This October, VinePair is celebrating our second annual American Beer Month. From beer style basics to unexpected trends (pickle beer, anyone?), to historical deep dives and new developments in package design, expect an exploration of all that’s happening in breweries and taprooms across the United States all month long.
In a working-class town south of Boston that’s seen better days, a craft brewery with no track record has had no real issue securing the cash it needs to open its doors for the first time this November. In Michigan, the co-founder of seven successful brewpubs with nearly two decades of brewing experience and business credit has been scrapping around for capital to launch a new brewing project in Hawaii.
In the vast middle between these two breweries is the story of how craft beer businesses are lining up financing in 2021 and beyond. By the end of last decade, the U.S. craft beer industry’s growth was slowing as the number of breweries climbed and flavored malt beverages burst into the beer aisle. And then the coronavirus pandemic hit, sending drinkers into pantry-stocking mode and brewers — many of which had shifted to an on-premise model to control the customer experience and capture margins that would otherwise go to canning lines and distribution partners — into disarray. So it’s not unreasonable for an outsider to casually wonder who would be crazy enough to put their cash into a craft brewery in the year of our Lord 2021.
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But I’m not in the business of random speculation. I’m in the business of calling experts and asking them for very specific speculation, then reporting what they say to you, dear reader. So whether you’re a homebrewer long on vision but short on working capital, a crowdfunding financier about to commit to some craft brewing equity, or just a curious third party wondering how the sausage gets made (wherein sausage is brewery debt and equity structures), never fear: I’ve got you covered. All I’ll ask of you in return is not to try to get me to invest in your brewery, unless your brewery is in Hawaii and I can live there.
If you work in the financial services industry, you can probably skim this section, but for the rest of us normies, some basic frameworking is in order. Pandemic aside (insane phrase, I know, but suspend your disbelief for a moment), there are a few typical models for funding a craft brewery project or expansion in the U.S. of A. The “why” is hopefully obvious, but just in case it isn’t: Breweries are expensive as hell, from the square footage and equipment they require, to the labor that powers them, and so on. Even for existing craft brewers with strong cash flows, increasing capacity or opening a new location is tough to cover out of pocket. So typically, you finance — either by taking on debt, or offering equity.
The Brewers Association, the craft brewing industry’s largest trade group, has lots of detailed resources on this stuff for members, but in the interest of not making this feel like homework and/or boring you to tears, I’m going to stay out of the weeds. Speaking generally, here are the usual brewing financing models, in rough order of ease and convenience:
- Be rich.
- Have rich friends and family.
- Have perfect credit and a bulletproof Small Business Administration loan application.
- Some combination of the above.
- Have an all-star team assembled with decades of experience and deep connections with credulous private-equity people (who don’t really exist, but again, just go with it.)
- Have a LOT of credit cards and an intimate familiarity with 0 percent interest balance transfers.
- A much messier combination of the above.
In the past half-dozen years or so, an eighth option has been thrown into the mix: crowdfunding. Long within the purview of, like, Kickstarters for bamboo sunglasses (or whatever), more recently breweries have found real success both crowdfunding debts, and issuing equity directly to rank-and-file supporters under a provision in U.S. financial law known as Regulation A.
If you read my byline here at VinePair, that term may ring a bell, and it should: I’ve written about how both BrewDog USA and Armed Forces Brewing Company have used Regulation A offerings to raise capital for their respective expansions. Whatever you think of those breweries, the model itself is compelling for some breweries. “It’s a marketing tool for the brewery, and if the brewery is a really good marketer of their brand, then they can market shares of their brewery just the way they market their beer,” says Mike Mitaro, an industry veteran and founder of Brewers Advisory Group, an independent consultancy that assists breweries with, among other things, SBA loan applications.
BrewDog is the undisputed world heavyweight champ in equity crowdfunding as a beer company, having pulled together upwards of $100 million across a decade-plus of raises. But other breweries are catching on: In Charleston, where I’m based, a contract brewer called Island Brands has raised over $3.5 million in an equity raise that’ll close at the end of the month. Now that we all know how breweries get financed in general, let’s get a little more specific.
The salad days
There was a time when it was easy — well, easier, at least — to finance a craft brewery. These were the golden years of the industry, when 20 percent market share by 2020 seemed inevitable and everyone was drunk on West Coast IPA and boundless optimism. (Ah, how young we were.) “Five or six years ago, private equity couldn’t get in, because the banks were first in line,” recalls Tim Schoen, CEO of Brew Hub, a contract brewer and packager that also produces its own brands. “At the time, it was kind of a treasure trove of new clients for the banks.”
