Crowdfunding in beer: danger sign?

A crowd.

Have almost started to think of crowdfunding as a danger sign. Why won’t a bank just lend them the money?”

We tweet­ed this in response to @bringonthebeer the oth­er day and it prompt­ed a few chal­lenges, includ­ing some that changed our think­ing, so we thought we’d unpack it a bit.

It’s just, real­ly, that it feels as if crowd­fund­ing is a com­mon fac­tor is a recent spate of beer indus­try takeovers and col­laps­es.

Mar­tyn Cor­nell gave a detailed run­down of some of the prob­lems with crowd­fund­ing in beer a few years ago: it’s not real invest­ment in most cas­es; and lots of crowd­fund­ed busi­ness­es fail, or fail to deliv­er on promis­es.

Most recent­ly, there’s been Hop Stuff and Red­church.

But we’re talk­ing about some­thing ever so slight­ly dif­fer­ent – that the very act of appeal­ing to the pub­lic for invest­ment seems increas­ing­ly like a red flag for the future of those oper­a­tions.

With hind­sight, in many cas­es, crowd­fund­ing often looks to us like a cry for help or act of des­per­a­tion.

Crit­ics of crowd­fund­ing some­times call it ‘beg­ging’ and it can feel that way.

When in day jobs we’ve been involved in rais­ing fund­ing, it’s been through banks. They’re unpop­u­lar, old school, not very ‘craft’, but they are part of our sys­tem of checks and bal­ances. If a bank won’t lend a busi­ness mon­ey, it prob­a­bly means that busi­ness has failed to present a con­vinc­ing case for its long-term suc­cess.

Some of the chal­lenges we got on Twit­ter did make us pause for thought, though: secur­ing fund­ing via banks usu­al­ly requires prop­er­ty as col­lat­er­al, which makes things tough for those who don’t own a house.

Some would no doubt say if you can’t man­age to buy a house, you prob­a­bly shouldn’t be aim­ing to expand a busi­ness to larg­er or mul­ti­ple loca­tions but giv­en the bizarre state of the UK hous­ing mar­ket, we’re not sure that wash­es.

Even so, when we see a crowd­fund­ing cam­paign launch, unless we know the brew­ery or retail­er in ques­tion has a cult fol­low­ing and strong mar­ket­ing game, it increas­ing­ly strikes us – right­ly or wrong­ly, on an instinc­tive lev­el – as a tar­get paint­ed on their flank: they’re weak, ripe for pick­ing off, and this is their last shot.

Of course we under­stand the appeal to busi­ness­es of crowd­fund­ing, and it’s not always bad news. We also know that many investors go into it with eyes open, as a bit of fun.

But the longer term prob­lem is this: if, as we read it, crowd­fund­ing is about the con­ver­sion of cus­tomer good­will into hard cash, every fail­ure or per­ceived betray­al reduces the amount of good­will in the col­lec­tive pot, and its val­ue.

6 thoughts on “Crowdfunding in beer: danger sign?”

  1. Crowd­fund­ing on Kick­starter and such proves there is a mar­ket for your new prod­uct. Go to a bank and tell them loads of peo­ple want a “smart umbrel­la “ and they will ask for proof in sales. But you can’t afford to make it at that point.
    In beer that seems less of a prob­lem. Make your new beer home brew. Let peo­ple taste it. Get­ting a small brew­ery to let you make a batch costs how much?

  2. Crowd fund­ing is a good way to grow a busi­ness by con­vert­ing its exist­ing and poten­tial cus­tomers into ‘investors’ who feel a greater con­nec­tion to the busi­ness and its prod­ucts. The ‘equi­ty’ which the ‘investors’ receive is not a gen­uine stake in the busi­ness and gen­er­al­ly it is dif­fi­cult for an investor to cash in a stake,the real aims of the pro­mot­er and the ‘investors’ is to cre­ate a fan club for the busi­ness. Crowd fund­ing has many advan­tages over tra­di­tion­al sources of fund­ing such as bank loans, no secu­ri­ty is required and the ‘fans’ buy the prod­ucts. Crowd fund­ing should not be seen as a sign of weak­ness or des­per­a­tion in a business,instead it is a sign of strength inso­far as a busi­ness feels con­fi­dent that it has devel­oped a cus­tomer base which can be fur­ther devel­oped into fans of the busi­ness. There are many exam­ples of suc­cess­ful crowd fund­ings in the brew­ing indus­try includ­ing Brew­dog and Left Hand­ed Giant in Bris­tol.

