Friday, August 27, 2010

Beer, Cheese ... and Startups ... and Beer Startups

Posted by Jeff
Yestday Dane101 posted an article from TechCrunch about the entrepreneurial spirit here in Wisconsin. I've talked about my friends over perBlue, one of the highlighted companies that is making some pretty nifty mobile games.

Earlier this week, I was happy to attend a talk by Madison's Economic Development Director, Mr. Tim Cooley. He pointed out what a lot of us in "the biz" already know: Wisconsin's problem isn't a shortage of talent, infrastructure, or ideas, but rather a shortage of capital. We don't have enough people - venture capitalists, investment firms, etc - willing to invest in all of the startups going on here.

The situation is getting better, particularly for "big name" industries such as biotech and e-commerce. And, part of the reason for that is the recent (2005) investment tax credit passed by the state to give an incentive to invest in these kinds of companies that is now starting to pay some dividends. This is a 25% credit on funds invested into "Qualified New Business Venture". Obviously, this begs the question: what is a Qualified New Business Venture and does your company qualify? The rules are as follows:
To be certified as a Qualified New Business Venture by the Department of Commerce, businesses must be able to answer "Yes" to the following six questions:

1.Are you seeking private equity funding for pre-commercialization activities related to the development of a proprietary new product or process in Wisconsin?

2.Have you been in business for no more than 10 consecutive years?

3.Are your principal administrative offices located in Wisconsin?
and
Does at least 80% of your payroll go to people employed in Wisconsin?

4.Do you have less than 100 full-time equivalent (FTE) employees?
(FTE=Total number of hours worked per year multiplied by total number of employees divided by 2,080 hours)

5.Do at least 51% of your employees work in Wisconsin?

6.Since its inception, has your business received, in aggregate, no more than $10 million of private equity investment in cash?
It is my belief that brewery startups would qualify as "Qualified New Business Ventures" under this definition. There are two issues that would determine eligibility: 1)"pre-commercialization activites" and 2) "proprietary new product or process". The second is easy: recipes are trade secret, hence proprietary. Easy peasy. The first is a little more difficult: "Pre-commercialization activity".

Some organizations define pre-commercialization activity as things like market analysis, research and development, and product testing. On the other hand, "Commercialization Activities" are generally understood within the product life-cycle to assume a product is available for the general public. So, "pre-Commercialization" would be anything prior to "available to the general public". In the software universe, the equivalent of "beta" testing would be "pre-commercialization".

So, let's apply that to the brewing industry for a moment. What does "pre-commercialization" mean in a brewing context? Beta testing? What is beta testing? Well, how many batches do you think it takes to perfect a recipe, to do market analysis on the success of a recipe to determine acceptance, and then roll out the product to a wider market?

I'd argue that most brands take at least 2 years, if not 5, to become fully refined. Take, for example, O'so's Picnic Ants Saison - last year's version was very, very different from this year's. And not in a "rotating brand" kind of way like "Stone Anniversary" or something. Rather, this year's is a refinement, based on market analysis and product testing, research and development, beta testing; call it what you like, but it is no different from the 5 years that GMail sat in beta to refine it for general consumption.

So, I would argue, any brewery that otherwise meets the other definitions would be engaging in "pre-commercialization" activity by limited release of new brands to refine proprietary recipes. So, what's "limited release"? Good question. GMail was in beta for 5 years and it counted as "limited release" because you had to be "invited"; given the multiple millions of email gmail.com addresses before it came out of beta, I'd argue "limited release" is a pretty fluid definition. Or, for a more local option, look at perBlue's Parallel Kingdom - it qualifies. Alice.com qualifies and it has thousands of users - far more than drink, say, BrewFarm beer.

Yet another way that the brewing industry is similar to the software industry ... So, I think it's time to add "breweries" to the list of things that Wisconsin is known for. Oh ... wait ...
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8 comments:

  1. I have turned over many stones trying to find start-up venture capital for my brewery start-up and am still looking. Seems as though most of the State's and lot's of venture capitalists or "angel" investors are very focused on Bio Tech or computer related start-ups. Although, I have not gone an "pitched" my start-up to any venture capitalist (they typically want to own a peice of your ass) if one looks at the websites and as an example the "Govenor's Business Plan Contest" it's all heavily skewed towards biotech.