The exact moment in time these financial salad days began and ended is up for some debate, and varies based on the region, project size, and a bunch of other factors that aren’t even worth hashing through here. (That’s what quants do and Lord knows, I’m not one.) Rick Wehner, founder of Brewery Finance, a Colorado firm that has helped craft breweries line up debt financing for new equipment purchases since 2005, puts the heyday when lenders were “throwing money in your windows” closer to the end of last decade; Jeff Clark, senior lender in the wine & craft beverage group at Live Oak Bank, puts it seven or eight years back.
“I’ve still got a magazine from 2013 with a cover that’s a painting of beer snobs serving other beer snobs, and it was all about how everything [in craft beer] was all blue sky and sunshine,” says Clark, laughing. Salad days, baby.
Ron Jeffries and his wife, Laurie, predated craft brewing’s easy-money era, opening Michigan’s Jolly Pumpkin Artisan Ales in 2004. But they’ve been successful even so: Jolly Pumpkin now operates seven brewpubs around Michigan, and their beers are complex, award-winning, and widely popular. “When we started Jolly Pumpkin, it was just a microbrewery [with] a little retail space” and no taproom, Jeffries tells me. “I did have to go to a number of banks before we got an SBA loan for our initial opening, but that was quite small compared to what we’re looking to do now.”
What Jeffries and his wife are looking to do now is open Holoholo Brewing Company, a new, separate project on Hawaii’s Big Island. (Jeffries wants to be clear he is planning to remain with Jolly Pumpkin as well.) And lining up financing for the project, despite Jolly Pumpkin’s 17-year track record of success, has not been easy. “At the beginning of 2020, everything really kind of came together,” Jeffries tells me. Investment partners were on board; the location in Waikoloa Village was leased; the business plan was written up and ready for an SBA preferred lender’s review. And… well, you know what happened next.
The pandemic effect
When the pandemic hit in March 2020, the Jeffries had to put Holoholo on the back burner and tend to the Jolly Pumpkin empire. In some ways, it was for the best: If they’d opened the Hawaii project in, say, January of last year, they’d be on the hook for the entirety of their lease with no cash flow to pay it. But in many, many more ways, it was a devastating development for Holoholo. “In March , everybody who had expressed interest in the project pretty much walked away from it. Not everybody, but most people did,” Jeffries says. “A lot of the people that we had” committed to invest, “had either other investments in the brewery and restaurant space, or were in the space themselves.”
“It was not a good time to be asking people for money,” says Jeffries, drily.
In Massachusetts, Ed Cabellon and his friends were doing just that. The charismatic higher-education administrator lives in Brockton, Mass., a south-of-Boston burg with a downtown drag lined by once-proud buildings just aching for redevelopment. “Brockton is one of those spots that gets a bad rap, but there’s a lot of business opportunity down there if you just know how to connect with the community,” Cabellon tells me. “That’s what we’re about.” And so, Brockton Beer Company was born… on paper, at least.
With limited formal experience in the business, Cabellon and his five co-founders would seem at first glance to fall into the “unbankable” category of craft brewing hopefuls, pandemic or not. The Brockton Beer backstory smacks of Schoen’s cautionary “two guys and a taproom” tale, which goes a little something like thi — actually, I’ll just let the industry veteran tell it himself.
“[We] are two young homebrewers, and we’re going to start a business in Poughkeepsie or wherever, and we’re gonna build a taproom and get after it and [we think] the banks are gonna give us money…” [Pause; you can hear Schoen roll his eyes through the phone.] “No way, not gonna happen.”
But here’s the thing: Cabellon and his Brockton Beer buddies didn’t get their financing through a bank. It’s not that they didn’t try: “We did go out and look for support for SBA loans, and I have to tell you, there were some concerns about craft beer being a thing in an ‘urban’ city like Brockton.” (In other words: “You wanna do a taproom… in this neighborhood?”) Nonplussed, the group scraped together what private capital they could, then cobbled together additional debt financing from a series of alternative sources. With support from Brockton’s newly elected mayor, they successfully convinced MassDevelopment, a state-affiliated lender/developer, to issue them a loan; ditto NeighborWorks America, a development nonprofit active in the area. For the rest of the cash they needed, they turned to Mainvest, a debt crowdfunding platform that has become increasingly popular with new brewery projects in recent years.
(“Breweries are some of the most successful on our platform,” Mainvest content marketing manager Lauren Murdock tells me via email.“By the last quarter of 2020, we had a total of 16 breweries raising on the platform and 18 new brewery offerings moving into Q1 of 2021. … Post-pandemic, things have continued steady, but slower, and anecdotally, breweries are still one of the most popular verticals on Mainvest.”)
“We set a target of about $107,000 to raise last year … at a return of around 1.7 percent,” Cabellon says. (Mainvest declined to share details about the amount of debt capital breweries typically seek to raise, but another debt crowdfunding platform, Honeycomb Credit, tells me that the past five brewery campaigns have averaged a raise of $130,000.) Thanks to 200 funders across the country, the project hit its goal on the platform during the darkest days of the pandemic’s second wave. Brockton Beer Company was a go. “When you think about a Black-owned brewery — one of very few in the state of Massachusetts — the way we were able to leverage what I think was a pretty creative approach to financing a brewery,” says Cabellon, “doing this during a pandemic … I’m very proud of that.”
