What is the smartest thing to do with $100? Shinobu Kato tried asking his supporters and fellow Brooklynites to invest in his craft sake brewery, Kato Sake Works – to support brick-and-mortar businesses shaping the community and also earn financial return.
“Everybody is like, hey, we want to help you. But we didn’t have a way to ask for their help,” said Kato, who lives in Brooklyn. Customers – mainly from the Bushwick neighborhood – have been actively looking for ways to back Kato Sake Works, including free video advertisements production, before he launched his latest crowdfunding campaign in December.
The Japanese rice wine brewery opened its doors in April 2020 during the pandemic; that same year it generated $200,000 in revenue, but growth has been hard to come by. “Crowdfunding might be a really good opportunity to capture [that] generosity from our supporters,” he said. Kato launched a campaign on Mainvest, a platform specialized in small businesses debt crowdfunding, to finance his new 2,500 square-foot facility–also in Bushwick– with new equipment and fermentation tanks. The promise to deliver 50% return in five years and the love from avid drinkers helped Kato raise $250,000 over the course of 63 days from 217 people.
Across the United States, sake brewers are launching crowdfunding campaigns to raise capital for their business expansion – from the conventional swag giveaways and memberships like Setting Sun Sake Brewing Co., and issuing debt as Kato Sake Works or selling public shares akin Colorado Sake Co. The idea is that if customers are willing to buy a bottle of $35 sake, why not turn them into investors?
Of course, crowdfunding itself has been around for more than a decade–popularized by Kickstarter and Indiegogo, among others. However in recent years, the financing tool has become popular with a certain subset of businesses, thanks to an Obama-era investor reform law. Breweries in particular, say equity and debt crowdfunding options have been useful for helping them survive the pandemic and grow.
Debt crowdfunding platforms including Funding Circle and Mainvest provide smaller brick-and-mortar businesses an alternative to often tough-to-get bank loans, as well as a new way to engage their existing buyers. It is particularly valuable for sake breweries who want to expand their operations.
“I think that this is going to be something that people turn to, just because it’s a relatively easy way to raise funds, and there are fewer strings attached,” said Weston Konishi, the President of Sake Brewers Association of North America, based in Washington DC. It represents more than a dozen sake breweries from Canada, the United States, and Mexico.
Konishi said crowdfunding is attractive because it requires less effort from founders to build partnerships, and as interest rates are destined to go up, bank loans may start to look less attractive. “These are just essentially angel investors in a lot of ways,” he said. Even though, in Kato’s case, debt-crowdfunding is more expensive than a traditional bank loan. He is in touch with a bank which is offering a rate at around 8% as a fall back.
Even though, in Kato’s case, debt-crowdfunding is more expensive than a traditional bank loan–he is in touch with a bank which is offering a rate at around 8%, for instance–he still thinks it’s a better option.
Kato decided to raise debt in his campaign because he did not want to give up any parts of his company, and he thought selling equities could be costlier than borrowing money. “I didn’t like to have 100 investors forever,” he said. It could be a big commitment sending emails to 100 investors every year, reporting financials and dividends.
Debt crowdfunding is only one route available to business owners. After failing to secure a $170,000 loan from the Small Business Administration. Setting Sun Sake Brewing Co. had to lay off staff and close down its tasting room for almost two months.
The Southern California sake maker is now hoping its crowdfunding-style effort will help it recover. Setting Sun aims to bring 500 people to their Ronin Club by the end of the year – a membership system that provides drinkers with spending points to help the brewery to stay afloat.
The business has tried crowdfunding before. In 2015, the Setting Sun Sake Brewing Co. put up an Indiegogo campaign, raising $1,560 by offering its supporters etched rocks, glass, hats, t-shirts, hoodies, and access to future special releases.
“We wanted to do it differently from other crowdfunding sites,” said Kim Roxas, the co-founder of Setting Sun Sake Brewing Co. “Because we wanted to keep it local to our community.”
Josh Hembree, another co-founder of Setting Sun Sake Brewing Co, said the business prefers using its own point-of-sales platform for the campaign because it allows money to come in at the rate of their ability to raise awareness instead of setting a specific run time with allocated payouts at the end. He also found the cost of curation of the rewards for the Indiegogo campaign more expensive than the total revenue raised.
“This new model allows us to do the things we do, like selling our sake to customers,” the former beer brewer who transformed into a sake enthusiast said.
Still other entrepreneurs like Willliam Stuart from Colorado Sake Co., based in Denver, was more attracted to the idea of selling shares to the public. “We wanted to give people the opportunity to own a part of our company and be a part of the journey with us,” said Stuart. “That would give us regular customers for life because they own a piece of the company.”
He added that taking private capital risks losing some control over the company to outside investors. Colorado Sake Co. raised $705,211 in December 2021, and a profit margin as high as 80% has attracted more than 748 investors through the equity crowdfunding platform StartEngine. The minimum investment was $250, and Colorado Sake offered non-voting common shares at $1 per share.
Stuart opted for offering non-voting shares to investors because calling more than 700 people for a vote was unrealistic. StartEngine is responsible for investor relations, and as the operator, Stuart has to make all the company financials visible on the website for its investors. StartEngine charges companies around 7-12% of total capital raised and an additional 2% of the amount in equity.
The funds helped expand the brewery and grew revenue from $600,000 to potentially $3 million in 2022, he said. “One more raise would allow us to get to that five to $10 million range,” Stuart said.
