When independent Scottish brewery Brewdog, broke UK records by raising £4.25 million through a crowdfunding exercise last December, the company’s co-founder James Watt didn’t mince his words.
Watt, a 31-year old law graduate who co-founded the Aberdeenshire-based brewery with Martin Dickie in April 2007, said: “The mental shackles that have tied down British SMEs to the staid and unimaginative traditional methods of raising funds have been untethered. We have ushered in a brave new world.”
However there is a big difference between BrewDog – which has now raised more than £7 million through three crowdfunding exercises from 12,000 enthusiastic investors or “fanvestors” in 2009, 2011 and 2013 – and other companies that have raised capital through the relatively new method of equity-based crowdfunding: it did not make use of a third-party platform.
The platforms that currently focus on equity-based crowdfunding in the UK – Crowdcube, the granddaddy of the industry launched in February 2011; Seedrs, launched in July 2012; and Banktothefuture launched in August 2012 – were not around when Brewdog launched its first Equity for Punks fund-raising back in 2009 and none of them are yet capable of handling fundraisings of this scale.
So in a sense Brewdog, which struggled to persuade banks to lend in the wake of the global financial crisis, had little option other than to go down the unorthodox route of self-crowdfunding. The company’s finance director Neil Simpson told the Scottish Parliament the main reason BrewDog continued to go down this route was because the costs are “significantly” lower than using a platform.
The Ellon, Aberdeenshire-based company is estimated to have saved at least £350,000 in fees by going it alone (crowdfunding platforms like Crowdcube and Seedrs charge investee companies about 5%-7.5% of the sum raised with some, such as Seedrs, charging an additional 7.5% fee to investors based on capital growth).
Attacking the establishment
Brewdog is probably one of the few companies in the UK capable of going down the self-crowdfunding route. This is partly a consequence of the firm’s uncanny knack for garnering positive PR, often through outlandish stunts, and often at the expense of established drinks industry players.
The company has a cult-like status among aficionados of its craft beers; it’s seen as being plugged into the Zeitgeist; it achieved reported sales of around £17 million last year; it has been successfully trading since 2007; it has posted average annual growth of 167 per cent since launch; it has listings in major supermarket chains including Tesco, Sainsbury’s, Asda and Waitrose; it has 224 employees and has launched a chain of 13 branded bars in the UK and overseas to help promote its highly-rated ales.
Overall, however, the success of the Equity for Punks fundraisings, as they’re called, is dependent on the loyalty of Brewdog’s customer base. The firm also did some bold marketing to promote the equity offerings, including driving a tank around the Bank of England on the day the last one was launched.
As David Prosser suggested in Forbes last December, investors have also been attracted by the perks that come with share ownership. These include invitations to parties and cheaper beer. “Investors in BrewDog shares qualify for a lifetime discount in its bars and its online shop.”
Brewdog’s co-founder and managing director James Watt has said one of the main reasons the company chose to self-crowdfund was so it could avoid having to deal with “pretentious investment bankers” and venture capitalists. He told the Daily Telegraph: “We spoke to a few VCs and had a lot of offers. It just feels like selling your soul to the devil – there are so many conditions, so many constraints.”
Watt added: “With three successful rounds of Equity for Punks completed, we have displayed that crowdfunding is no longer just a fad or buzzword, it is a legitimate alternative financial system. We have broken all records, and silenced all doubters.” More than 8,124 investors signed up for the 42,000 shares priced at £95 each in the company’s most recent fundraising.
Not just for Punks
London-based Beer writer and blogger Chris Hall, who was critical of the firm’s chaotic and badly organised annual general meeting in August 2012 was more positive about the shareholder event Brewdog staged in the Aberdeen conference centre last summer. Hall recently wrote:-
“When you invest money, time or effort in something, you expect a return equal to or greater than what you put in. A major criticism of BrewDog’s Equity for Punks shareholder scheme has been that it is not a traditional model where dividends are distributed and shares traded. Some say that BrewDog are taking advantage of their fans’ passion and excitement and taxing them for it. Others might say that what BrewDog do best is bottle the excitement of the people who are passionate about their beer, and use that excitement to create even more of it …. Buy the shares, take the ride. An investment in BrewDog isn’t just financial. It’s buying into a culture, an attitude, and a hope that beer can be incredible and bring out the best in people.”
James Watt is concerned that misconduct in the Crowdfunding arena risks giving the nascent funding method a bad name. He recently said: “There are challenges facing crowd-funding. 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.”
He stressed that with each of its three self-crowdfundings, Brewdog has been careful to do everything by the book, spending money on professional advisers to do “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 crowdfunding there are grey areas, but we wanted to do everything properly and give investors comfort.”
One big issue facing investors, however, is that there is no secondary market in Brewdog shares. So equity-holding “Punks” are unable to cash out. However Brewdog has said it intends to remedy this by adding a share-trading facility to its website in 2015 that will permit “Punks” to sell down their holdings rather then being enforced buy-and-holders.
Further down the line, a listing on the Alternative Investment Market of the London Stock Exchange is a possibility. Given their respective 38% and 32% holdings respectively, this could make James Watt and Martin Dickie (Dickie Brewdog’s co-founder and production head) extremely wealthy. But neither is yet prepared to commit to a timeframe. Watt told the Telegraph, “It is not why we do it. Our motivation has never been financial. We want to change the face of the beer industry in the UK.”
He has ruled out a trade sale for similar reasons. He told the Herald: “I cannot think of anything worse than sitting on a beach somewhere, watching a big, monolithic, evil company tearing to pieces everything our team has worked so hard to do.”
This article was published by Unquoted on 25 March 2014