The Bootstrapper's Dilemma: No Cash, No Customers
By Peter S. Cohan
James Watt and Martin Dickie, a pair of Scottish 20-somethings, liked to brew beer. There must be hundreds if not thousands of home beer brewers around the world. But Watt and Dickie were different. They made full-bodied, distinctive beer. And they didn't want it to be just a hobby; they wanted to wanted to throw everything they had—which wasn't very much—into it.
Lack of resources was only the first problem the fledgling brewery faced. There was also the fact that local Scottish beer drinkers didn't particularly like BrewDog, which meant the company would either have to change what it made or look elsewhere for customers.
1. The Backstory:
Co-founders with passion but few resources
“The idea to start our own brewery certainly wasn't something we consciously set out to do,” Watt says. BrewDog officially began in April 2007 but it was some months before that the two hatched the idea (appropriately) over a couple of beers. They were bored with their conventional jobs, disliked conventional beer and the conventional corporate cultures they represented, and wanted to do something they loved to do.
Martin had just finished a degree in brewing, so they decided to create their own beer "as a means of remedying the stuffy ales and fizzy yellow lagers that had come to dominate the UK drinks market,” Watt says.
That evening, they set up a makeshift, "sketchy looking" brewery in Martin’s garage and created the first batch of what has now become known the world-over as Punk IPA.
They decided to send some to Michael Jackson, a well-known beer and whiskey writer (not the late singer) to see if he liked it. Jackson did like the home brew—so much in fact that he urged them to quit their jobs and establish a brewery.
In 2007, they took Jackson’s advice. Both only 24 years old, they pooled together $78,000 in savings, got a $47,000 "scary bank loan," bought some second-hand brewing equipment, and leased a building. "The first year involved living, eating, and sleeping at the brewery—a drafty warehouse on Fraserburgh’s coastline," Watt says. "Martin and I often worked 20-hour shifts, both to stay afloat but also to stay warm.”
They poured everything they had into the business but they still weren't even sure the thing would take off.
2. The Problem:
No customers, no cash
During the first six months, BrewDog could barely generate the sales it needed to pay interest on its bank loan.
The problem? Customers in northeast Scotland wanted a beer with a lower price and less flavor. Rather than change their company to meet local customer needs, BrewDog’s founders decided to look elsewhere for customers. Perhaps enthusiasts in Scandinavia and North America would buy their beer.
There was no way they could afford the TV advertising, billboards, and print advertisements that large brewers typically use to market their products. So, desperate for cash, they tried replicating their initial success in impressing Jackson by reaching out to popular brew bloggers in other countries.
It worked—especially in Sweden—but it led a new problem: Suddenly they were in the exporting business and they were still short on cash. To grow the business, they were going to need some help.
3. The Solutions:
Creative marketing, steady cash flow
Before approaching potential overseas partners, Watt and Dickie decided to amp up their guerrilla marketing efforts. Social media—social networks, bloggers, and videos—were both affordable and effective ways to reach their audience.
They identified the most influential beer writers and sent them samples. For a little over $2,000, they created a humorous YouTube video that quickly racked up 250,000 page views.
"We got fantastic reviews and coverage," says Watt, whose official title is "Captain." "When we went to the distributors, we were able to say, 'We've done the marketing for you, all you've got to do is sell it.’"
To keep cash flow steady especially in the early and unpredictable months, BrewDog took an innovative approach to getting paid by suppliers and customers.
BrewDog pays for its raw materials—such as hops, malt, and bottles—when they are ordered but it typically has to wait 60 days to get paid by its distributors. To speed up payments, BrewDog offers a 3% discount if cash is received in 10 days. But these partners are in the minority—most of them must pay before BrewDog ships its product to them. Only “rock solid” partners, such as those in Sweden and Norway (which are government owned), do not have to pay before BrewDog delivers.
The company got creative, too, when it came to raising capital to finance growth. BrewDog couldn't get a bank loan in 2009 because of the weak financial markets. So the company set up a website where BrewDog fans could buy shares at a minimum investment of $361. The idea ultimately raised $1.2 million from 1,500 investors after making the investment required to comply with British financial regulations, which included providing a full audit on its accounts.
By March 2012, BrewDog’s products were available in over 27 countries and 65% of its $11 million in 2011 sales came from outside the U.K.
4. The Takeaways:
- Pick the right partners. When Watt and Dickie first began to export to Sweden, they identified four or five major distributors on their initial list. They then talked with other beer companies and got background information on each of the potential partners. Based on that, BrewDog's co-founders developed a short list of two or three and met with each in person—listening to their pitches on how they could develop the market for its product in Sweden. BrewDog picked the partner that was not so big that it would get lost but big enough so it had the resources to support the product and would benefit meaningfully from its success.
- Use suppliers and customers to finance your business. Most entrepreneurs automatically assume they must pitch traditional investors when cash is tight. BrewDog turns that conventional wisdom on its side, demonstrating that it’s possible to use suppliers and customers as a cash source to pay the company’s bills.
- Market by turning your weakness into a competitive advantage. When BrewDog got started, it was impossible for it to compete with the advertising budgets of big brands. So it didn't even try it. The company relied on social networks, bloggers, and funny videos—all affordable and effective ways to reach their particular demographic.
Peter Cohan is president of Peter S. Cohan & Associates, a management consulting and venture capital firm. He teaches strategy at Babson College and entrepreneurship at Olin College. Peter's 11th book, Hungry Start-up Strategy: Creating New Ventures with Limited Resources and Unlimited Vision will be published in November 2012.