As many of you know, I am an attorney. What many of you may not know is that I started my career in software development during the first internet boom of the mid-to-late-90s. None of this legal advice, nor am I even commenting on the legality of the models put forth. It's just a summary of many conversations I've been having over the past few months. Today and Monday we'll look at some rather unique models for encouraging startups in the brewing industry based on some models that the software industry uses.
What I always find interesting is the similarities between the software and brewing industries. You typically have a small group of very knowledgeable people with little capital but a huge amount of talent trying to get a company off the ground. Initial, proof-of-concept, costs are fairly low. But soon the marketing and production costs begin to skyrocket.
Technology folks talk about the start-up cycle as consisting of a few elements: 1) idea, 2) proof-of-concept, 3) marketability (sub-divided into salability and profitability), 4) scalability, 5) sale. So, 1 and 2 typically are handled by one or two people. It is late part-two or part three that seed funding begins. Is the idea marketable, will people, anyone, use the product and can the product be profitable? At this point, a third person, a marketing-specific person, might be brought in. This is typically a first-round of seed funding that covers the cost of bringing the third person and some marketing efforts and to finish rough development.
The second step, early-stage funding, typically focuses on seeing if the idea scales. This is where more developers are hired and a CEO might be appointed from a Venture Capital firm to oversee costs and product development to make sure scalability can happen in a profitable manner.
Finally, the product is sold off to a company interested in the technology, brand, or whatever. The difference in how much the investors put in, and how much the company/brand sells for, is where angels and VCs make their money.
In the brewing industry, however, instead of labor costs - initial start-up capital is almost entirely equipment-based. But interestingly, the numbers are fairly similar to a start-up technology company. Where a technology startup might need to raise $500K in a three-year cycle, a brewery needs to raise $500K now, but it will last for three (or more years - and bonus, you can sell it at the end unlike sunk labor costs for hiring a $100K developer and bunch of computers that will obsolete in three years; we can talk some other time about the technology industry's developments to reduce equipment costs, though)
Yet breweries have a harder time finding start-up capital than technology companies. There is an entire investment structure around funding technology companies.
What I propose is that breweries could be funded by similar "angel"-style investment along the model of software development. It would require thinking about brewing in a new way and would look at brewers, breweries, and brands in a more commodified manner from an investment standpoint (even if not from a consumer-facing standpoint). So, what brewers need to think about, and what they've never thought about before, but what angels will ask as one of the first questions is: what is your exit strategy? Are you looking to hold? Or are you looking to sell off brands? The latter is more attractive, but represents a rather large shift in the brewing model.
But think about a brewer like Mikkeller. It owns no brewery, no stainless. Mikkel basically shops his services around and contract brews everyting. It's an interesting model. A professional brewer, with his own recipes, but no stainless. He takes his recipes and brews them under his label at various breweries around the world.
But, what if he licensed his recipes to breweries? He'd have even lower costs with returns based on sales generated by other companies. He could tap into their success to sell his brands. The brewery licensing his recipes would get "Mikkeller" recipes to market which carry a premium on the market.
You have a product with very low costs to get to market, but the equipment itself has very high costs. So, basically dividing up the brands produced on the equipment could be one way to split up the cost.
For example, an investment group is looking for 10% return. So, on a $1,000,000 investment they want to get $1,100,000 back. In software, the way it works is that the angels give the company $1,000,000 in return for stock, then when the company is sold to someone who wants the technology, the angel, in theory, gets something more than $1,000,000 in return. But, breweries don't really work like that. You don't really ever "sell-off" a brewery in the same course, or meaning, as you "sell-off" a software company. But you can, or could, "sell off" brands.
So, say, again, you have a brewer like Mikkeller. Mikkeller could "sell off" let's say "Jackie Brown", a wonderful, hoppy, brown ale. A brewery like, say, Sierra Nevada, without a brown ale but a rather sizable distribution network, could purchase (or license) Jackie Brown from Mikkeller. While, of course, the beer would be brewed by Sierra Nevada, not Mikkeller, the recipe would be the same and there is some portion of the goodwill that would transfer - there is plenty built-up in the marketplace - and it would, of course, be necessary during the change-over to insist on some amount of quality control. But at the end of day, there would be "Sierra Nevada Jackie Brown by Mikkeller" not "Mikkeller Jackie Brown". As certain brewers get known for these kinds of transactions, a greater portion of the goodwill will transfer as the marketplace begins to recognize "start-up" or "recipe" brands.
But, in this way, shortening the sale cycle from, essentially, never to approximately 1-3 years for a brand to build a reputation in the market is much more in-line with the software life-cycle. So, a brewer would need to sell 11 brands at $100,000 each to recoup the investors' money. Thinking about the life-cycle and proliferation of brands, this is extremely possible. Separating out the brewery equipment entirely to create a "brewing incubator" would also be possible - a pure alternate proprietorship where investors could make money on the equipment itself, not just the brands that it spins off.
Finally, these models provide more immediate, quantifiable, returns and more exit points for investors who aren't necessarily interested in owning a brewery, but want to make money off of the brewing industry. An investor could quantify, and valuate, what specific brands developed by a particular brewer are worth and there would be competition in an investment marketplace for brewers, not just brands.
I'm not saying that this model is for everyone. Though in reality, with the sale of distribution networks to and among distributors, there is already some of this in the second-tier. I'm really just proposing the second-tier sale to the first-tier. But, it is an option that brewers who are trying to figure out how to raise money could look into.