  3. As Red Dave points out the bar­ri­ers to entry in brew­ing are com­par­a­tive­ly small. But with the 5000 hls annu­al lim­it on beer duty relief for small brew­ers, the obsta­cles to grow­ing the busi­ness beyond a cer­tain point are sig­nif­i­cant. Hav­ing a supe­ri­or prod­uct is by no means a guar­an­tee of suc­cess. After all look at the strug­gles at Hard­Knott.

    Crowd fund­ing has a place I am sure, but as a York­shire­man I keep my mon­ey firm­ly in my pock­ets when­ev­er I hear of the lat­est appeal to the mar­ket.

  4. It…depends. Anoth­er good rea­son for crowd­fund­ing that applies more to pubs is that it can be a good way to raise rel­a­tive­ly small amounts of equi­ty that can unleash quite large amounts of financ­ing (loans and grants) from sources like the More Than A Pub fund.

    Hop­stuff seems to have been a clas­sic case of over­trad­ing if you look at Tweets like this :

    They got them­selves a big­ger brew­house, then realised that to make that work they had to sell it to per­haps “low­er qual­i­ty” cus­tomers than pre­vi­ous­ly which caused cash­flow night­mares, so they did more crowd­fund­ing to go from 2 to 8 tap­rooms, which caused ter­mi­nal cash­flow prob­lems.

  5. I won­der if it’s relat­ed to inter­est rates being on the floor for the last few years. I did very briefly look into crowd­fund­ing myself a bit back, around the time an ISA was matur­ing (for yes, I am Dis­gust­ing­ly Rich*). Hav­ing lent some mon­ey to a friend’s busi­ness many years ago (at 11%, which now seems like an insane inter­est rate**), I won­dered if maybe I could get, oh, 3–4% out of lend­ing to a Busi­ness Ven­ture in the World of Brew­ing, as com­pared to 1–2% on your aver­age long-term ISA.

    I’m still won­der­ing, because it turned out that – as John Lam­b’s com­ment says – crowd­fund­ing has noth­ing to do with invest­ing in the con­ven­tion­al sense; to put it anoth­er way, it has noth­ing to do with invest­ing. The brew­eries who do it might as well just say they’re open­ing a fan club with a £500 min­i­mum mem­ber­ship – although obvi­ous­ly the rea­son they don’t is that that does­n’t sound like a very good deal.

    So why do I say crowd­fund­ing has some­thing to do with low inter­est rates? Not because it’s attrac­tive to wouldbe investors – it isn’t – but because there’s a gen­er­a­tion com­ing up who have nev­er known any­thing but low inter­est rates, just as they’ve nev­er known any­thing but high house prices. If you’ve worked for a few years and you’ve got a bit of mon­ey knock­ing about, and it’s not going to do much in a deposit account except sit there (and there’s no point even try­ing to save for a house), lob­bing a grand at a glo­ri­fied VIP Pass scheme might seem like as good a use of it as any.

    *Not real­ly, but I have got an ISA.
    **Although since the busi­ness even­tu­al­ly went bust and I lost the lot, the effec­tive rate of return was­n’t as high as all that.

  6. I have to dis­agree com­plete­ly that a brew­ery crowd­fund­ing effort is “a cry for help or act of des­per­a­tion.” You don’t get to organ­ise a crowd­fund­ing through the likes of Crowd­cube with­out a con­sid­er­able amount of due dili­gence being con­duct­ed – those guys have their own rep­u­ta­tions to pro­tect. Thus some­one who is only try­ing to raise cash because they are des­per­ate is going to be weed­ed out. Nor is it a bad sign that banks have turned some­one down: banks are not very good at spot­ting like­ly suc­cess­ful ven­tures, and are extreme­ly risk-averse. See, eg, the exam­ple of Brew­Dog, which was turned down for a bank loan in its very ear­ly years after receiv­ing a mas­sive order from Tesco, thus mak­ing that par­tic­u­lar bank man­ag­er the finan­cial equiv­a­lent of Dick Rowe, the guy at Dec­ca who reject­ed the Bea­t­les.

    If Hop Stuff and Red­church, high-pro­file exam­ples of col­lapsed brew­eries that had gone in for crowd-fund­ing, makes you feel crowd-fund­ed brew­eries are there­fore asso­ci­at­ed with fail­ure, I sug­gest this is what might be called the “pub­lic­i­ty illu­sion”: there are undoubt­ed­ly large num­bers of clo­sures in the UK over the past few years of brew­eries that nev­er went in for crowd-fund­ing but col­lapsed any­way. Unfor­tu­nate­ly there appear to be no fig­ures avail­able on just how many brew­eries in the UK have closed down, but with eg SIBA see­ing a drop in mem­ber num­berss of 78 in the year to Jan­u­ary 2019, then it’s undoubt­ed­ly am con­sid­er­able num­ber.


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