Getting a spirit venture off the ground requires dedication, vision, and most importantly, financing. We’ve put together a comprehensive overview of some of the best advice on the subject from our Park Street University library, starting from the very beginning.
Determining Financial Needs
Before you search for funding, it’s important to have a clear vision of what you want to achieve with your brand and how much money it would take to accomplish it.
In the early stages of growing your business, it’s important to outline a 3-5 year forecast to determine how much funding is required, according to Marc Levit of ML Advisory.
It’s a good practice to weigh projected costs against projected revenue to outline cash flow on a quarterly or monthly basis.
The next step is to think about how much your inventory will cost and when you will need to buy it because in the alcohol industry it may be well in advance of when you sell the product, notes Levit.
It’s common for beverage alcohol suppliers to operate on a negative cash flow for the first couple years, so it’s crucial to outline what your cash burn will look like for the next 12 to 24 months when determining your financial needs.
Types of Capital Available for Startups
As an entrepreneur, there are multiple paths to finance your vision and the more you familiarize yourself with the options at hand, the better the likelihood becomes of finding the right match for your brand.
Equity financing is one of the most common.
“That’s where you bring in somebody and they provide cash or something of value in kind. Maybe it’s equipment, maybe it’s sales and marketing, maybe it’s brands,” explains Jeff Clark, Senior Lender at Live Oak Bank.
It’s also the most expensive form of capital because you’re trading ownership and future profits for investment, but for a startup that is not cash-flowing, this may be the most realistic option.
Hard money is another option in the early stages according to Clark. Hard money comes in the form of high interest loans. If your company is not cash-flowing, the lender will naturally be weary of a default on your loan, so interest rates can be in the double digits, despite the current low-interest rate environment.
Conventional loans from banks are available if your business has been cash flowing for two to three years. Before handing out these loans, the banks must have sufficient reason to believe your business is sustainable because banks have to be successful in 99% of their loans. If banks miss their target, they can go out of business or regulators will force them to be purchased by someone else.
There are also federal, state, and local government loans, such as SBA or USDA loans, in which government programs step in and allow banks to take larger risks on entrepreneurs.
Types of Investors
Just as there are different types of equity to consider, there are also different types of investors to choose from. Andrew Beebe, Vice President of Arlington Capital Advisors, provides an overview of the different types of investors.
These are friends, these are family, or wealthy individuals. They’re typically the first stop to be able to fund your business. “They love you, they love the idea, they’ve probably heard you talk about it for years, and they’re really proud to be with you on that journey,” says Beebe.
Your business can also look for institutional investors in the form of angel investors, venture capital, and private equity firms. These investors can provide the expertise and growth capital you may need, but it’s also important to note that they are diligent, strong negotiators, and they will have high expectations.
Strategic investors are typically a larger company within the same category that invest in a brand or company through incubator program, partial funding, or outright acquisition. They can provide professional expertise and support for your brand, and even integrate your business into their network. If you choose to go this route, keep in mind that partnering with a strategic investor is a long-term commitment.
“There are ways to be involved, even post-acquisition,” says Beebe. “Whether it’s marketing, whether it’s production, whether it’s still being the face and founder of the brand. There’s many different options that you want to consider as you look to talking with a strategic.”
Crowdfunding is a relatively new but up and coming way to raise money as well. This method allows consumers, supporters, and other individual investors to finance your venture directly through small investments. This can be done through traditional platforms like Kickstarter or GoFundMe, where a reward or perk is typically exchanged for a donation, but equity crowdfunding, in which small investors can become shareholders, is another option. Typically, this option is only viable for a company that’s been around for some time and has an established consumer base.
Pitching an Investor
An investment is more often than not the start of a partnership and the best partnerships evolve when both sides are benefitting from the agreement. For this reason, it’s important to do the research to understand what the different types of investors are looking for in an investment.
Regardless of the type of investor, Levit recommends breaking down your financial forecast into what’s driving growth at both channel and SKU levels. “Explaining how the product mix is going to get you to your forecasted revenues will really help you strategically plan as well as get your investors on board” he says.
Pitching a Bank
Live Oak Bank, for example, looks for good character and credit, industry experience, and cash flow. They want to see that you have sufficient working capital, strong leverage, and ensure that your net margins are profitable. Having team members with industry experience and experience navigating through downturns will also provide the banks with some confidence.
“If you’ve made mistakes, tell the banker,” says Clark. “That’s what I’m looking for. Somebody that’s not afraid to make a mistake, not afraid to admit they made a mistake, and won’t make that mistake again because they learned something from it.”
Banks will also ask for up to three years of monthly income and balance sheet projections. If you need assistance with these projections, Small Business Development Centers are available all across the U.S. to assist with putting together your business plan and projections.
Pitching Institutional Investors
In the case of institutional investors, they’ll be more likely to invest in a company that is up and running, with some success under their belt.
“We do not invest, from our standpoint, in pre-revenue companies,” says Kristen Bareuther, Managing Director at First Beverage Group “We typically invest in companies that are getting close to around $2 million in revenue. $2 million in revenue to us is usually when somebody has figured out what’s working, what’s not working, and how to make their brand function in one, two, maybe even three markets.”
Pitching Strategic Investors
Jeff Menashe, Founder and CEO of Demeter Advisory Group, notes that when investors assess the credentials of a brand “it’s about raising the center of gravity on their portfolio in terms of growth and profit. It has to be accretive to what they already own.”
Common characteristics that strategic investors have shared with Park Street University include:
- Founder drive, commitment, and industry knowledge
- Differentiated product offering
- Ability to scale in the future
- Strong, sustainable growth in home market
- Strong margins, velocity, and account retention
Menashe is also clear that brands have to demonstrate long term sustainability, since their growth will often be subject to profit differentiation and white spacing. “Most times, there’s not going to be a chance for a buyer to leverage what they currently have. You’ve got to deliver something in terms of margin that can carry on that growth trajectory that somebody is paying for”.
More Park Street University Resources on Financing
Park Street’s 2022 Beverage Alcohol M&A Overview
5 Steps to Prepare for an Economic Downturn
Raising Funds 101: Setting a Strong Valuation
Raising Funds 101: Startup Capital Sources
Constellation’s Jennifer Evans on Finding Scalable Success