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Sunday, 07 December 2014 22:00

Tapping into Crowdfunding: Breweries among cautious early adopters of intrastate crowdfunding

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Newaygo Brewing Co.’s Scott Looman, Krista Looman, Nick Looman and Eric Looman. Newaygo Brewing Co.’s Scott Looman, Krista Looman, Nick Looman and Eric Looman. PHOTO: MATT PRATT

While politicians touted intrastate crowdfunding as a game-changer for small businesses seeking to raise capital, it seems the tool has been on the menu for only a select group of companies in Michigan.

In particular, craft breweries and food-based companies have embraced crowdfunding more quickly than most other types of businesses. The reason: Many of them struggle to find traditional sources of capital to get all the funding they need to get off the ground. To fill the gaps, startup neighborhood breweries have started turning to new forms of crowdfunding made possible by the Michigan Invests Locally Exemption (MILE) Act, which was signed into law a year ago.

That was the case for Newaygo Brewing Company LLC, whose owners recently launched a crowdfunding campaign for the business that will be located about 35 miles north of Grand Rapids.

While the traditional rewards-based platforms such as Kickstarter and Indiegogo are more established, the newer model of crowdfunding yields more return on investment, said Nick Looman, president of Newaygo Brewing.

“(Traditional crowdfunding) is a lot of legwork for what I consider to be a measly return. I’ve enjoyed being a part of those, but a T-shirt only goes so far,” Looman told MiBiz. “Earning your money back and claiming that you own a portion of Newaygo Brewing Company’s profit and success is a lot bigger deal.”

The early popularity of intrastate crowdfunding among the craft beer and local food industry comes from the businesses’ deep connections in the communities they serve, Looman said.

“In a crowdfunding sense, this is a large group of people that have to put their money where their mouth is and drink the beer,” Looman said. “It lets the average Joe in our community and our consumer base invest in and be a part of our business growth. Our success can be their success.”

Kyle DeWitt likens the newly available crowdfunding models to a more elaborate form of mug club membership, in which patrons pay an annual fee to get rewards at the brewery ranging from a discount on beer to access to special events.

“You’re going to be getting a couple hundred mug club members within the first year or two anyway. When you have a chance to do crowdfunding, why not make them investors?” said DeWitt, the co-founder of Southeast Michigan-based Tecumseh Brewing Company LLC. “It’s such a symbiotic relationship and makes sense for breweries to utilize this mechanism as long as the locals support it.”

FIRST IN LINE

DeWitt and business partner Tim Schmidt launched the first successful intrastate crowdfunding campaign in Michigan, raising $175,000 in startup capital over 90 days ending in late April, as MiBiz previously reported.

The brewery structured the campaign as a revenue sharing loan, meaning that a percentage of sales each month will go to pay back the investors until each investor receives one and a half times his or her investment.

The capital raised via crowdfunding also allowed the company to secure a $200,000 loan from OSB Community Bank in nearby Brooklyn, Mich., on top of the $145,000 it raised from friends and family.

The company bought two adjacent buildings in downtown Tecumseh for the taproom and dining area and expects to launch in late January. The brewery used all the money from the crowdfunding campaign and from friends and family to buy the real estate and equipment and to pay for the building renovations, but it has just begun to tap into the bank loan, which was structured such that the company can access the funds as needed, DeWitt said.

So far, DeWitt had nothing but praise for crowdfunding, although he said the model may have contributed to a longer-than-anticipated process in securing the proper government licensing that the company needs to start production.

With the renovations nearing completion, DeWitt and Schmidt are anxious to welcome their first patrons at the downtown Tecumseh pub and brewery.

“We can’t wait to open the doors,” DeWitt said.

The need for capital was similar for Newaygo Brewing, which also plans to open in early 2015. After tapping out its initial funding, comprised of a $150,000 U.S. Small Business Administration loan and $135,000 from family members, Newaygo Brewing aims to secure a six-figure raise to fill its gaps in startup capital and build a small warchest for its first year, Looman said.

“Like a lot of business startups, as we closed on opening day, we had secured quite a bit of funding,” Looman said. “But we found that we needed twice as long and it costs twice as much as what we thought.”

The breweries in Newaygo and Tecumseh both used Indianapolis-based Localstake Marketplace LLC, a crowdfunding portal that launched in June 2013 that manages localstake.com. This summer, Localstake created a Michigan-specific platform at CrowdfundingMI.com in partnership with the Michigan Municipal League.

In addition to Tecumseh Brewing, the only other Michigan-based company listed on the portal’s website as having successfully raised funds via Localstake is Ypsilanti-based Unity Vibration Living Kombucha Tea LLC.

In an interview with MiBiz’s sister publication REVUE West Michigan in August, Unity Vibration co-founder Tarek Kanaan said the company used the portal to raise $136,300 only from accredited investors, which was not affected by the MILE Act.

Localstake founder Kevin Hitchen said about 50 percent of the portal’s past clients nationwide and 85 percent of its current clients have been companies in the food and beverage industry.

