Beer nerds are often not business nerds, so the financial challenges and solutions to running a startup company can be a lot like learning Chinese (Wenzhou dialect). Luckily, there are professionals lining up to help future brewing operations navigate the busy waterways, changing philosophies, new laws and common practices of the brewing business world. Let’s start at the beginning — raising money to start your brewery.
Traditionally, there are three main avenues to consider when trying to raise capital for a brewery:
- Self-funding — This includes your money or family money.
- Investors — This includes giving up ownership in the brewery for money.
- Institutions — This includes banks, venture capitalists (VCs) or other lending organizations.
But those three money streets are changing directions and expanding with new resources and tools. Crowdfunding, in particular, is a new-school way for cash-strapped entrepreneurs to both involve fans in brand expansion as well as gain the funds necessary to reach business goals. Sounds great, right? Well, it hasn’t been that great in America because of the variety of restrictive laws and complex crowdfunding platforms, but that’s changing.
We took the opportunity to sit down with one of those smart business professionals mentioned above, by the name of Ryan Schildkraut, lawyer with Winthrop & Weinstine, based in the Twin Cities. Schildkraut recently spoke on the changing crowdfunding laws in America and other ways to raise startup capital at the Craft Brewers Conference (CBC) in Philadelphia. He also took time to answer a few of our questions and educate us and our readers on clever ways to raise some legal tender.
CBB: Ryan, thanks so much for taking the time. We appreciate it. Winthrop & Weinstine seems to be getting a lot of appreciation these days, helping brewers with their financial and legal needs. What was the onus of your seminar at the CBC?
Schildkraut: Our session was geared toward a startup or early-stage brewery that needs some more capital for growth. The goal is to always showcase ideas on how breweries can go out and get an investor — not just a venture capitalist or private equity firm — but a new kind of retail, individual investor. We’ve tried this approach for approximately 40 to 50 of my brewery clients, and we’ve found success in pooling money from a combination of friends, family and founders to help us take advantage of some of the new crowdfunding laws at the federal and state levels. Granted, we’re lawyers. We don’t raise money for people, but we can help breweries devise a structure that would make it attractive to an investor. Then, we help them navigate the process of complying with the laws and trying to find the investors.
CBB: What are the new crowdfunding laws? I know in Europe, they can actually have investors through crowdfunding, but that’s not exactly true here.
Schildkraut: When a lot of people think of crowdfunding, they’re thinking of donation crowdfunding, like Kickstarter, where you give some money and you get some type of perk in return. What I’m more interested in is investment crowdfunding, where instead of being a donor, you become an owner of the business. The U.S. laws are really playing catch-up in that regard, but there have been a lot of recent, exciting developments. Can I give you the long version?
CBB: Totally. Plenty of time.
Schildkraut: As a reaction to the Great Depression, Congress passed the Securities Act of 1933, which has regulated pretty much all methods by which companies have been able to raise capital from investors for the last 80 or so years. Essentially, what the law says is entrepreneurs can raise money from friends and family, but they can’t advertise the fact that they are fundraising to the general public. In today’s modern age, this has proved to be problematic. Entrepreneurs such as breweries can’t go to the media (like TV or a newspaper) and say they’re raising money and they certainly can’t mention it on social media either (this includes Facebook, Twitter and LinkedIn). It makes it really hard for any entrepreneur to raise the money they need, especially for a brewery, which is very capital intensive.
So in 2012, Congress aimed to fix the problem by passing the JOBS Act. The JOBS Act really had two key components, Title II and Title III. First, let me tell you about option number one, which is Title II. Title II was the first aspect that went into effect in late 2015. That lifted the ban on advertising, but only if you sell to accredited investors, who are essentially very wealthy, rich individuals. It’s basically 1 to 3 percent of the population. We helped pull together a deal for a craft brewery in Minneapolis called Utepils Brewing. While they raised about $1.25 million and did it via advertising and through channels on the internet, it could only be aimed at a limited group of wealthy people. It was portrayed as crowdfunding, but is it really crowdfunding when only 3 percent of the population is eligible to invest?
