Higher and Higher Valuations

The beverage industry has always attracted entrepreneurs with no prior beverage experience, but also capital with little to no prior ties to anything beverage.   Now we’re seeing more and more signs of start-up beverage companies able to raise large sums of money based on no sales.  I recently met with two companies, for example, which had not sold one case (and in one instance had not finished formulation of the product), with post-money valuations over $20 million.  In each case, the founders’ sweat equity piece was enormously rich.

The good news is that there seems to be a new influx of outside capital coming into the industry.   And there’s a belief that, despite the bad economic environment and the hurdles brands face on crowded retail shelves, the right brands can provide very attractive, long-term returns.

But it’s hard to believe that for any investor a made-up valuation of over $20 million on day one makes sense, unless of course owning a beverage brand has a cache that allows investors the chance to throw off normal investment discipline in order to tell friends that they own the next vitaminwater, Silver Oak, or Sierra Nevada.   It reminds me of friends that invested in golf companies years ago more as a hobby investment than a business investment.  Normal investing parameters didn’t seem to matter.

But whether or not this kind of investment is good for non-industry investors, I’m not even sure it’s good for the companies.   Of course, they’re getting a lot of money, and if they’re successful they may never have to spend time raising capital again.  But often these raises load the company up with too much capital too soon, and many recent brand launches (and failures) have proven that too much money too soon can be a type of poison.   And god help these brands if they ever do hit some tough times and have to raise more capital. It’s likely they’d have to raise that money at a down-round (at a valuation multiple that is at a discount to their first raise) and deal with all of the resulting reputation fall-out.  I’m convinced these raises have a negative effect for one bigger reason: they reek of a lack of financial discipline at the very first stage of a brand’s life cycle.