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What to Know Before You Raise Capital

How much do you really need to raise?

Written by Marc Levit

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When jumping into the beverage alcohol industry, your primary motivator is probably passion. Passion for making, doing, and connecting with people. But, to keep those things a reality, you often need to raise capital for your business. Whether you’re just getting started and need to get the groundwork laid for your business or you’ve been around the block and want to seek out additional capital for growth, the process can seem confusing and arbitrary. To (finally) get started and make your passions a reality, keep reading.

Before You Get Started

“How much capital should I raise?” 

It’s a simple-sounding question that requires understanding in all aspects of a business. Consider:

  • What does our growth trajectory look like?
  • What additional resources, both capital and human, do we need to add to support this trajectory?
  • What is the biggest risk related to this? 
  • How sure are we that we can get this done?

Frankly, the only reasonable answer is that it’s a highly complicated question with significant nuance, dependent on circumstances both within and beyond our control. However, with a little bit of deep thinking and the help of advisers, business owners are often able to calculate reasonably correct numbers.

Where Do I Begin?

There’s more than a few tropes about how the planning process is more important than the actual plan (which is true), but I’ll let you read elsewhere. Instead, I often look at long-term planning to confirm the possibility of one of two outcomes:

  • Can we put this brewery or winery on a path to achieve long-term profitability?
  • Are we on a path for a successful acquisition?

Sometimes, the path to achieve either outcome is identical, as building a brand to generate meaningful profit naturally attracts a pool of acquirers. Other times, to gain market share and relevance, brands must overinvest in marketing, inventory, and/or human capital at a rate that leads to purposeful unprofitability.

No matter the path your business takes, your team should create a strategic plan and understand its risks.

Money, Money, Money

Back to raising capital: How much do I need? When? Will I need more? When?

Incorrect answers start with numbers. Correct answers start with some combination of “I don’t know,” “It depends,” or “Hmmm,” followed by the magic word: “but.”

Correct answers acknowledge the impossibility of the task at hand, but try to find a reasonable, actionable answer.

To determine the amount of capital needed to support your brewery or winery, try this:

  • Develop your five-year plan 
    • Lay out all of your expected operating costs.
      • This includes salaries, marketing, rent, utilities, etc.
      • Build these out monthly or quarterly for the first year or two, and yearly after that.
    • Think through all of your production-related costs (both fixed and variable) and how long you need to sell your product to pay for these.
    • Determine your streams of revenue with supporting detail on a product basis and channel basis.
  • Quantify what your net cash burn may be over the next 18-24 months
    • Your net cash burn is not the same as your operating loss from your income statement — it doesn’t consider the cost of inventory build, or your inventory, raw materials, works in progress, and more. 
  • Simply, round up

Getting There

To oversimplify, here’s an example. Perhaps over 18 months you determine the following estimates:

  • $850k of operating expenses (salary/marketing/rent, etc.)
  • $950k of inventory build
  • $600k of revenue

Your “net cash burn” in this period totals $1.2 million, in which case, for no good reason other than we just don’t know, I would advise you to strive to raise ~$1.5 million. If you want to make sure you have plenty of cash on hand, try to raise $1.75 million. We start with extreme thoughtfulness and end with arbitrary rounding.

There’s science, there’s art, and forecasting your capital needs is both and neither. We’re trying to determine what an optimistic but realistic path may look like. If that path isn’t driving you to profitability or a higher likelihood at acquisition, the plan — and your overall business strategy — should be reevaluated.

Do your best, be thoughtful, be conservative (but not too conservative), seek advice from those who have done this before, and be ready to update and adapt.

Marc Levit is the founder of ML Advisory, a strategic and financial advisory firm that advises beverage alcohol and CPG brands on sellside and buyside M&A advisory, capital raises, and achieving profitable growth. Over Marc’s career, he’s advised on >$1bn in transactions to the world’s most admired strategics including Constellation Brands, Moët Hennessy, E&J Gallo, and Chanel, working with high-growth brands including High West Distillery, Skinnygirl Margarita, Woodinville Whiskey Company, J Vineyards, and Ole Henriksen Skincare. www.marclevitadvisory.com

Written by Marc Levit
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