Beer start-ups, according to Henry King of the Beer Association of America, typically fail for one (or both) of two reasons: they're undercapitalized, or they're not making consistent beer. Verzello and Goodwin don't worry much about consistency, since the Lion Brewery, their contract brewer, enjoys a good reputation in the industry. But they have always been anxious about capital. Verzello's preoccupation with it borders on obsession. "If I could, I'd spend all my time trying to find more investors," he says. But ask Verzello about Black Sheep's monthly sales figures and he's momentarily stumped. "Oh, I need to get that out of the computer. I don't know all that off the top of my head," he says. Maybe his innocence about the numbers masks his disappointment in them: the company's original sales projection of $691,440 in its first 12 months of operation was a little optimistic; its actual sales for that period were $155,610. The founders, however, remain upbeat and hold firm to their plans to take the beer national. All they need, they say, is additional capital.
Finding capital has been a problem from the start. When Verzello and Goodwin were seeking seed funding, they calculated that they would need at least $300,000. Unable to raise that amount, they rethought a few expenses. Verzello's planned $30,000 salary was the first item to go. Legal fees were paid with company shares instead of cash. And they pushed out their schedule for expanding sales to additional cities. "Since we went slower, we didn't need as much inventory," says Verzello. Eventually, the founders got their estimated start-up needs down to $150,000. Actual costs have exceeded the $200,000 they raised, and the founding duo have had to pump a total of nearly $100,000 of their own cash into the venture.
Starting a beer company on the cheap, they say, has been a sobering experience. "Mark and I are a little burnt out," concedes Verzello. "This definitely isn't the easiest way to grow a business." So they're considering another private offering to raise an additional $300,000, which they plan to use to develop a full lager, increase their sales staff, take another crack at D.C. and New York City, and expand farther along the East Coast. They're also considering bringing on a third partner by selling a 10% equity stake. The person they have in mind has experience in evaluating companies for mergers and acquisitions, and he would bring an expertise that Verzello and Goodwin admit they lack: making the bottom line work. The potential partner would help the company secure a $200,000 line of credit, and his equity purchase would bring in another $200,000 or so in capital. And as a part-time chief financial officer, he would oversee the management of the business. "I'm not proud," Verzello says. "I want the money."
Besides, between the two of them, the founders would still own most of the company -- they currently own 75%. "That 75% will allow us to dilute down and still stay in control. We always want to be in control," says Verzello. But after a pause he adds, "Unless there's a big enough offer."
Offer?
Within five years, the founders see themselves in a possible joint venture with a large brewery, similar to a recent deal in which Anheuser-Busch acquired a 25% interest in microbrewer Redhook Ale. "There's a beer boom right now, but not everyone's going to make it," says Verzello. "You have to have good distribution, technical know-how, and advertising capabilities. And capital. All of that we could get from a big brewery."
But what would the David & Mark Brewing Co. contribute to the partnership? "The big breweries want to capture the microbrewery market," says Verzello. Craft brews made up only 1.3% of total U.S. beer production in 1994, but that percentage is expected to grow -- by at least 40% annually over the next five years, according to some industry estimates. By then the microbreweries could capture as much as 5% or 10% of production. And 10% of a $50-billion market is a lot of money. Huge brewers have spent millions to compete with craft brews. Some have produced "stealth micros" marketed to look like microbrews, such as Miller Brewing Co.'s Red Dog. "But the consumer can see through that," says Verzello.
Verzello and Goodwin think they can deliver something Verzello says a big brewery "can never get on its own": the gay market. He mentions Coors and Miller as companies anxious for a foothold in the market. Both have been the objects of gay boycotts, Coors for its past support of antigay causes and Miller for parent company Philip Morris's political donations to conservative senator Jesse Helms. "You can't buy Coors in Atlanta's gay bars. And Miller got kicked out seven years ago," he says. "Those companies are spending fortunes to gain that loyalty. Eventually, we can deliver it to them." Verzello has received at least three buyout inquiries, he claims, including one from one of the big three breweries. He won't name names.
For the moment, Black Sheep is still predominantly an Atlanta phenomenon, available at both Burkhart's Pub, a local gay watering hole, and the World Trade Club, a decidedly ungay, private men's club. "Beer appeals to everyone," observes Verzello. "Why limit yourself?"
EXECUTIVE SUMMARY
THE COMPANY
The David & Mark Brewing Co., in Atlanta, founded by business and life partners David Verzello and Mark Goodwin
Concept: Establish a microbrew-beer brand by targeting an affinity market -- gays and lesbians -- before taking the beer into mainstream bars and restaurants
Projections: Revenues of $5 million by fiscal year 1997
Competitive advantage: The gay affinity helps the founders establish distribution, build brand recognition, generate cash flow, and attract sympathetic investors
Hurdles: Generating sufficient capital and distribution to create a mainstream national brand, while avoiding being pigeonholed as the "gay" beer
THE FOUNDERS
David Verzello, age 31, president, and Mark Goodwin, age 33, treasurer
Brewing backgrounds: Verzello, with a degree in economics from the University of San Francisco, completed certificate courses in Microbrewery Operations and Management and in Intensive Brewing Science through the University of California at Davis. Goodwin, whose Davidson College degree is also in economics, brewed beer at home for five years.
Family: Themselves and two dogs, Blizzard and Caliban
