Exploring the Most Unique Relationship in Investing
We live in an era of funding options. Between traditional venture capitalists, micro-lending, prolific seed accelerators, and yes, Regulation Crowdfunding, startups have more sources for capital than ever before.
As new options create new relationships, there is none more interesting than the one between founders and investors of a Regulation Crowdfunding (Reg CF) campaign, particularly for product-based companies with built-in customer bases. Customers who decide to become investors have proven to be fiercely loyal buyers, extraordinary brand evangelists, and are generally more devoted than a VC, who has invested in dozens of more companies than your average personal investor.
“The awareness of who we are and what we're doing is growing, and it's growing exponentially because of the crowd,” said Steve Vanechanos, the Executive Chairman of the Board of Epec - James F.C. Hyde Sorgho Whiskey. “The crowd doesn't shut up. After they invest, they're not done. They tell friends and they brag about the company and the product. I definitely would not do it any other way if I was building a brand.”
We talked to four very different alcohol companies spread all over the country — Hawaii, Florida, Ohio, and California — to explore what they’ve learned by fostering the most unique relationship in investing.
The Island Brewery Dedicated to the Local Food System
The mainland’s image of Hawaii is one of sunshine and fertile land, pineapples and coconuts, palm trees as far as the eye can see. Those actually living on the islands, though, have a much different view of the local food system.
In Hawaii, 86% of the food and beverage consumables are shipped in. That would be a high percentage anywhere, but is particularly high for a place that can conceivably grow a lot of its own food.
Ola Brew Co. considers itself a part of that mission, so much so that the company was almost originally incorporated as a non-profit. And over its past 5 years of business, the objective of helping return the state to a more localized food system is as pressing as ever.
Last year, Ola purchased $65k in local fruits and produce from farmers to make their beers and ciders. They’re on track to raise that to $200k this year and $400k in 2019. So while mainland investors can’t yet drink Ola’s products outside of Hawaii, the capital supports the broader goal. It’s a cycle — investors pump up a brewery that pumps up farmers who pump up the local economy.
“While our investors are partially investing in a Cheers scenario where it’s, everybody knows your name when you come to the bar, there’s also a deeper thing happening,” said Naehalani Breeland, Marketing Director at Ola Brew Co. “You're participating in a larger economic battle between shipped goods and a localization movement.”
After completing two Reg CF campaigns, Ola has raised a combined $720,780 from 643 investors. But because just 137 of those people live in Hawaii, the Ola team had to strategize on how to empower mainland investors before starting their second raise. Those investors can’t necessarily come to the brewery every week, but they can be part of complementary relationships in lieu of someone who could.
What they didn’t anticipate, however, was just how complementary that bond could be. For example, Ola was recently on a desperate hunt for vanilla to make a new production batch. Through an ask to their investor community, they were introduced to a vanilla farmer on the island and now have a steady local supply.
In the next few years, Ola hopes to open a production facility in the mainland. Then they’ll be able to sell their beers and ciders— and therefore the products of local Hawaiian farmers — to a much wider audience. When they do, that decision is made easier knowing they’ll have a whole army of people waiting to help.
The Spirits Distillery Building a Brand
When Vanechanos and his team started Epec, they knew they had to be creative in garnering brand awareness. Education was a factor — Epec is pioneering American whiskey made with sorghum — as was the market, as liquor distribution laws make every state an individual market. Early-stage liquor businesses don’t have the capital to distribute in all 50 states, so national advertisements meant marketing to people who couldn’t even buy Epec’s whiskey.
As it turns out, Reg CF was a perfect fit for an uncommon marketing campaign. When Epec raised $222k from 279 investors in October 2017, Vanechanos felt like he gained not only capital, but almost 300 new Epec marketers.
“We need to change minds because we won’t be successful if a whole bunch of people have no idea who we are and love who we are,” he said. “That’s a lot harder to do with three venture capitalists than it is with 300 people.”
Now in 4 states, Epec plans to soon expand distribution to California, Texas, and Massachusetts, partially because of the existing investor bases there. For investors living in those 4 states, the ask is obvious — buy Epec’s whiskey and promote it locally. For those living outside the distribution network, Vanechanos was recently inspired by a Southeast investor. The man — a beekeeper — came to Epec hoping to buy a used whiskey barrel to age honey in. The company happily obliged, inspiring Vanechanos to start actively fleshing out other creative opportunities investors could be a part of.
The Local Distillery Growing to Acquisition
For its first Reg CF raise, Cleveland Whiskey assumed the majority of its investors would be from, well, Cleveland. Or Ohio. Or the Midwest. A place where people would have an immediate connection to the city.
The team wasn’t completely wrong — more people invested from Northeast Ohio than anywhere else. But of the 952 investors from their more than $700k 2017 raise, 699 were from places outside of Ohio. Drawn by whiskey innovation and revenue growth more than regional familiarity, Cleveland Whiskey’s investors came from 24 different countries, from California to New York and everywhere in between.
The out-of-town buy-in was so strong that it actually affected Cleveland Whiskey’s future distribution plans, as the company is planning on growing into California soon.
“We knew that when we expanded into California, we could blast our entire investor base while knowing a lot of those people were Californians and say, ‘Hey, now you can come get our product,’ ” said Reese Edwards, Controller at Cleveland Whiskey. “We moved a fair amount of bottles from investors that we wouldn't have otherwise sold because they were part owners of the company.”
Armed with this experience for its second Regulation Crowdfunding raise, Cleveland Whiskey focused on arming those out-of-distribution-network investors with non-liquor branding items. That included their new product — whiskey-infused wood chips — as well as things like branded decals and flasks. For a company very explicit about its goal of being acquired in the next 3-5 years, this felt like a mutually beneficial way to spread the brand.
The strategy worked — Cleveland Whiskey just closed an almost $830k raise, making it one of the highest-funded alcohol companies in Reg CF history.
The Budding Local Cidery
More than a decade after craft beer took off in the U.S., craft cider is starting its own renaissance. Ciders have grown from 1% of the beer market to a little more than 3% since 2014 and cider sales are 10X what they were 9 years ago.
This is a main reason why Dana Bushouse thinks that of her 219 investors, 86 aren’t from California. Her company, Crooked City Cider, doesn’t yet can or bottle, so everyone drinking her product has some proximity to Oakland.
But when Crooked City opens its new taproom — helped by the 107k they just raised on Wefunder — it’s going to feature both Bushouse's products plus other ciders from around the country. The way she sees it, investors who can’t drink Crooked City on-site are still helping by drinking cider elsewhere. A rising tide lifts all boats.
Bushouse has also encouraged her investors to think of their value as more than just purchasing power. Last month, an investor added Bushouse on Facebook, then introduced her to a person who she thinks could become Crooked City’s new General Manager. The investor has also connected her with other local businesses and has been so helpful that it pushed Bushouse to reach out to the rest of her base for other asks.
“He’s engaging with the brand, even if he's not coming to the space here every Friday, by thinking outside the box,” Bushouse said of the investor. “He’s seeing how he can help us grow and network and has therefore really become even more than an ambassador of the brand.”