Stuart said the brewery has seen a 100% year-over-year growth in the last three years. He also pivoted his business into online sushi classes and tasting events during the Covid-19 pandemic, which helped the breweries double its sales since its launch in 2016.
The potential shareholders did not invest only because it is a “cool” idea to own a part of the brewery, but they also cared about the investment return.
From donations to debts and equity
Debt and equity-based crowdfunding platforms entered the market as investments after regulations known as Title III of the Jumpstart Our Business Startups, or JOBS Act came into effect in 2016. The law, which was passed in 2012 during Barack Obama’s presidency, allows startups to raise money from non-accredited investors publicly over the Internet, providing new avenues for everyday retail investors to fund small businesses and startups.
“It kind of democratizes investment,” said Isabel Strobing, Mainvest’s director of marketing communications. She said regulated crowdfunding differs from regular crowdfunding as an investment is involved. “Instead of pitching out 100 bucks and getting a t-shirt, you’re actually getting some sort of financial instrument.”
Mainvest found a niche market in providing crowdfunded debt and revenue sharing – in which investors essentially provide microloans to small businesses in exchange for a share of the revenue. Companies can avoid diluting their ownership or dealing with equity, which could be complex for small businesses.
Mainvest was co-founded in 2018 by former Uber Community Manager Nick Mathews, valuation analyst Benjamin Blieden, and web engineer Felix Le Dem with a mission to fill small businesses’ financing gaps. The company has supported more than 450 investment opportunities, helping companies raise $15 million from thousands of investors. The company’s website also states a 96% repayment rate for Mainvest’s businesses.
“Brick-and-mortars are not only, as a lot of politicians say, the backbone of our economy, but also the lifeblood of our communities,” Strobing said. “I think it’s like the last remaining thing that allows the community to feel really connected.”
Small businesses are the ones that provide places to gather and jobs to communities, she added. Therefore, keeping small businesses alive and up and running is crucial, especially when institutional finance is not serving them.
Mainvest’s model offers to give small businesses more flexibility than even the traditional equity crowdfunding model. The revenue-sharing can lead to faster returns for investors. Instead of a fixed interest rate, the payoff is based on a business’ income, so repayment is more dictated on the success of a business.
The revenue-sharing model also works well for cash-flow-focused businesses with wide margins, too, said Strobing. The model requires companies to pay a certain percentage of any revenue it may generate every quarter until all principal and interest is repaid.
Mainvest’s debt is also subordinated, which fits firms with other capital types, such as private investors or bank loans. It means that if a business ever filed for bankruptcy protection, the Mainvest loan would get paid off after its other, higher-priority debt.
Apart from Kato Sake Works, Mainvest has also worked with Farthest Star Sake in New England and dozens of other craft beer breweries. The model works particularly well for breweries, which tend to have higher capital needs up front than other brick-and-mortar businesses.
Strobing points out that not every business can succeed at debt crowdfunding. Those that do tend to be stronger community builders.
Kato said a crowdfunding campaign is more like a popularity contest,”If you have a business that people feel is cool and people love, and good Instagram followers, you might be able to successfully raise money.”
“Breweries have been able to go out and excite communities about their concepts,” she said. “So that turns them into very good fundraisers.”
Mainvest’s Strobing notes that business owners shouldn’t take this agreement lightly. “They’re on the hook and they’re legally bound to repay those investors.”
Crowding is also very risky for investors. Investors should be prepared to lose everything they put in because startups and early-stage ventures are speculative and these enterprises often fail, warned SEC’s Office of Investor Education and Advocacy in its Investor Bulletin.
Equity crowdfunding does not pay off for investors in the short term – just as traditional angel investors or venture capitalists, any potential returns are only realized only when the company is listed on a stock exchange or acquired. And StartEngine, a equity crowdfunding platform, is piloting a secondary share trading platform to address the issue.
“It can take a very, very long time for a startup to get to the point of an IPO,” said Sarah Hanks, co-founder and CEO of CrowdCheck, is an attorney with over 30 years of experience in the corporate and securities field in a blog post. She said she is not aware of a regulated crowdfunded company having done an IPO.
Possible fraud convictions could be another major risk factor to consider. The U.S. Securities and Exchange Commission in September filed a complaint against the owner, sponsors and the crowdfunding portal of two marijuana real estate companies, for failing to disclose the involvement of a person who has a prior criminal conviction.
Kato said it is also essential to have a fallback plan from conventional funding sources so that even if the campaign fails, they can still proceed with the expansion plan.
“Crowdfunding is not like a magical place where you can find money,” he said. But for the discerning business owner, it’s an option.
Crowding is also very risky for investors. Investors should be prepared to lose the entire money they put in because startups and early-stage ventures are speculative and these enterprises often fail, warned SEC’s Office of Investor Education and Advocacy in its Investor Bulletin.
Possible fraud convictions could be another major risk factor to consider. The U.S. Securities and Exchange Commission in September filed a complaint against the owner, sponsors and the crowdfunding portal of two marijuana real estate companies, for failing to disclose the involvement of a person who has a prior criminal conviction.
Kato said it is also essential to have a fallback plan from conventional funding sources so that even if the campaign fails, they can still proceed with the expansion plan.
“Crowdfunding is not like a magical place where you can find money,” he said.
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