August 7, 2013

Attracting Like-Minded Investors in Craft Beer and Food

Rumors are swirling that the SEC could soon release proposed rules as a critical first step towards legalizing equity crowdfunding for the general public.  Whenever the proposed rules are released, much of the conversation will undoubtedly focus on the extent to which they protect investors.  The success of equity crowdfunding will depend on portals' ability to educate investors and establish realistic expectations.  As a niche portal focused on craft beer and food, it is critical that CraftFund attracts investors for the right reasons.  Our investor education will be geared towards this.  For now, here are two basic points:

1. You won't find facebook on this platform

Craft beer is really fun because the product is exciting and the industry is growing like crazy.  The Brewers Association recently announced that the craft sector is up 15%, marking several consecutive years in a row of double-digit growth.  For a segment that represents only 10% of the total beer industry, it's easy to see the craft trend continuing.  It would therefore be tempting to look at these trends as a potential investor and see dollar signs.  

However, the nature of the industry cautions against expecting big payouts.  The "exit events" that trigger big payouts typically result from a private sale or the company going public.  Of these two avenues, a private sale is the most likely.  Going public is a very burdensome and costly endeavor, which explains why only a few craft breweries have gone this route.  However, while the more likely of the two events, a private sale should not be expected.  Most breweries and food companies are not in the business to get rich quick. Brewing and the culinary arts are often driven more by passion than by profits.  As a result, most of the owners of these companies are in it for the long haul. This should be an important consideration for potential investors motivated primarily by a financial return.  You might invest in the next Lagunitas, but if the company never sells, you aren't going to cash in.  And who really expects Tony Magee to sell Lagunitas anytime soon?

Investors must evaluate their objectives going into equity crowdfunding.  Certain startups and small businesses are built with an exit event in mind.  What is cool about the movement towards equity crowdfunding is that it provides new investment opportunities for the general public.  Many will engage equity crowdfunding for the thrill of finding the next facebook.  That's pretty cool.  However, if you are approaching equity crowdfunding as an armchair venture capitalist, CraftFund is not the platform for you.  Instead, it would be best to use one of the many quality platforms out there that focus on technology and other similar industries.

2. CraftFund will appeal to investors interested in dividends and ownership experiences

The financial return with craft beer and food investments is likely to take the form of dividends.  As the Harvard Business Review recently explained, equity crowdfunding could best function as a dividend model of investment:

"First, Angels and VCs are only interested in businesses with a clear path toward an exit, and those focused on rather large market opportunities. This leaves    99% of the businesses outside the realm of their framework. These 'Other 99%' businesses are often excellent niche businesses. They can be profitable, cash-generating concerns, quite capable of paying dividends to their shareholders. However, the dividend model of investment is pretty much missing in the angel/VC industry. Crowdfunding could plug into this gap."

Craft beer and food investments will also appeal to investors seeking ownership experiences.  Craft enthusiasts and foodies want to connect with the products they are passionate about.  Equity crowdfunding will provide a means to turn these passionate consumers into owners.  As we've written about before, Scotland's BrewDog is the perfect picture of the kind of ownership experiences we expect to facilitate on CraftFund.

Conclusion

Potential investors must assess their expecations going into equity crowdfunding.  As a nascent form of investment based on changes to 80-year old securities laws, equity crowdfunding will only get off the ground to the extent portals, businesses, and investors are speaking the same language.  If dividends and ownership experiences are part of your language, then join our growing community!

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