CBB: That’s a really small crowd.
Schildkraut: Yes. It’s a small crowd. Although, it’s a promising step in the right direction, and my clients and I are encouraged to see that this brewery was able to raise as much money as it did . And they did it within 12 weeks, which is very fast. I’m used to seeing it take 12 to 18 months to raise that much money – if you’re even able to do it.
Now we can talk about the next option, which is using Title II and is considered a true crowdfunding law that allows anyone accredited or non-accredited to invest. This piece of legislation actually went live recently on May 16, 2016.
CBB: What does this new law allow?
Schildkraut: Well, the idea of it is better than the reality. It allows a company to raise up to $1 million from accredited or non-accredited investors, but there are so many restrictions and so many hoops you have to jump through that I’m not entirely convinced that it’s going to be a usable system. Here are three issues I see with Title III:
First: While the million-dollar cap might work for a smaller brewery, in the example of Utepils Brewing, they needed more than $1 million just to buy the brewhouse and the tanks and build out the tap room. Unless they were going to reduce their fundraising goals by 20 percent, this wouldn’t have been an option for them.
Second: Non-accredited investors can participate, but there is a limit to the amount that they can invest. This amount is determined by a formula of their income, and for most people, the formula results in about a $5,000 limit. So if you’re trying to raise the full $1 million, but if people can only invest small chunks of $5,000, it’s going to be harder and take longer to do, plus your brewery could wind up with hundreds, if not thousands, of shareholders, which creates its own issues.
CBB: Now the crowd’s getting too big.
Schildkraut: Exactly! It’s hard to manage down the road. Now third: Your brewery still has to sell these investments through an online portal that’s registered with the SEC and FINRA. And also, participating companies have to provide reviewed or audited financial statements to investors. Yes, there are a lot of hoops to jump through, which gives breweries a lot of reasons to NOT do it, but I’m optimistic. We’re still so early in the roll out of this new law, and it’s hard to know how it will take off. In fact, I saw the first Title III crowdfunding portal was just approved by the SEC yesterday. The floodgates did not open on May 16, but it’s an evolution. We’ll see how it goes.
CBB: Luckily, there’s a third option, right?
Schildkraut: Yes — luckily another option. …
The third option is cool. Click next page to read it and a bunch more advice.
Schildkraut: … The third option is that, while the SEC was dragging its feet to roll out these different crowdfunding systems, different states started passing their own crowdfunding laws. For example, in Minnesota we actually wrote the law with breweries in mind. Again, it’s not in effect yet, but the law has been passed and we expect the Department of Commerce, the body that regulates securities to issue final rules, to sign off at the end of this month. Minnesota and approximately 35 other states have their own laws. The laws differ from state to state, but you’ll be able to raise $1 million to $2 million from accredited or non-accredited — usually with less restrictions and less hoops to jump through than the federal system.
The main takeaway is: Three years ago there was really no option for these breweries unless they either had rich connections or they were just going to break the law. Now, there are three options that all have their pluses and minuses. There are new ways to do it. It’s just becoming easier for these startup breweries to raise capital and get up and running.
CBB: Can you explain the European variation in crowdfunding, to give us some contrast?
Schildkraut: This whole idea of crowdfunding is a trendy buzzword, but all it really means is the ability to advertise that you’re raising capital. You harness the power of the internet to connect with people who might be investors. In Europe, they haven’t had all these restrictions on fundraising, so it’s bizarre to them to understand why we need new laws and why we can’t do it. It’s just been that way since, almost an overreaction to the Great Depression. I wasn’t around in 1933, but I’m imagining the point of the law was so you didn’t have someone come knocking on your door asking if you wanted to invest in swamp land in Florida. People were doing that kind of stuff, and they got swindled and lost their money, so Congress passed these very restrictive laws that said you can’t ask anyone to invest unless you have a relationship with them. Or, you register the offering like an IPO, which a small company is not going to do. Or you use some sort of intermediary, licensed securities broker, which again, a small company is not going to use either.
