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.