Crowdfunding craft beer: Viable business strategy or market fad?

Crowdfunding 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, there’s no such thing as a free pint. Let’s see if crowdfunding makes sense for your business.

“With the number of breweries/brewpubs/craft beer affiliate companies skyrocketing, there is only so much that private financing and bank loans can support. We offer an outlet of additional funding to these companies that was not available to them in the recent past. We feel that the craft beer market will continue to grow at a high rate, and that there is an untapped market of everyday craft beer enthusiasts that want in on the action.”

That’s Mark Slattery at CrowdBrewed.com, a craft beer-specific crowdfunding website. The non-craft-beer-specific crowdfunding sites, like Kickstarter.com, see about one or two craft beer campaigns per month and have about a 45 percent success rate.

Slattery said the company currently has 15 campaigns in its pipeline nearing campaign launch, and each is at a different stage of company development. Some are established and looking to expand or add equipment and others are start-ups looking for that first boost. There are even some approaching CrowdBrewed as a point of sale or marketing vehicle.

The sample isn’t terribly robust, but the outcome makes sense: Established companies perform better than unknown entities, but Slattery said that should not deter the unproven breweries out there as long as they are close to launching on their own.

“Typically, we advise people that crowdfunding should be toward the last step in the process, not the first,” Slattery said.

But if you aren’t established yet, will there be enough crowd interest in your campaign to meet your goal? Again, there isn’t a ton of examples, but it has happened. The most successful campaign on CrowdBrewed to date was J Wakefield Brewing, which spent nearly a year building its reputation and contacts prior to launching its start-up crowdfunding campaign. J Wakefield ended up well exceeding its goal of $55,000.

Key to the J Wakefield’s success was how it nailed the crowfunding best practices, for both established and new brewers alike. According to Slattery, those keys are:

• Spend time prior to launch building social media network/buzz about upcoming campaign and leveraging existing relationships to help when campaign is launched;
• Provide high quality and unique rewards for investors/contributors; and
• Never stop with social media and self-promotion during the course of the campaign.

J Wakefield “offered very unique rewards and promoted the campaign right up until the end,” he said.

Over at CraftFund.com, the company performed a study of Kickstarter craft brewery campaigns that showed 29 successful campaigns out of 71 launched as of December 2012 for a 41 percent success rate. Of those successful campaigns, there was an average of 231 donations per campaign and an average of $96 per donation.

Some takeaways the company listed on its site:

• Set a reasonable target based on your personal network. “The most money a brewery has crowdfunded [with CraftFund] is $52,000 and only seven campaigns have raised over $30,000.  Successful campaigns on average had a lower target [$17,224] than unsuccessful campaigns [$24,730].”

• Video marketing is critical — be sure to tell your story. Of those 29 successful campaigns, only three were successful without a marketing video that explains the uniqueness of the brand. “The discrepancy is even greater with craft beer as campaigns that used a video [$13,215] raised on average an incredible 229 percent more than campaigns without a video [$4,015].”

Campaigns are also popping up that use crowdfunding websites like CrowdBrewed to pre-sell their product, sell off used equipment and turn crowdfunding into a marketplace rather than just a pre-opening funding method.

Rewards v. equity

Strangely enough, people aren’t just lining up to hand you thousands of dollars with no strings attached. Breweries looking to capitalize on a crowdfunding campaign would need to either offer rewards or equity for prospective donors. Those two words mean wildly different things, so let’s take a close look.

Rewards, especially right now, are the most common route.

“Rewards crowdfunding will continue to be a viable option for start-up breweries with little brand recognition,” said David Dupee, founder of CraftFund.com. “One of the biggest perks of rewards crowdfunding is its marketing potential.  Start-up breweries will view rewards crowdfunding as a way to get on the radar. “

“When a brewery does a rewards campaign with us, we only allow rewards that the company is able to fulfill under their own licenses [e.g. any beer sold needs to be picked up at their taproom instead of shipped to the contributor, etc.],” Slattery said. “We also advise the campaign to have realistic fulfillment dates listed on their campaign page so contributors have an understanding about when to expect their reward and how it will get to them [shipped vs. pickup vs. experience].”