CBB: Super interesting. What are the other popular avenues for raising capital in the brewing industry today?
Schildkraut: The first way is by getting capital from banks for startups. Banks typically can offer some sort of small business loan at a pretty attractive interest rate and are normally willing to lend an amount based on the value of the equipment. When you look at the overall capital stack, it’s maybe half debt, half equity. A second way is by founders’ equity, whatever they can contribute or are willing to risk. Third, there are often opportunities to get a low-interest-rate municipal loan from cities, counties or states. Fourth, some people are able to get grants, depending on where they are.
But there is one final way: We have one client, Bauhaus Brew Labs, in Minneapolis, who did a full fundraising traditional method and then said, “You know, it would be really cool if we could install a sound system and a stage and have concerts here. It’s going to cost $25,000.” But they had already closed the offering and it was going to be complicated and expensive to re-open it. So they said, “We’re going to try Kickstarter.” They sold things like: $5 gets you a high-five. $35 dollars gets you a T-shirt, and dozens of things all the way up to $2,5000, where you could rent the brewery for a night.
Not going to lie. I was kind of suspicious Bauhaus could raise $25,000 doing that in 30 days. I was wrong. They raised $42,000 in 19 hours. It really proves the power of using that kind of tool.
CBB: What advice would you give to a potential brewing operation looking to raise capital? Is there perhaps a solid formula you can share?
Schildkraut: It’s not really a formula because every situation is different, and it really depends on what their business plans are and where do they see those going in five to seven years. But if I were to give one piece of advice for potential brewers, I’d remind them that it all starts from having a quality business plan that keeps your target audiences in mind. A lot of times that’s what we — as attorneys — first ask someone to see. We often see brewers, really any entrepreneur, put together the business plan that shows how the business will be successful but when you want to go find investors it’s a little bit of a different spin on it. You now also have to address the questions: How am I going to get my money back, and what’s my return on investment?
A lot of brewers haven’t really thought through that. We can help them think through some creative structures that maybe help investors get their money back more quickly. Again, if it works with the overall business plan and goals. A lot of times it’s not as simple as investors invest $500,000, and they get 25 percent of the brewery. There are other ways we do it where the investors invest that much money, and then they get maybe 80 percent of the distributions until they get their money back, with some sort of return on top of it. Founders get 20 and then once the investors are paid back with their return, it flips to be 20/80 the other way. There are a lot of creative structures we’ll help people with.
CBB: Do you see the investors getting their return on investments?
Schildkraut: A lot of stuff we’ve been working on, they’re too early and their client doesn’t have to pay the investors back for years down the road. One thing that helps the brewers here is it’s pretty clear that when you’re finding someone to invest in a brewery, it’s what I would call a glamour investment. Not necessarily a bad investment, but if you were really just after the financial reward, there are much better things you could be investing in. It’s a startup; it’s risky; it’s a competitive industry. Yes, it’s growing, but not everyone’s going to be the next big regional brewery.
We meet with people who just want to have a neighborhood tap room that makes really good beer. That’s great. You can have a nice lifestyle business doing that, and the owners can probably pull a nice salary and be very happy. That’s now a little inconsistent with taking a couple hundred, a thousand, up to a million dollars from investors who need some sort of return on it. They’re not just a bank that’s going to give you money and just sit on it for 20 years without any expectation of return. No one’s going to invest if it’s just a flat line business without growth. It doesn’t need to be the aggressive growth, as if it were a tech company. No one here thinks they’re investing in the next Microsoft or Google.
I hear a lot of people say, “If I just get my money back at some point with some reasonable return, but I also get to drink free beer for 10 years, and I get to tell my friends that I own a brewery, I’ll be happy. I get to go to a restaurant and if I see that beer on tap, I get to brag to people that I own it.” There’s kind of this glamour to it all. People like investing in their community and being part of something. I think a lot of it in this space is that people buy on emotion. What you really need to do when you’re out finding investors is to sell an experience and the idea of being part of something.
