Generalisations about beer culture opinion

Crowdfunding in beer: danger sign?

“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 replies on “Crowdfunding in beer: danger sign?”

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?

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.

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.

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.

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.

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.


Comments are closed.