011. http://online.wsj.com/article/SB10001424052970203611404577042333598282986.html
5 Growth Business, “Raising equity its own way,” 15 September 2011. http://www.growthbusiness.co.uk/channels/raising-finance/venture-capital/1655348/raising-equity-its-own-way.
Market Watch, “Craft Beer Maker BrewDog Backed by 5,000 Investors With 10% of Shares Still Up for Grabs” Press Release. 21 November 2011. http://www.marketwatch.com/story/craft-beer-maker-brewdog-backed-by-5000-investors-with-10-of-shares-still-up-for-grabs-2011-11-21
SF Gate, “Crowd funding, an online path for small businesses,” Carolyn Said, 15 January 2012. http://sfgate.com/cgi-bin/article.cgi?f=/c/a/2012/01/15/BURS1MO311.DTL
Equity for Punks II prospectus http://www.brewdog.com/EquityPunks2.pdf

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Posted in: Beer Industry