Crowd-Sourced Funding for Breweries - What's in it for investors?
In continuation of his Crowd-Sourced Funding (CSF) for Breweries series, Mark Hubbard, an OnMarket Campaign Manager specialising in Breweries, conducts an interview to determine the reason why the general public invests in breweries.
When I talk to craft brewery owners about crowd-sourced funding (CSF), which is also referred to as equity crowdfunding, one of the first questions I get is “what’s in it for investors?” Having founded and owned a brewery myself, it’s not a difficult question to answer, but I asked the same question to a friend of mine who has invested in a brewery CSF campaign to get a CSF investor’s perspective firsthand.
My friend, let’s call him Jim, is the CEO of a well known Sydney organisation and has decades of C-Suite experience in Australia and internationally. He is an astute investor with a large and active equities portfolio and a superannuation fund he takes a working interest in managing alongside his financial adviser. He also meets the definition of Sophisticated Investor by ASIC, which means he passes certain income and net assets hurdles that allow him exemptions from regulatory restrictions usually applying to retail investors and investment products.
So, with his extensive portfolio and investment expertise, I was surprised to learn that Jim is part of the crowd that has invested in brewery CSF raises and become a craft brewery shareholder. Why would an investor like Jim be drawn to an investment in an unlisted, young company?
I asked - "Where does this fit in your portfolio, Jim?" Well, he said, "it doesn’t."
“The investment decision here was about becoming closer to something I enjoy (craft beer), indulging in a hobby if you will, and going along for a journey with a prospect that resonated with me. I see it as a similar decision to investing in a race horse syndicate, which you know I do too. With that, I get regular updates as to training progress, I get excited by upcoming races, I follow the races, and I back my horse. I don’t expect to win, but it is a thrill when I do. I do it for joy, not to make money. The same with my brewery shares. I put $500 into a CSF raise with a brewery I like. I get updates as to their new beers, awards won, expansion plans and so on. I get discounts on brews and swag. I take the enjoyment of my hobby to another level. My journey is the reward. I may never see that $500 again, or I may double it if the brewery, say, lists or sells. Either outcome is acceptable and wasn’t part of my key investment criteria. Either outcome will obviously make little difference to my overall financial well-being. But in the meantime, I am part of something that has value to me.”
"That is refreshing to hear", I tell Jim. "Do you feel you have gotten good value from your participation?" Well, Jim replies,
“Knowing what I know now, I would do it again. I know the offer document disclosed the valuation, but there wasn’t sufficient price sensitivity in my decision to make it matter to me, so I can’t even recall what it was, or what it might be now. So that isn’t part of the equation. But I enjoy the beer, the brewery, the news updates, the insider feeling and the discount I get. If I lived in the same state as the brewery, I would probably be able to enjoy those things even more. I feel that they could do a better job communicating with me as a shareholder, but I have to admit my expectation there is more informed by my experience with the investments I make where my financial return is paramount. Having said that, I am happy that I have an ownership interest in my brewery. I like seeing it in the bottle shop, and I always look for it.”
Jim and I agreed that this is the power of crowd-sourced funding. Individuals of the general public, also known as 'the crowd', makes small individual investments that accumulate to something significant to the company - in terms of both money and the ability to realize strategy. Returns can be the ancillary to an investment decision, but having fun, becoming part of an insider’s club, sharing pride of ownership in achievements and milestones, and going on a journey are often more central.
Jim was aware that CSF investors can invest as little as $200 and up to $10,000 in an CSF raise, depending on the minimum investment amount set by the company. Sophisticated Investors are not limited to $10,000, and companies can raise up to $5m in a 12 month period. As a Sophisticated Investor, Jim chose to invest $500 to take his hobby to a new level.
Advice to brewery owners
Now, dear brewery owner, you too know a craft brewery investor that you have had this conversation with. You know them quite well, in fact, and probably have non-stop discussions with them.
It is you.
Ask yourself, why did you invest in your brewery?
On one hand, did you have attractive compound annual growth rate targets? Did your business plan include a lucrative dividend policy, an exciting exit strategy and timeline, and/or a robust IPO strategy and timeline? Did you have realistic expectations around forecast sales, earnings and cash generation that could yield returns superior to alternate investments?
Or, on the other hand, did you have a passion for the craft that you wished to take to the next level? Did you have a purpose for being in the sector, to bring something to it that wasn’t already being done? Did you have a dream to realise, an itch to scratch? Did you feel compelled to go on a journey, to give it a go?
Chances are, all of the above are things you thought about before making your investment in your brewery. But if you are being honest with yourself, you might agree that answers to the latter questions carried more weight in your decision making.
And that is where CSF for Breweries, and OnMarket as a licensed financial intermediary, come in. We specialise in connecting like minded investors with visionary founders. You invested in your brewery, probably for a myriad of reasons, many of them emotional. Don’t discount the fact that there are many others that would invest in your brewery for similar reasons, and with no greater certainty as to outcomes. And, unlike the situation you may find yourself in, they can do so without betting the farm.
Significantly, they can invest in your brewery without diluting your control, through sharing a much smaller ownership stake.
It is important to keep in mind how you communicate with prospective shareholders to attract investment. Their investment criteria is their choice. You don’t need to make assumptions about what they are, you only need to communicate clearly and honestly in an offer document, in compliance with ASIC's regulatory requirements. The offer document does not need to include forecasts, expected returns, dividend policies, or exit strategies. You don’t need to assume that you need such information to have a successful CSF campaign.
However, the offer document must disclose your valuation, the number of shares you intend to issue under the offer, their price, and the number of shares already on issue. Following simple maths, this information then determines the valuation of your brewery. Your valuation does not legally require justification in the offer document but OnMarket can assist you with selecting a valuation methodology and provide comparables to help ensure the success of a CSF raise.
Then, the investor can decide whether to accept that price as a purchaser or not. Remember, the value of something is what a buyer is willing to pay for it. Price sensitivity is low at minimal levels of investment, and this is conducive to CSF campaigns being able to command superior valuations. You might be interested to know that the average valuation of breweries raising funds via CSF in Australia to date is 6.55 x revenue.
Is crowd-sourced funding the next step in your growth journey?