PUNK EQ­UITY

HOW BREWDOG CHANGED THE FACE OF FI­NANC­ING

The Sunday Telegraph - Money & Business - - FRONT PAGE - tele­graph.co.uk/fes­ti­val-of-busi­ness writes Ed­win Smith

bankers” and ven­ture cap­i­tal­ists that it’s ap­par­ently so ea­ger to avoid. “We spoke to a few VCs and had a lot of of­fers,” says Watt. “It just feels like sell­ing your soul to the devil – there are so many con­di­tions, so many con­straints.”

But Watt’s mis­trust of the “men in suits” doesn’t mean that he’s con­tent to ex­plore other fund­ing mech­a­nisms. A generic crowd-fund­ing cam­paign or­gan­ised through a plat­form such as Kick­starter would have been one way of get­ting hold of the cash the com­pany needs, but it was an­other op­tion that he and co-founder Martin Dickie de­cided to avoid.

“There are chal­lenges fac­ing crowd-fund­ing,” ex­plains Watt. “If there’s no real reg­u­la­tion, the more com­pa­nies that do it, the higher the risk of it get­ting a bad rep­u­ta­tion. That could kill this thing that has the po­ten­tial to rev­o­lu­tionise busi­ness be­fore it’s even got out of the start­ing blocks.”

As a re­sult, Brewdog has spent time and money do­ing “things that we don’t strictly have to do – ver­i­fi­ca­tion, au­dited ac­counts and mak­ing sure the scheme ad­heres to Sec­tion 21 of the Fi­nan­cial Ser­vices Act”.

“In crowd-fund­ing there are grey ar­eas, but we wanted to do ev­ery­thing prop­erly and give in­vestors com­fort,” Watt says.

That might not sound very

The founders of Brewdog have – at one time or an­other – held the record for the world’s strong­est beer (the 55pc ABV End of His­tory), driven a tank through the City of Lon­don and railed against the “self-im­por­tant pen-push­ers at the [Ad­ver­tis­ing Stan­dards Au­thor­ity] in their Bur­ton suits”.

It’s no sur­prise, then, that when it comes to fundrais­ing – and gen­er­at­ing £4m for am­bi­tious ex­pan­sion plans – the in­de­pen­dent com­pany has elected to beat a some­what dif­fer­ent path once more.

The busi­ness, which sold its first bot­tle of beer in 2007 and opened its first bar three years later, has in­vited the pub­lic to in­vest in its own “eq­uity for punks” scheme for the third time, in a share of­fer that val­ues the com­pany at £111m.

Some of the cap­i­tal (£1.5m, if all 42,105 shares are sold at £95 be­fore the clos­ing date in Jan­uary) will be used to scale up pro­duc­tion at the brew­ery in El­lon, near Aberdeen. This, the com­pany says, will en­able it to quench cus­tomers’ thirst for its spe­cial­ist craft beers – de­mand cur­rently out­strips sup­ply by 35pc.

Funds will also be used to add to Brewdog’s port­fo­lio of bars. It cur­rently has 11 in the UK and one in Stock­holm, with five oth­ers planned for the UK as well as Tokyo, New Delhi, Sao Paulo, Brus­sels, Rome and Ber­lin. The brand will also at­tempt to break into Amer­ica next year.

Ac­cord­ing to the com­pany’s 31-year-old front­man, James Watt, the fundrais­ing scheme, which has prompted 5,500 peo­ple to in­vest £2.5m since it opened in June, has been de­vel­oped to fit with the ethos of the busi­ness.

“It’s about so much more than rais­ing fi­nance,” Watt says, perched on a bar stool in Brewdog’s glass-fronted Shored­itch out­post. “It builds this cul­ture and com­mu­nity around what we do, locks in our best cus­tomers and takes ad­van­tage of the in­ter­con­nec­tiv­ity that so­cial me­dia al­lows you to have with your au­di­ence.”