“Equity crowdfunding is relaxing the rules on selling ownership in your business. It believes a company should market itself to sell ownership without having to go through the rigorous process of a SEC filing. It also opens up opportunity for the common man to invest in what they believe in. Equity crowd funding allows anyone to invest.” — Chris Farmand, Small Batch StandardAfter the campaign ends, it’s entirely up to the brewery to fulfill its rewards obligation as if a customer purchased an item directly from the brewery. If they are unable to fulfill the rewards down the road, then contributors should request a refund from the brewery itself.

But what if a couple pints and a brewery tour doesn’t get it done? What if donors are looking for a piece of the company’s equity instead? Dupee said this is still a very complicated but extremely intriguing option for the craft brewing industry.

“The few breweries that have done equity crowdfunding in the U.K. [where it is legal] have offered shares for around this same price,” he said. “Therefore, consumers might be less interested in a bottle opener, T-shirt or other reward when for the same price they could become an actual owner through purchase of shares.”

This of course assumes equity crowdfunding will prove workable, which, on the federal level here in the United States, it is not just yet. Dupee noted that the federal JOBS Act, which would allow the general public to invest in private companies online, comes with significant red tape. Examples include requiring companies to have their financials reviewed/audited as well as go through an intermediary that will have to register with SEC.  Suddenly there are significant upfront costs and hurdles associated with equity funding as a viable option. But some states are starting to flip the funding script.

“States are beginning to create their own crowdfunding exemptions that would make it possible for breweries to seek capital from residents of the state where the brewery operates,” Dupee said. “These state exemptions eliminate much of the red tape included in the federal JOBS Act. Because craft brewing is part of the buy local phenomenon, state crowdfunding could be an intriguing option for breweries.”

Georgia, Kansas and Wisconsin are the states presently with equity crowdfunding options on the books. Michigan, North Carolina, Washington and New Jersey have proposed laws.

“Regardless of the form it takes [state or federal], we believe equity crowdfunding will be as much about engaging customers as it is raising capital,” Dupee continued. “You see this in the U.K. where BrewDog’s ‘Equity for Punks’ raises have turned 12,000 fans into brand advocates and owners.”

Dupee believes equity crowdfunding has the greatest potential to appeal to regionals, micros and start-ups alike, and CraftFund is going to be mostly focused on facilitating equity crowdfunding campaigns instead of rewards campaigns.

“Equity crowdfunding will be a way for bigger craft brewers to retain their grassroots feel that is so critical to the brand while at same time mobilizing owner/advocates to fight for a brand’s place on an increasingly crowded shelf,” he said.

CrowdBrewed and its partners at North Capital help to broker the entire deal and walk the brewery through the process of taking on equity investors.

As you might expect, equity crowdfunding presents unique business issues, some that may be difficult for any entrepreneur, but especially many craft brewery owners who are brewers first and business minds second. We asked our resident brewing accounting columnist Chris Farmand, founder of Small Batch Standard, a CPA firm helping craft breweries across North America, his thoughts on equity crowdfunding. Here is what he had to say:

“Equity crowdfunding is relaxing the rules on selling ownership in your business.  It believes a company should market itself to sell ownership without having to go through the rigorous process of a SEC filing.  It also opens up opportunity for the common man to invest in what they believe in.  Currently, most private investment deals require ‘accredited investors’ to play.  This rule alone disallows most people from participating.  Equity crowd funding allows anyone to invest.

“As for the kind of equity, this is for the lawyers.  There are many business structures out there to protect the business and operating owners from investors messing things up.  I would imagine the crowd investors would have limited ownership and the agreement would prevent them from a number of things.  It would circle back to the lawyers, who will write up the most complicated, expensive agreement. Big picture, I own stock in Home Depot. I cannot show up at Home Depot HQ and run amock.  It would be far easier to do this with a small brewery. I guess it’s the risk you run for bringing in strangers.”

Farmand preaches caution, as any accountant should, especially when it comes to such a new business model that has not been tested over a longer period of time.  Some pitfalls just can’t be known right now, with either rewards or equity crowdfunding.

“Equity crowdfunding is highly regulated and the duration of a campaign, escrow, release of funds will be dictated by the regulations that apply to a brewery’s raise [federal JOBS Act or specific state exemption used],” Dupree clarified.  He notes that much of the equity crowdfunding space remains in flux, but much more could be known as regulations start to settle during 2014.

Despite the risks and the unknown, we know craft brewers, maybe more so than owners in other industries, don’t mind a little experimentation, especially when fans can be intimately involved in lockstep with growth goals. What do you think? Will you be turning your mug club into an investors meeting in 2014?