In the first quarter of 2020, thanks to Covid-19, the investment landscape for spirits—and literally every other category—quickly devolved into something unexpected. So what does this mean for investors and entrepreneurs looking for venture capital funding?
Private equity firms are having internal conversations about strategic plans going forward, but the fact that no one knows how long the current status quo will last or what comes next is challenging, said Kristin Bareuther, managing director, First Beverage Ventures, a New York-based private equity firm whose current portfolio includes alcoholic and non-alcoholic beverages such as Laws Whiskey House, Essentia Water, Q Mixers, CBD drink Mad Tasty and Gem + Bolt mezcal.
The retail environment is a particularly big question mark, she added, with events like the Pennsylvania Liquor Control Board’s closure of the state’s retail outlets last month disrupting sales channels. The loss of opportunities to host on-premise sampling events is also forcing up and coming brands to reevaluate their promotional strategies to introduce new products to consumers.
These days, a lot of VC groups are looking for deeply discounted deals, said Jeff Hopmayer, managing partner of Nashville-based wine and spirits investing consultancy Brindiamo Group, which has advised brands such as Bardstown Bourbon, Angel’s Envy Rye and Popcorn Sutton whiskey.
“We’re seeing a lot of really great companies with significantly diluted or depressed valuations, especially in the public markets,” he noted. “The only reason these companies are trading the way they are is because of the pandemic.”
Some small distilleries shifted their production toward sanitizers in the early days of the pandemic, which was great in the short term, at least from a public relations perspective. But large industrial alcohol providers are getting online for full capacity quickly, negating the longterm need for craft operations to provide this service. And, added Hopmayer, as consumption in most places is now off-premise, that has forced small brands into a fight at retail with big brands armed with hefty marketing budgets.
While he hasn’t gotten desperate calls from investors or brands yet, he senses those days will come. “I think there will be some panic and certainly some tremendous fallout for people who didn’t have enough of a cash reserve built up to be able to weather these sorts of times,” Hopmayer said. “The debt markets aren’t that easy—you’re going to will have to show you can stay in business and win the fight on the shelves. It will be harder for these people to get loans across the board.”
Still, the market isn’t completely bleak. Entrepreneurial brands can come out stronger at the tail end of the current landscape, if they refocus their energies into areas that will be meaningful in the new normal, whatever and whenever that may be, Bareuther said. She thinks there will still be capital available from investors for brands that position themselves the right way.
She expressed confidence in entrepreneurs to rise to the challenge of a changing landscape. In the course of a single week, two different entrepreneurs shared completely refocused business plans with her that were unusual and impressive. “They were able to look at their original idea, see where the puck had moved to, and where they could capitalize on an opportunity in a way no one else was going after.”
One example of a brand pivoting is Laws Whiskey, which recently shifted a tasting and product launch online. Samples were sent out to media representatives, who participated in a Zoom call to learn about the blend.
“I hope entrepreneurs don’t think money isn’t out there, because I’m pretty sure it is. If anything, I see the future being quite bright, and we’re going to see some people come out of this incredibly well positioned,” Bareuther said. “Part of the reason our fund existed is because of the radical consumer shift towards people wanting healthier products, and there is still the opportunity for innovation. You will still see people making investments.”