marketing opinion

Startups and the runway to buy-out

Some businesses are founded with the intention of being sold for big money in five, six or seven years’ time. How can you spot them?

This isn’t a post about a specific brewery – though clearly Cloudwater has been on our minds this week. Perhaps our observations don’t apply generally. And maybe they don’t apply in brewing at all. But let’s have them out anyway.

We’ve both ended up with day jobs where we’ve been working with or on behalf of a number of startups recently. They’ve been across a range of businesses including food production, professional services and technology.

What we’ve noticed is that, despite the range of sectors and business models, they all have certain characteristics in common.

Six tell-tale signs

First, they tend to have a c.5-year business plan which acknowledges the business may not make a profit for several years, if ever.

Secondly, they have external funding from private sources – either founders and family, or venture capitalists. Funding from the latter is usually raised in multiple stages with late funding being dependent on hitting certain targets relating to sales, number of customers, market share and so on.

When late-stage startups make surprising decisions, this may well be what’s driving it.

Thirdly, they put sales to the fore. While it’s nice for them to be able to show that eventually the business will be profitable, the sales-growth trajectory is more important.

Consequently (item four) marketing will be conspicuously important to the business early on. There will be highly sophisticated marketing collateral from an early point in the business’s life, such as a cutting-edge website, a full suite of professionally-designed brand assets and a strong social media presence. It’s not unusual for these companies to have permanent marketing staff before they have an in-house finance team, or even their own manufacturing capability. 

Underlying all that there will be (five) a remarkably clear brand position and proposition, often focusing on an exaggerated difference between their product and established competitors. This is the essence of ‘disruption’ – at last someone is going to do this properly, cut through the bullshit and show the complacent dinosaurs what’s what!

This isn’t to say the product isn’t important. You certainly have to believe in it and be able to talk about it with convincing passion for several years. So, six, there will probably be a focus on new product development and heavy investment in it, at least in the early years.

What’s the endgame?

The final goal for this type of startup is usually a buyout of some description, in a set period of time – often five years.

Even if the founders want to stay in the business after that, they need to repay capital to early investors, so there’s always a ticking clock built in.

In the final stretch, you’ll often see a flurry of activity as they seek to maximise the value of the brand and of the company, which is what we were getting at when we last tackled this topic back in 2018:

There might be surprising partnerships with ‘evil’ companies; there may be contracts to supply supermarkets; or plans to have beer produced under contract, with more or less transparency… This kind of thing usually comes with a rush of blurb explaining how, actually, this way is even crafter because it widens access to the product, challenges the status quo, and so on, and so forth… The tying off of loose ends is another thing to watch out for, e.g. the sudden settling of legal disputes… The emergence of a dominant beer in the portfolio might be the biggest red flag of all.

The thing is, these companies will rarely, if ever, admit to their customers that the endgame is to sell it. After all, it’s a bit awkward when your marketing messages are all about what makes you distinct, different and superior.

That, we think, is why buyouts always seem to land as a massive surprise to customers and suppliers.

Contrary to what you might hear, people get just as narky about independence in other sectors as they do in beer. For example, we’ve both observed surprise and fury among boutique software users when products they love are bought out by a much bigger competitor. “I chose Quirple specifically because I liked their different approach and didn’t want to work with X-Corp,” they say, “and now I’m an X-Corp customer whether I like it or not? Quentin has betrayed me!”

It’s also worth saying that many businesses of this type never make it past the early stages. There is a high rate of failure with startups and even industry experts may never have heard of the ones that didn’t work out, or will forget them quickly.

What’s the alternative?

What does a growing business look like if it wasn’t built with that planned five-year-on payday in mind? Well, these businesses can still be successful, and still sell for big money, but their growth will tend to be organic, showing…

  • Lumpy sales growth and production – growing in fits and starts instead of on a smooth curve. 
  • A reluctance to invest in slightly intangible things like marketing because it all hits the bottom line.
  • A tendency to be behind the curve with new technology and production methods – they want to see it works before they invest hard-earned cash reserves.

As we said at the start, this isn’t really a post about breweries. We don’t work with breweries and it’s possible that not a single brewery has ever been founded as a startup with the aim of eventually selling to a larger competitor.

Perhaps every single one of those success stories (“Wow, great work guys, and well deserved!”) is a genuine surprise to the founders.

