James Watt is launching something of a second British Invasion--for craft beer. And, as it turns out, more than a few of his countrymen and women want to hold his hand during the process.

This month, BrewDog became the first crowdfunded "unicorn," when it raised $264 million from American private equity firm TSG Consumer Partners. Prior to taking institutional capital, BrewDog had raised money from tens of thousands of average investors across the U.K. The most recent round valued the Scottish company at more than $1 billion.

A crowdfunded American unicorn could be close behind. Since the Jumpstart Our Businesses Startups, or JOBS, Act passed under then-President Barack Obama in 2012, a growing number of U.S. small businesses have raised cash from so-called non-accredited investors. (Previously, private companies could not advertise stock offerings to these investors, nor could they accept money from them in exchange for equity.)

On the leading edge of this trend stateside is Green Sense Farms, an Indiana-based indoor farming startup which raised more than $600,000 on the equity crowdfunding site StartEngine. And last year, San Francisco startup Cruise Automation--which makes technology for self-driving cars--sold to General Motors for more than $1 billion, having raised some money via AngelList.

A different way to brew

As it turns out, these companies can learn a few things from each other. Back in 2007, Watt, a retired fishing boat captain, started a brewery from his garage in Aberdeen, Scotland, with the goal of creating an American-style beer with traces of British taste. He and co-founder Martin Dickie--a whiskey industry veteran--say they were inspired by the American craft boom. "Back then, there wasn't much of a craft beer scene in the U.K. at all," Watt remembers. "It was either mass market, generic beers, or very conservative, stuffy traditional beers." To make their brand of brew, they began by mixing malted barley with hot water, boiling this with U.S.-sourced hops, and fermenting the remaining liquid with an old English yeast strain.

Watt says he wants to be beholden to his customers in ways that traditional makers aren't. That was the idea behind his inventive series of crowdfunding efforts, called "Equity for Punks." Over the course of five campaigns--ranging from four to twelve months in length--the company offered thousands of its shares to average investors online. The minimum to invest was 95 British pounds, and the maximum amount of BrewDog that a single investor could own was just 0.2 percent. (The company insisted there were no pre-requisites, though asked that investors read an extensive prospectus on the benefits and risks of equity crowdfunding.) In return, investors received perks such as discounted beer, and an exclusive invite to the members-only "Equity Punks" music festival.

Since 2009, more than 50,000 individual investors have pledged more 40 million British pounds ($50 million), in return for a collective 17 percent equity stake in the company. Bolstered by that cash, BrewDog has expanded to more than 58 countries worldwide and dozens of pub locations in cities such as Tokyo, Stockholm, Barcelona and Rome. In a matter of weeks, the company will begin selling beer in the U.S., where it has already built out a taproom in Columbus, Ohio.

The risks and rewards

It's worth pointing out that in the U.S., equity crowdfunding is still very new. In 2012, the JOBS Act outlined how private companies could secure capital from more (and more average) investors. Yet it wasn't until last year that Title III took effect, allowing non-accredited investors to take part. (Generally, accredited investors in the U.S. make more than $200,000 annually, or have a net worth of at least $1 million.)

There are further limits to how small businesses in the U.S. can pursue this funding route: Startups can only raise $1 million over the course of a twelve-month period, for instance. There are also steep costs associated with the regulatory compliance.

Equity crowdfunding holds considerable promise. Globally, as much as $34 billion was invested this way in 2015, of which around $3 billion worth of deals involved equity, according to the research firm Massolution.

Still, there are substantial risks involved. Buying up stock in a startup is not the same thing as investing in the public markets; there's little to no liquidity, and most investors won't see returns for several years. Consider, too, that with a program such as BrewDog's "Equity For Punks," investors are only allowed to move their shares once a year.

Watt concedes that there are downsides to the approach. "It's a risk," he says, "but we've fulfilled [our] responsibility." To his point, BrewDog has been able to offer early investors a return of more than 2,700 percent on their initial investment, thanks to its rapid growth. Last year, the business reeled in more than 72 million British pounds ($90 million) in revenue, and anticipates doing more than 130 British pounds ($166 million) in 2017.

Of course, the U.S. craft beer market is saturated with competitors--such as Lagunitas Brewing and D.G. Yuengling and Sons--which collectively account for some $6 billion in annual sales. It's unclear whether BrewDog will be able to achieve the same cachet it enjoys abroad, inasmuch as the company is--in effect--selling an American product back to American consumers.

Even so, Watt doesn't seem fazed. "For us, we don't really see [local brewers] as competition," he says. "We see everyone making good beer, competing together against the big, industrial, multi-national businesses."

Published on: Apr 27, 2017