Should I Invest in a Brewery?

Readers, if you have a question that you’d like featured in Millennial Moola, email me at [email protected]. This fantastic question comes from Jack in Florida: 

I have the opportunity to invest in a local brewery. I’m doing my due diligence – I’ve confirmed the beer is good – and the team has a good history of running businesses. However, the minimum investment is $5,000.

I’m 23, no student debt, programmer. I founded a tech startup, so right now I make $50,000 per year, though my market salary would be closer to $100,000 per year. Within the next year we’ll either raise more money and I’ll raise my salary to at least $75k, or we’ll go out of business and I’ll go back to market salary around $100k. 

Right now I have $3k in a roth IRA and $11k in a Roth IRA, plus a $6k safety net. I also have a $3k investment in Fundrise’s income reit, and $2700 loan from lending club that was used to finance the Fundrise investment. I also have shares in a company I consulted for that are worth $4,000 on paper but will probably end up worthless, plus my company shares, which on paper are worth a few hundred grand but will statistically most likely be worthless.

So total I have net liquid assets around $20k. I live on $1,250/m, giving me an after-tax savings rate of 66%. Should I invest in a brewery?

First off, congrats! This is one of the most interesting alternative asset classes I’ve ever heard of. Perhaps my blogger advisory fee could be paid in a diversified portfolio of IPA and Stout? While this situation is highly unique to the reader, most of you will be solicited for an investment in an awesome business idea at some point in your life. Deciding whether to invest in a brewery could possibly be a great life decision but a poor financial decision. Before going off the beaten path of stock and bond investing, I would first suggest a framework for making the investment.

Do You Have Money to burn?

You can lose a lot of money in a Vanguard stock or bond index fund. However, no expertise is necessary to properly put your dollars to work to make you wealthier. You seem to recognize good beer, but I for one barely know the different between a craft porter and a Natty Light. You see, my extreme frugality in college forever damaged my palate where I’m unable to recognize true quality. It was so bad that I was not allowed to make beer runs at parties.

Ask yourself, do you know anything about running a successful brewery? Are you familiar with the margins, competitive landscape, and market dynamics? You could ask these questions about any fun off the wall investment opportunity. If you are not an expert, make sure you have a great emergency fund, good job prospects, no debt, and a solid Roth IRA with low fee index funds. Jack has all of those things and then some, so he clearly passes the first test.

Do You Believe in the Founders’ Passion and Business Skill?

One of my favorite parts of Peter Thiel’s book Zero to One is about what a startup founder should look like. One reason Thiel took a chance on Facebook is how its founder’s passion for the company affected his appearance. Zuckerberg was so laser focused on growing his idea that he didn’t have time to think about what outfits he would wear in the morning, so he wore a hoodie. Thiel also loved that Zuckerberg demonstrated tremendous business instincts as well instead of just being a talented programmer.

Think about Wozniak with Apple. The guy lived and breathed computers, but without Jobs he would never have moved beyond constructing machines for a few close friends. You need both ridiculous passion and good business sense behind any cool idea before considering turning over your money to fund it.

Do your founders look the part(passion for beer and good business sense)?

When you meet with the people who will run the brewery, how much do they love beer? I’d want a founder or founders who look like they walked off the set of the Hangover movie, not a corporate cafeteria. The more grizzled or untraditional the team (a team of all female brewers could be a differentiating advantage for example), the more I would trust that they could accomplish something besides making an average craft beer. The most likely result from any fun investment is that they perform at an average level initially, lose steam, and fail. You want to maximize your chances that you are funding the people who will make a beer hipsters all the way in Brooklyn will demand by name.

That means you need people on the team who have great business instincts. You could have the best beer in the world, but if you do nothing to market and promote it then the business will fail. Ask the founders about the state of the market. Ask for a detailed business plan, including expected profits, marketing plans, and promotional materials. You don’t want a bunch of guys brewing and drinking beer all day on your dime.

Treat Fun Investments Skeptically, You Aren’t a Charity and Could Always Be a Loyal Customer

You do not want to finance someone else’s dream. Make sure the founder is putting up substantial equity and has a lot to lose if the idea fails. Inquire about the founders’ other commitments and make sure this is not one of many projects for them.

Just because you want the idea to work does not mean that it will. Make sure the founders are sharp and have thought through all the risks and potential problems with their business. You could ask questions like “what’s a typical population to brewery ratio? What is your target market?” If you’re in a college town, you might demand evidence that college kids would pay premium prices for beer.

If the brewers don’t have any good answers for questions like these, I doubt their business is going to amount to much more than a break even operation. Remember that the purpose of putting money into cool ideas is still to watch them be financially successful. You can always be a customer. After all, $5,000 would buy you a whole lot of beer.

The Non-Financial Considerations

Our reader in this case study is so young. Jack’s got a bunch of high earning years in front of him and clearly saves more than he needs to. When you are old and boring, my dad always says you better hope you have some good stories. Deciding to invest in a brewery regardless of its success could be a fantastic conversation starter for years to come.

$5,000 is a relatively high number given our reader can only access about $20,000 right now. I would ask for a lower minimum investment. The worst they could do is say no. If you were able to go in on the idea with more people as a passive minority stakeholder, then you would gain a broader team of people who wanted the business to succeed. This broader group of stakeholders would promote the business to their friends, family, etc. Maybe you could pitch a lower investment minimum to them that way.

You should not treat your fun money account like charity. However, I don’t think you should only look at financial considerations when deciding how to use it. Have fun investing, because honestly leaving your money in the S&P 500 untouched for 40 years is so freaking smart but so freaking boring. What if the brewery had a great run over the next two years? Say it won multiple awards at craft beer festivals. Say it gave you fantastic life stories but only returned 50% of your original investment. How upset would you be? If the answer is not that much, then maybe you should let the non-financial considerations outweigh the financial ones since we are talking about a relatively small sum of money here compared to Jack’s lifetime earnings potential.

My Own Take on whether i would Invest in a Brewery

While I’m no expert, restaurants and bars generally make terrible investments. There’s almost no barrier to entry. Margins are also not very high. I looked up a business plan from one Microbrewery, and the balance sheet showed profit margins of about 4.5%, 9%, and 13% in the first few years of operation. These numbers are from a successful operation! Imagine if your business struggled to gain customers. These low margins available in craft brewing would make me personally decline to invest in a brewery. The only upside you have is if the brand becomes famous and leads to national distribution. Given how saturated the market already is, I would put very small odds on that happening.

Additionally, you would encounter lots of fixed costs such as wait staff and rent. Unfortunately, competition in craft beer sector is fierce. You would not only be competing against local breweries, but ones all over your region. The people who run food and beverage joints usually know food and booze really well. However, they might have limited skill in making smart business decisions. It’s not enough to have a good product.

I’d Want enormous profit potential, and breweries just don’t provide that

Think about how many restaurants and bars you see come and go in the community. What does that say about the probability of success for the idea? If you have a 50% chance of losing $5,000, I would want enormous profit potential. I’d invest in a tech startup or biotech company with a promising new drug. Breweries seem to be really capital intensive since they need large spaces and machines to work.

So in summary, I believe that the decision to invest in a brewery would be an awesome life decision but a poor financial decision. If you can put down a smaller amount to be a minority partner, maybe you should do it. If they demand the full $5,000 to participate, I would pass.

Readers, am I being a total debbie-downer for the once in a lifetime opportunity to be a part of a craft brewery? Should the cool factor from being able to say you own a brewery at bars outweigh the chance that Jack might lose all his money? Comment below!