Craft Brewers and the Prettiest Girl at the Dance-Syndrome
After reading a recent piece in Harry’s newsletter I was taken back to a significant time in my life. Harry and I emailed back and forth about it and I thought it could perhaps be a good post.
Harry was reporting on the money and attention that is being thrown at craft brewers and their responses. Let me tell every craft brewer out there (and every wanna-be) my tale of woe…
The time is the late 90’s. The dot-com boom is rocking. There was a river of money flowing by and I wanted to jump in and grab some. The final straw was when I read about DrKoop.com in the Wall Street Journal... here was a company with revenue (not profits, but revenue) of around $40,000 and its market valuation topped out at over a billion. And where is it today? Exactly.
I called a tech friend and said let’s get together… as I told him, he was a tech-wizard and I know how to start businesses so let’s get rich. We got together with a few of his tech buddies and discussed how we could all make each other rich. And off we went with a company we named eSniff.com (notice how we tried to capitalize on every buzz-word of the time, the e and the .com). Our technology used in tech-terms a packet sniffer and thus the name.
The company’s goal was to help organizations keep people from screwing around on the Internet at work. It was a real product with real profit… both things few of the dot-com companies had. We even went international right away with sales in Mexico and a beta-product for Japan. Trying to impress the money-guys even more.
Looking back, our arrogance and my ego were astounding… are you listening yet craft brewers? Little did we know we were looking in the rear-view mirror when we pounded our chests about the value of our business and what we would or wouldn’t take for even a piece of it. We thought since this or that company was valued in the billions we could match them. But since we were doing our planning by looking in the rear-view mirror, we failed to see what was coming… instead we focused on what had been… and the past was very much to our liking.
Our business strategy was to get big fast… that’s what got the private equity guys attention… so we burned through money and did in fact get relatively big. We actually had the beginnings of a pretty nice little company… eh, craft brewers?
Now the private equity folks aren’t stupid and they knew many of these business plans and the valuations they were generating were in many cases built out of smoke and mirrors. There really wasn’t much there, there. But operating on the greater fool principle… you know the greater fool principle?… the specific investment might not make any sense and have any real value but as long as you can find a greater fool to sell it to at a profit, what difference does it make?
During the housing boom in Florida I heard of many situations where people bought a house and sold it in 90 days for a $30K profit. It’s all well and good as long as there is a never-ending supply of greater fools. But just like the kid’s game Musical Chairs, it’s not much fun when the music stops and there is no chair for you. Being the last fool really sucks.
So these private equity folks were all VERY aware that a great deal of the dot-com stampede was driven by greater fools… but they played because they could make HUGE profits… and did. And they had the inside information so they thought they could ensure there would be an exit for them once the music stopped.
So we lived it… a river of money and crazy valuations simple stopped. It did not slow down… it did not coast to an easy stop… it ENDED. The private equity folks behaved like a herd and when one smelled danger they all took their money and ran to the exits. Dreams of going public? Yeah right. Dreams of a big dollar payday? Yeah right.
And for those of us whose business plans depended on this river of money to fund our growth? Well we went from the prettiest girl at that dance to a person begging to do things just for a few bucks to keep us alive for another day. Not only were we willing to sell our soul, we did. When you are staring into the maw of bankruptcy and the damage to every employee it will impact, it is amazing the things you will willingly do.
THE CASE FOR EXPERIENCIAL LEARNING
Every craft brewer out there needs to read that last paragraph again. Getting your nuts cut off has a very negative impact on your aforementioned arrogance. I went from laughing about the “low” valuations that we would never accept to sleepless nights wondering how we could all just get out with our hides in one piece. Our original investors lost everything… and they were friends who had trusted me. I still can’t get over my failures to these folks.
So craft brewers… enjoy the ride. But the path from prettiest girl at the dance to the depths of depression and despair is a lot shorter than you might think. And if you think you remotely control this (we’d NEVER let that happen to us), you are whistling past the graveyard. I’ve had the misfortune of walking this path… you are riding a wave but don’t let your arrogance and ego convince you that you are the maker, let alone the controller of that wave.
Being in the sweet spot of an incredible consumer awaking is a great place to be. Just make certain your strategy is flexible enough to deal with all potentialities. I don’t know the future, but things are just like they have always been right up until the moment they aren’t anymore.
And remember, if and when the money folks get a sniff of fear, the game will be over and it will be over quickly. No more come-hither looks from across the room. No more business cards with special messages. No more of a lot of things. Only the bottom-feeders will be happy when this comes to be… and you very well might be their meal… that is if they even consider you worth eating. Right now the value of your brand equity is high (oh, I remember those days) but after the crash you may find it is non-existent… been there, done that.
And yes, Steve Cook and I are providing M&A and profit-improvement services to craft brewers and would be happy to discuss potential opportunities but please don’t write off my tale of woe as just some self-serving marketing ploy. This story and my scars are very real.
Whether you use our services or not, keep the above in mind as you enjoy being the prettiest girl at the dance. Just don’t think that it will last forever. I lived it and hope you can learn from my very real pain. From the peak to the valley is a lot shorter (and a lot quicker) than you can imagine. And it’s kind of like sky-diving… it’s not the fall that is the problem… it’s that sudden stop at the end ;-)