How Up-and-Coming Spirits Brands Use Crowdfunding to Get Off the Ground
Grassroots investors chip in to give entrepreneurs a boost into the big time.
Whether you're a bartender or a cocktail connoisseur, if you want to see a specific brand or category flourish, you can have a direct say in the matter. Not just by putting a bottle on the shelf or bringing a bottle home. Today, anyone can literally invest in a brand.
Welcome to the world of spirits brand crowdfunding.
Take Avuá Cachaça, for example, a hand-crafted Brazilian spirit made from sugar cane which has a current WeFunder campaign looking to initially raise between $50,000 and $100,000, with a long-term goal of up to $500k. (Its makers have raised $22,000 at the time of this story.) Avuá is offering revenue-share crowdfunding and will pay 5 percent of its quarterly revenues back to investors, up to 200 percent of the initial investment. In other words, the people behind Avuá are offering — although they certainly can't promise —a chance to double your money. The minimum investment is $100, and they're offering a range of perks at different thresholds.
"This is a relatively new means of raising money for early stage businesses through friends, family and followers who may not be accredited investors under past SEC regulations," says Peter Nevenglosky, co-founder and president of Avuá Cachaça. "It [Title III of the JOBS Act, which went into effect in May 2016] allows for smaller companies to access a wider pool of fans and supporters to help fuel their business outside the challenging venture capital investment models and for everyday investors to diversify their portfolios in ways they have not been able to in the past."
This isn't the same thing as Kickstarter. There, you may get that "perk" or buy an early version of the product or whatever else, but you don't get your money back, let alone get it back with profit.
"Kickstarter is essentially a donation for a small token," Nevenglosky says. "But actually in our case, it's a revenue share model."
A new way to raise money
So why would a spirits brand choose to raise capital this way? "There are two main reasons: One, crowdfunding allows us to build a group of passionate supporters of Avuá as we grow who are invested financially and emotionally in our journey," Nevenglosky explains. "And two, it gets us access to needed capital for growth of working capital — getting Avuá to your bars as fast as the demand hits — and human resources while retaining ownership of decision-making, and a long-term perspective on brand growth."
That means they didn't have to sell equity, or a stake in the business, in order to raise funds. Equity crowdfunding exists as well, and of course there's the world of venture capital, more familiar to tech companies in Silicon Valley than spirits brands.
"Venture capital firms typically look for a 200-300 percent growth rate and a quick exit — something that is not sustainable in our opinion for building a long-term healthy brand and achieving our mission of elevating the cachaça category globally," Nevenglosky says. "We believe the crowdfunding model will help us build this brand the right way for the long run."
Other brands have taken the crowdfunding approach as well, including Chareau, Cleveland Whiskey and Barrow's Intense Ginger Liqueur.
"We launched an equity crowdfunding campaign within 30 days of the enactment of Title III of the JOBS Act," says Josh Morton, CEO and co-founder of Barrow's Intense. JOBS, by the way, stands for Jumpstart Our Business Startups. ”We were one of the first companies to take advantage of Title III, and the first craft spirit to make a Title III offering on WeFunder. We came up with the term 'craft investing,' because it epitomized this innovative and new form of investing that allows any individual to invest in small craft companies — not just big funds and the ultra rich."
Barrow's raised approximately $300,000 from 550 investors in their campaign, and it sees similar benefits to crowdfunding as Nevenglosky does. "So much of our business is about building brand awareness," explains Eve Alintuck, co-owner and vice president of Barrow's. "And investors are one of the best catalysts for growth. Equity crowdfunding investors are engaged and ready to help the company … Combining capital-raise efforts with brand advocacy is an efficient use of resources for our small brand."
There are challenges to pursuing crowdfunding, of course, particularly for a brand such as Barrow's. "We had several procedural hurdles that we had to overcome because we were one of the first companies to take advantage of the new law," Morton explains. "The tax filing was a lot more complicated than we anticipated. There are many ways to structure your offering. The one we chose … was simpler for the investor to understand what they were getting for their investment."
That's a challenge that Avuá is currently experiencing. "It is early for us — we only launched the raise in mid-June — but I would say the challenge is the lack of understanding around this type of investment," Nevenglosky says. "Making it clear that it requires only $100 minimum and what you get out in return has been the challenge. The flip side is it allows so many more people to get behind what we are doing that have not been able to in the past."
For brands that have already seen success, like Barrow's, it's been worthwhile. "Even with the hiccups, though, we would recommend it to other spirits companies," Morton says. "We're happy to give advice to anyone thinking about it as an option so they can benefit from our experience and hopefully avoid some of these headaches."
Other brands are using different funding strategies. Black Star Co-op in Austin, Texas, is the first-ever co-op owned and managed brewery and pub. There are no complaints about the beer selection there because many of the individuals drinking it are the same ones who are making it.
Industry-specific venture capital works, too
Then there's Distill Ventures, a drinks accelerator which has committed more than $72 million to over 15 brands. They also now have a focus on non-alcoholic drinks, including Seedlip, the first distilled non-alcoholic spirit. Diageo is the investor providing funds into Distill Ventures, but DV is still independent.
Distill Ventures is bringing a spirits-specific venture capital platform to the table, solving an issue that many brands have had with the tech-filled VC world. "Finding angel investors is difficult because most angels do not have expertise in this space; the majority are in finance or tech," Morton explains.
"We believe the best entrepreneurs can always raise money, but to go the distance in the drinks industry, money alone is not enough," says Dan Gasper, co-founder and COO of Distill Ventures. "We founded DV because we believe the right recipe for supporting entrepreneurs is the combination of funding, mentoring and access to a network of expertise."
Diageo is able to offers its global reach, massive networks and experience to the DV team's entrepreneurial expertise. "We understand the mindset of the entrepreneur because we are entrepreneurs ourselves with more than 120 years of drinks and start-up experience across the core of the team," Gasper says. "This allows us to share a first-hand perspective on the challenges and opportunities that face entrepreneurs scaling their business in the drinks industry."
With DV, a spirits brand receives mentoring and an extensive collection of resources, in addition to potentially ongoing, large-scale cash infusions. Of course, brands give up equity in exchange, and investments include call options for Diageo to buy the business in the future. But it’s another option for entrepreneurs.
So what's a spirits brand supposed to do? It depends on how much cash needs to be raised, whether or not the team is willing to give up equity in the company to get that capital, and what the short-term and long-term goals for the brand and its owners are. There's no right or wrong answer, and there's no shortage of options to consider.
[Full disclosure: The author has made an investment in Avuá’s campaign.]