    Also, I hate to say it but another problem is bureaucratic hurdles. I'm not one of these "small government" types, but the headaches involved in licensing both in terms of alcohol and construction/site location related to doing a brewery start-up almost drove me to seek locations outside of madison.

    Page,
    House of Brews
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  2. The idea that venture capital is not available here in Wisconsin is nonsense. Capital is not bound by state lines but merely gravitates to the best business opportunities. For some reason there are many in Wisconsin that think venture capital should be some sort of "good will" investment with no strings attached. If your business or idea is of merit, investors will usually invest regardless if where you are located. When government gets in the middle of this, it is usually for the wrong (non-business) reasons.
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  3. Mr. and/or Ms. Anonymous,

    You know, I don't think anyone in their right mind thinks venture capital is a "goodwill" investment at all. Venture wants it returns, they wouldn't do it if it didn't make money. So, your comment is simply false. No entrepreneur I talked to is looking for a hand-out without expecting to give something back in return.

    Second, You would think that's capital wouldn't respect boundaries, but that's not true either. Venture capitalists tend to want to have some control over their investments; they tend to take board positions and exercise some amount active control. As a result, they typically want their investments near them. Madison is littered with the detrius of companies that have left for the coasts at the behest of VC money.

    Again, this is changing as VCs are starting to appreciate the Midwest for its investment potential. One of the primary attractors is tax incentives (your "government getting in the middle mucking things up") - without which there would be little incentive for VCs to change their investment patterns and all of those smart folks who go to UW would choose to go to Stanford, Berkley, and MIT because that's where the money is.

    The fact is that there is simply not the culture of VC here. There isn't the flow of capital here that there is in other places where entrepreneurship thrives.

    So, no, the idea that VC money isn't here is not nonsense. It's, sadly, fact. It's a fact that is changing as returns and solid businesses are proving that the midwest is a good investment.

    Some day we'll talk about why breweries in particular are difficult investments for VCs, but that's another story for another day. To ruin the surprise of that story though: exit strategy.
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  4. Anonymous...

    You're wrong on this. Early stage VC will only invest in close proximity to their offices and those are not in WI.

    It's unrealistic and a bad allocation of time for an early-stage VC to make a two or three day trip to WI from either of the coasts to make a once a month board meeting, something that's normal for a start-up.

    What they will do is participate in a syndicate IF there's a lead local investor/VC firm that will monitor and mentor the investment.

    There are always exceptions to the rule but normal is that for a company to attract outside the state institutional money, a precondition may very well be to move the company.
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  5. Here's some info on this from the Global Midwest Initiative:

    http://globalmidwest.typepad.com/global-midwest/2010/03/an-investment-in-investing.html#more

    "His overall point is that, while the Midwest has some venture capital available, there's not enough of it, and it isn't enabling the region to compete with capital-rich regions on the two coasts.

    Right now, the Midwest has a handful of private venture capital funds, useful in themselves but pretty small by national standards. The biggest is Venture Investors, headquartered in Madison, Wisconsin, with some $200 million under management. Not bad -- until you consider that the average American venture capital fund has more than $250 million under management. In other words, our biggest is smaller than the nation's average."
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  6. VC is one thing and government incentives/assistance to encourage investment is another. They are linked at times, but largely separate. Currently, I have found a big bias in terms of both in WI (especially Madison) towards biotech. I think Jeff is correct in saying breweries are a good bet, but overlooked. Take a look at these statistics http://www.brewersassociation.com/pages/business-tools/craft-brewing-statistics/facts.

    Personally, I have shyed a sway from VCs because my business vision (employee owned in 5-10 yrs) probably won't fit with too many VC's RIO expectations. And, I'm not saying that this is wrong on the part of the VC. However, from a State/Govt. perspective it makes sense to help a microbrewry start-up if the goal is to create jobs and tax revenue.
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  8. Page - the Gov. Business Plan seems tipped to biotech and was in prior years, but that has changed a little bit. One reason it was like that is because it that's who were start-ups looking for money here. But last year had some great non-biotech entries. In addition, check out the Early Stage Symposium: http://www.wisconsintechnologycouncil.com/events/earlystage
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