Everyone has had enough bad news lately, so I’m happy to be able to end this column on not just one, but several positive notes.
First: the craft beer business is hard, but breweries weathered it fairly well — and Wehner at Brewery Finance thinks lenders noticed. “What I’m seeing now is these banks are coming back around,” he says. “The mass fallout that they were expecting didn’t happen, and I think that’s just going to make lenders that much more bold [because they’ve realized] this is a very resilient industry.” And the pandemic has taught lenders more about the nuances of the brewing business’s equipment needs, too. For the past 18 months, Wehner has been explaining to one bank after another why every brewery was simultaneously trying to buy a canning line. Plenty of lenders that weren’t serious about the space decided to stop financing breweries entirely, but the ones that stayed are committed. “Perhaps the silver lining of the pandemic was that [less specialized lenders] got out,” he says.
Second: The craft beer business, like every other, has ebbs and flows — and Live Oak’s Clark thinks it’s coming back around. “This stuff is cyclical, it really is,” he says. “I started lending money to wineries in 1993, and I’ve been through four cycles now. I think beer is gonna be like that.” He tells me he’s seeing more qualified brewery applicants than ever before, and hardly any garage homebrewers looking for a loan to fund their poorly thought-through leisure business: “That person seems to have left the building.” That’s bad news if you’re an arriviste looking to scale up from a 5-gallon setup, but good news if you’re willing to build a solid business plan and a team to implement it. There’s simply less chaff for lenders to sort through in order to find the wheat. Be the wheat, man.
Third: the craft beer business isn’t even just about beer anymore. “The craft beer world is not the same world that it was even five years ago, because now it’s a ‘beverage’ world,” says Mitaro. This seems like bad news, and it might be if you have no intention of changing your portfolio to acknowledge the rise of FMBs. But if you’re willing to adapt, financiers on both the debt and equity sides of the equation are interested in giving you the dough to do so. Schoen knows this firsthand: After nine years operating Brew Hub as a place for “craft brewers to go when they want to grow,” the company has switched its slogan to “where craft beverages go to grow.” More importantly, they got a distilled spirits plant license, and are building out their liquor-based RTD offerings. (“Love that model,” Clark tells me.)
Fourth: private equity firms are still interested in the craft brewing space — or at least, some of it. As I was reporting this column, news broke that Catawba Brewing Company — a North Carolina beer company that owns Palmetto Brewing Company in Charleston and the Twisp hard seltzer line, among others — would be acquired by Wiregrass Equity Partners, a Florida-based PE firm that’s building out a Southeastern portfolio of breweries. This one comes with a couple caveats: a) that’s an acquisition, not a start-up or an expansion; and b) that type of investor isn’t necessarily interested in smaller breweries. Catawba did around 30,000 barrels in 2020. “The private equity guys are more interested in the bigger deals,” Mitaro says. “If you’re a 10,000-barrel brewery and you want to expand, where’s that money coming from if it’s not debt?”
Finally, return to our original tale of the two breweries themselves. It’s hardly sunshine and roses, but it’s not entirely doom and gloom, either. After a pandemic year of keeping the Jolly Pumpkin plates spinning, Jeffries mostly replenished his investor base, and is on the hunt for an SBA loan. It’s been a frustrating process, much harder than the application for the original Jolly Pumpkin loan. And he’s still not sure he’ll land one. “I’ve cycled through a lot of banks, and it’s proved really, really challenging,” he says. “Some flat out will just tell [us] that they’re not doing a brewery or restaurant right now; some aren’t doing any startups right now.” One told him they’d need to see six months’ — half a year’s — worth of operating capital on hand at all times to secure the loan. Still, Hawaii is calling, and he remains bullish on Holoholo. “I’m very optimistic because it is a really solid plan,” Jeffries says, which, no surprise — they’ve been doing this for 17 years. If the banks he’s in talks with now won’t take his application to the SBA, he and Laurie are preparing to go the crowdfunding route to make up the difference.
Back in Brockton, Mass., on the other side of their own crowdfunding campaign, Cabellon and co. are hurtling toward a targeted November opening. Based on sales at the beer garden concept they introduced this past summer to generate cash flow, spark neighborhood interest, and test out operations before their space was ready, Cabellon thinks he dramatically underestimated the project’s potential. “Our commitment to the Mainvest investors that invested in Brockton Beer Co. was that they’d be paid back within three years,” he says. “We’re gonna do that in the first year. We’re gonna make sure those investors get taken care of right away.”