Under the company’s revenue sharing loan model, a type of debt security, business owners do not give up any equity in their business, he added.

“We think there is significant opportunity in the food and beverage space,” Hitchen said in an email to MiBiz, noting that the industry has been dominated in recent years by large corporations. “We think that consumers will continue to demand more local and/or all-natural food and beverage items. Small food and beverage companies, in our opinion, are well suited to meet that demand.”

UNCERTAINTY COOLS INTEREST

Crowdfunding portals like CrowdfundingMI formed as a result of the MILE Act, which allows Michigan-based companies to advertise a solicitation for investment from in-state investors without having to register with federal securities regulators. The law allows accredited investors to make unlimited investments, while non-accredited investors can put up to $10,000 into a new or existing business, thus deepening the potential pool of capital for companies undertaking a raise.

To date, very few companies have tapped into the securities-based crowdfunding model made possible by the MILE Act, and some advisers are actively counseling their clients to avoid it.

Grand Rapids-based attorney Joe Infante, who leads Miller, Canfield, Paddock and Stone PLC’s alcoholic beverage regulation team, said the uncertainty surrounding the relatively young law gives him pause when clients ask about it.

“It’s just such a strange situation to do equity this way,” Infante said. “I would suggest their corporate lawyer review all the documents first and make sure it is a good business decision and, in the end, will be in compliance with state and federal regulations pertaining to the beverage industry.”

A lot of that concern has to do with properly vetting would-be investors, Infante said. While crowdfunding platforms help with the vetting process, they can keep investors and business owners distant when they should be talking the most, he said.

In the startup phase, companies should lean on investors for advice and help, but using crowdfunding to attract a broader pool of smaller investors makes that a more difficult process, Infante said.

Erik May, the CEO of Byron Center-based Pilot Malt House LLC, a maltster that aims to provide locally sourced malted grain to craft breweries and distilleries, launched a crowdfunding campaign with Localstake this spring but eventually canceled it and decided to go in a different direction.

Instead of relying on a large pool of state-based investors, May said he realized that he instead prefered having a limited number of investors who brought both capital and experience to the table to help him grow his business.

“If I can use truly local people who have expertise in many different fields, then I can build a close-knit team, versus the crowdfunding platform where I’m not gaining anything but capital,” May said. “At the end of the day, I want people and capital.”

After a business partner backed out of the venture, May opted to cancel his company’s six-figure crowdfunding raise in favor of a private investment. Miller Canfield’s Infante advised May on the decision.

CONCERNS ABOUND

While Michigan was one of a handful of states on the leading edge of equity-based intrastate crowdfunding, the model has yet to create a “crowdfunding stampede” in any of the states where it was legalized, according to a Nov. 18 report in the Dealbook column of The New York Times. But where the model has been used, craft beer seems to be a running theme.

“In this world, craft beer seems to be the sine qua non of fund-raising. Who doesn’t want to invest in their own beer?” the report stated.

In part, the model may be slow to take off because of the concerns of advisers like Infante or because the federal Securities and Exchange Commission has yet to issue final rules on the practice, which it has been slow to embrace over fears of fraud.

“Perhaps the S.E.C.’s concerns are overwrought and crowdfunding doesn’t need the tighter regulation. Alternatively, perhaps crowdfunding is the refuge of fraudulent brewers. Either way, we’re about to see which narrative of crowdfunding is true and whether crowdfunding can succeed, just in particular states,” the report stated.

Hitchen from Localstake said food and beverage companies have been among the early users of crowdfunding because it’s an industry average investors can easily wrap their heads around.

“Compare a craft brewery to a new life sciences company looking to develop a drug to cure cancer. Most potential investors have heard of a craft brewery and can understand their operations, how they make money,” Hitchen said, noting an investor in a life sciences company would need a background in pharmaceuticals or a Ph.D. to truly understand his or her investment.

Despite the new fundraising tools, not all startup craft breweries have flocked to crowdfunding, either out of necessity or by choice. For example, Cedar Springs Brewing Company LLC recently structured a deal with traditional debt from ChoiceOne Bank of Sparta, as MiBiz previously reported.

The company’s plan to distribute beer following a ramp up in operations – as well as the owner’s background in finance – convinced the bank that a loan was feasible, said Jason Parker, an assistant vice president for commercial lending, for a report last month in MiBiz. While ChoiceOne covered the majority of the project, Cedar Springs Brewing hopes to fill in the remaining funding gaps through the Michigan Economic Development Corp.’s Community Revitalization Program.

A MATTER OF PLACE

Despite the questions surrounding intrastate crowdfunding, it’s not just the breweries that benefit when community-based businesses have easier access to capital. The startup operations give small communities like Newaygo access to the rapidly expanding craft beer scene, attracting both more local spending and tourism dollars to the area, said Andy Lofgren, executive director at the Newaygo County Economic Development Office.

“It’s something that the community has been clamoring for,” Lofgren said. “Grand Rapids is already Beer City. Maybe we’ll become Brew City Suburb.”

 

Read 5514 times Last modified on Wednesday, 17 May 2017 16:10

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