But it seems pretty unlikely, doesn’t it?

breweries Generalisations about beer culture pubs

Bars That Brew, Brewers With Bars

When we were in the research phase of Brew Britannia during 2013 we thought we observed a nascent trend: the cutting out of middle men.

A few years ago, there was a fairly cosy relationship between brewers, bar owners and distributors serving a nascent  ‘craft beer’ (definition 2) market, each taking a slice of the cost of a third of IPA.

But brewers seem often to feel frustrated at the fact that their reputation so often relies on the care with which their product is presented by third parties — assuming, of course, that they can even get any pubs or bars to stock their beer. The building of a tap room or the acquisition of a tied pub is an obvious solution to these problems.

Beer history

The Inevitability of Chains

Brewdog’s string of bars, The Craft Beer Company and the Pivovar empire are all expanding at a rate of knots. Every day, it seems, brings a launch party or details of a future opening. And every time a new bar opens, it seems to fill up, so why wouldn’t they keep opening more?

‘Decent beer pubs’ (diplomatic turn of phrase…) have often been part of, or turned into, chains. There was CAMRA Investments, in 1975; and, in 1979, the Goose and Firkin brewpub was such a huge success that David Bruce would have been daft not to open another, and then another, until, in 1995, there were more than forty Firkins around the country. Even JD Wetherspoon began life as a single pub in North London, also in 1979, making it to seven pubs by 1983 — growing at about the same rate as the ‘craft beer’ chains we’ve mentioned above.

Is it always bad news when a pub becomes a chain? We’re optimists and believe it is possible for a small chain to retain whatever magic it was that made the ‘seed pub’ successful. Often, however, it is the personality of one person (or perhaps a couple of people) that makes a business what it is, and that can easily be spread too thinly.

And, with chains, the temptation to compromise seems inevitable. CAMRA Investments was cut loose and became ‘Midsummer Inns’, under the leadership of former CAMRA chairman Chris Hutt; in 1981, he came under attack for disregarding CAMRA’s ideals when the pubs in the chain began to sell lager and keg bitter, and introduced fruit machines and juke boxes. Sounding rather like those he had laid into in his book The Death of the English Pub in 1973, Hutt defended this decision on the grounds of ‘customer choice’ — it was what the punters wanted, he argued.

Then there is an even bigger temptation: why not sell the whole bundle off, perhaps to Whitbread or Mitchells and Butlers, and take a well-earned early retirement? How long does the ‘decent beer’ last under new ownership? In what peculiar ways is the ‘brand extended’?

There’s another risk, too, as David Bruce discovered when Whitbread launched their own ‘fake Firkin’ brewpubs in the early eighties: chains are easy to imitate, at least superficially. Did anyone else notice the spate of ‘gourmet burger’ chains that sprang up in London c.2005, often with worse burgers, chips and beer, but at the same price?


Not a proper pub, but not so bad

Sometimes, holding an establishment up to the standard of the mythical perfect English pub can be unfair because there are now so many different business models operating successfully under that banner.

One of the most common alternative models is one we associate particularly with Wetherspoons, although we’ve got no idea if they originated it. These kind of pubs:

  • are “food-led”, but certainly not gastropubs
  • high turnover
  • operate on a “what’s your table number?”, order food at the bar basis
  • are usually based in very big hall-like buildings and
  • have some of the trappings of a traditional pub, e.g. dark wood.

In Cornwall, with its busy tourist trade, there are lots of these places, half empty in the winter but heaving in summer. Most are run by St Austell but not all.

What does a good pub of this type look like? Let’s take a St Austell pub in Newquay as an example.

  • Despite being food-led, a great range of beer in tip-top condition.
  • Efficiently run — not too much waiting, food delivered quickly.
  • Clean and tidy — no peas rolling around the floor or crumbs on the tables.
  • As cosy as possible — big enough to house a Zeppelin but warm, with booths and pillars to hide behind.
  • No illusions — this pub doesn’t claim to be traditional, historic or characterful.

We’ll always choose a proper pub first but, in their own way, pubs of this type give beer a home in unhospitable territory. They’re rarely charming, but they surely have their place.

Bailey used to work in a pub like this as a student waiter (a “Brewer’s Fayre”). One of his jobs was picking chips and peas out of the revolving sauce tray and stirring in the crust on the ketchup. That is why they always have sauce in sachets these days.