Will the crowd go wild for beer?
DEUCHAR IS a great name for a brewer. In Edinburgh many years ago my local bar was the Cumberland in the New Town. It specialised in serving real beer with loving care, including the thirst-quenchingly smooth Deuchar’s IPA.
No wonder it caught my eye to see one Andy Deuchars pop up in the offer document for Renaissance Brewing, a tiny Blenheim beer maker aiming to be the first to raise money on new crowdfunding website Snowball Effect.
Deuchars co-founded Renaissance in 2005 with his brother-in-law Brian Thiel and the pair have built themselves a reputation for producing a quality product. Their offer document proudly notes that Renaissance was named New Zealand Champion Brewery in the 2013 Brewers Guild awards and Champion Small International Brewery at the Australian International Beer Awards this year and last year.
Presumably in an effort to gain media support, Renaissance sent the Sunday Star-Times a box of beer a couple of weeks ago and having sampled it I can endorse the judges’ views. It’s good stuff.
If you want a critic’s view, Star-Times beer columnist Michael Donaldson described the brewery’s Scotch Ale as ‘‘a gem’’.
‘‘Deep red in colour, this is all about the complex layers of malt, which produce a mellow flavour akin to chocolate-coated raisins with a dash of sweet spice. And it’s capped off by just the right tickle of bitterness to balance it all out.’’
However, it’s one thing to ask a few dollars for a bottle of decent beer, it’s another to ask at least $500 for a share of the business.
On this score, making good beer is necessary but far from sufficient for success.
Investors in Moa’s initial public offer in 2012 learned that the hard way. From an offer price of $1.25, Moa shares dropped as low as 35c last month after the company met major distribution problems and missed prospectus forecasts by a country mile.
Moa had some institutional investors, but to judge from the attendance at its annual meetings many of them were probably craft beer enthusiasts who wanted to help foster local success – the same people who may consider backing Rennaissance.
From that point of view, I’d say Renaissance looks more attractive.
If it’s just financial returns you’re after, there are better places to put your money.
The first things to watch out for in the Renaissance information document were typing errors. Some were trivial. Others were serious, like adding $2 million to forecast earnings before interest and tax in 2015.
The typos have apparently now been fixed, but they are probably part and parcel of the cheap and cheerful fundraising method.
Snowball Effect is a new crowdfunding website made possible by changes in securities law. It was one of the first to be licensed by the Financial Markets Authority on July 31 (the other was Pledge Me), allowing it to help companies raise up to $2m in any one year.
The idea is to make it easier for small companies to raise cash by exempting those using a licensed crowdfunding service provider from the requirement to provide a prospectus or a product disclosure statement.
Instead, companies can disclose what they like, subject to the fair dealing provisions of the Financial Markets Conduct Act which prohibits misleading or deceptive conduct or statements.
In my view Renaissance has done a good job of presenting information to potential shareholders, typos aside. The basic details are there and it’s easy to understand what the business would like to do.
In essence it wants to raise $700,000, of which $450,000 will be spent on equipment such as kegs and tanks, and about $250,000 on business development.
The money is to come from the issue of 350,000 shares at $2 a share, which will represent 12.3 per cent of the company.
This implies Renaissance is worth about $5.7m.
The document provides some value comparisons with other drinks companies which show it to be neither cheap nor expensive. And although it includes Moa, it tactfully uses the NZX-listed company’s current valuation, not the IPO version. I’m not going to be so tactful. At the time of its IPO, Moa had revenue of $2.4m and was nowhere near making a profit as it focused its energies on growth.
Its prospectus projected revenue would grow to $8.6m in the year to March 2014, with a loss before interest, tax, depreciation and amortisation (ebitda) of $2.2m.
Its IPO, which raised $16m, valued Moa at $38m. I thought at the time that was steep because it valued Moa like similar companies that were already profitable.
The market has since delivered its verdict, valuing Moa at about $13m.
I should point out that Moa is run by talented people and makes great beer. It’s business plan is much more ambitious than that of Renaissance and it may ultimately be much more valuable, but its experience shows how hard it is to compete in the craft beer market.
Beer is cheap to make and the market attracts many small-scale operators. Distribution is crucial to growth, but it also expands the number of competitors. Phoenix Beers for example, distributor of Renaissance in Australia, also lists 35 other craft beer brands, including several well-established overseas brewers.
So although the market is growing, it is packed with competitors. Renaissance thinks it can grow its revenue in a couple of years to $2.3m, generating ebitda of $400,000. On 2015 numbers the offer price values it at an ebitda multiple of 28.
This is pricing in a lot of growth, but not as much as Moa.
Renaissance also appears to be achieving a better gross margin than Moa – 42 per cent in 2014, while Moa has not managed more than 37 per cent.
A beer enthusiast wanting a piece of brewery action may therefore get more for his money with Renaissance than he did with Moa.
However, on pure investment grounds that does not make it a good deal. Renaissance will be unlisted, making it hard to sell shares. Public shareholders will own a tiny portion of stock and will be at the mercy of the controlling shareholders. It may be a long time before dividends emerge and the company could well need more funding before then.
Topping it all off is the considerable risk that Renaissance will not come close to its growth targets.
Time will tell whether New Zealand’s first crowdfunding deal pays off, but I hope it does.
This is one for beer lovers more than accountants, and in many ways that’s exactly the point of crowdfunding. In the beginning, building a business is more about enthusiasm than calculation and so far it seems more than 150 people have decided to give Renaissance a go.
It’s a good start.