Cru­cially, it also al­lows the com­pany to be less re­liant on the “pre­ten­tious in­vest­ment

We spoke to a few VC's- it feels like sell­ing your soul to the evil

“punk”, but Watt also re­veals that, some­what iron­i­cally, the com­pany’s un­ortho­dox way of do­ing things has ac­tu­ally opened the door to re­la­tion­ships with the banks. “Once you have cap­i­tal of your own, it’s much eas­ier to get banks to match fund­ing. It opens up bank fi­nance that wouldn’t have been avail­able with­out it.”

But along­side this prag­ma­tism, could there be a con­flict be­tween Brewdog’s up­start im­age and its am­bi­tions for growth – one that could limit the po­ten­tial up­side for in­vestors?

Watt says that he thinks 20 is about the right num­ber of bars for the UK – enough to be ac­ces­si­ble with­out be­ing ubiq­ui­tous – and makes the point that Brewdog’s cur­rent share of the UK beer mar­ket is 0.01pc. “Maybe we’ll have an is­sue if we hit half a per cent or one per cent, which is 50 or 100 times big­ger than we are now, but we’re still so niche.”

Monthly sales cur­rently stand at around £1.75m, and have been grow­ing ex­po­nen­tially. An­nual growth has av­er­aged 167pc over the past five years and the busi­ness has been the fastest-grow­ing food and drinks man­u­fac­turer in the UK for the past three years.

It will look to broaden its hori­zons – and cre­ate an­other rev­enue stream – by open­ing a beer acad­emy in East Lon­don’s Dal­ston that will teach peo­ple about brew­ing and of­fer the chance to be­come an ac­cred­ited beer som­me­lier.

“The in­dus­try is chang­ing,” says Watt. “But it’s still dom­i­nated by the big in­dus­trial com­pa­nies who pro­duce the low­est com­mon de­nom­i­na­tor – that peo­ple drink for the ef­fect, not the ex­pe­ri­ence. We want to el­e­vate the sta­tus of beer.”

All this, along with a boom­ing craft beer cul­ture in the US (where a beer-based TV se­ries hosted by Watt and Dickie will be broad­cast this au­tumn), sug­gests that there is fur­ther scope for the com­pany to grow, even if Watt him­self ad­mits that the cur­rent val­u­a­tion (up from £28m in 2011) is “punchy”.

For now, eq­uity-hold­ing “punks” are un­able to cash in on the com­pany’s suc­cess. But if all goes to plan, Brewdog will in­tro­duce a share-trad­ing fa­cil­ity to its web­site in 2015 to al­low in­vestors to buy and sell at will. Fur­ther down the line, a bona fide pub­lic list­ing might be an op­tion. With a 38pc and 32pc hold­ing re­spec­tively, this could make Watt and Dickie ex­tremely wealthy. But nei­ther will com­mit to a time frame just yet.

Asked which busi­nesses he ad­mires, Watt, who left a job as a trainee so­lic­i­tor to haul her­ring and mack­erel out of the North At­lantic be­fore launch­ing Brewdog, gives an in­struc­tive re­ply. He liked the on­line cloth­ing busi­ness Zap­pos with its com­mit­ment to cus­tomer ser­vice and the way it treated its staff, but went off the com­pany once it was sold to Ama­zon.

He also ad­mired the al­ter­na­tive, ir­rev­er­ent po­si­tion­ing of In­no­cent. “But only in the early days,” he adds. “Af­ter the sell-out to Coca-Cola, it all rings hol­low.”

So, can Watt rule out any­thing sim­i­lar ever hap­pen­ing to Brewdog? “It would go against ev­ery­thing we’ve done,” he says. “I can think of noth­ing worse than do­ing that and sit­ting on a beach some­where while some id­iot in a suit tears to pieces ev­ery­thing that we’ve worked so hard to build. That’s not why we’re do­ing it.”

Brewdog founders James Watt, left, and Martin Dickie. De­mand for the com­pany’s craft beers out­strips sup­ply by 35pc

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