by Elizabeth Hans McCrone
When Naked Wines was contemplating financing for a new, online wine venture in the United Kingdom five years ago, the company came up with a simple but astute philosophy: we need to be nice to our customers.
“We said to ourselves ‘we don’t have huge financial backing, we can’t do things the way anyone else does,’” explains Ryan O’Connell, winemaker and Marketing Manager for Naked Wines. “We decided, ‘let’s do it better.’”
“Better” meant making customers the key – as well as the front-end source for the working capital that has financed Naked Wine’s expansion throughout the United Kingdom and into the United States last year.
It’s a concept known as crowdfunding and their formula is pretty straightforward. Customers seeking to buy wines online can do so by creating a private account, which they fund at a rate of $40/month. In return, they are given preferential prices for wine purchases – between 40 to 60 percent discounts – plus access to the winemakers who actually craft their products.
“It’s about accountability and exchange,” notes O’Connell. “Our customers have a direct line of communication with us. But it’s not just about thanking them; it’s about getting conversations started. It makes for a much more engaged wine drinker.”
That engagement is paying big dividends. Through their estimated 150,000 online “angels,” Naked Wines now has enough capital to fund more than 100 different winemakers in 13 different countries, purchase a “bricks & mortar” winery in Kenwood, California and get some good deals on grapes from choice vineyards in the United States and beyond.
New Crowdfunding Opportunities
While the crowdfunding model Naked Wines uses isn’t brand new, it is one of the hottest topics in investment financing throughout the beverage industry right now. Businesses interested in seeking crowdfunding financing have two primary options open to them.
The first involves a Donation/Reward program. Projects are funded with relatively modest contributions from a large base of donors, who receive something in exchange, such as company memorabilia (T-shirts, logo glasses, etc.), invites to special dinners or discounts on products.
The second is an Equity/Debt model, where investors contribute larger amounts of money in return for shares of the company in the form of equity or convertible notes; i.e. debt..
Both the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC) in Washington, DC heavily regulate the Equity/Debt model. While the JOBS Act signed by the Obama administration in 2012 has eased some restrictions on crowdfunding, investors must still be accredited to participate in the program. Terms of being an accredited investor can be found on the SEC website.
The JOBS Act regulations for unaccredited investors are expected to be implemented in 2014, and that is when everyone becomes eligible equity crowdfunding investors.
Travis Benoit is the owner of CrowdBrewed, an online funding platform for the craft brewing industry. Benoit is also a partner with North Capital Private Securities Corporation. He’s excited about crowdfunding potential for the wine industry.
“In the old days there were only three options open to wineries,” Benoit states. “Friends & family, bank loans, and venture capital.”
Benoit says that venture capitalists, especially, were heavily focused on high tech start-ups versus wine-related projects. He points out that the financial collapse of 2008 created even more obstacles, joking that obtaining a loan was next to impossible “without giving away your first child.”
Benoit is in the process of launching CrowdVino, an online portal specific to the wine industry that will offer crowdfunding financing under both the Donation/Reward and Equity/Debt systems.
“CrowdVino will be the first and only global crowdfunding website that allows the accredited investor to own a piece of their favorite vineyard or winery,” Benoit claims. “In late 2014, CrowdVino will allow the general public to be an owner for as little as $100. The goal is, we hope they’ll spread that (winery) love to family and friends as well.”
Can Crowdfunding Work for the Wine Industry?
Not everyone is as enthusiastic about the recent crowdfunding phenomenon. Rob McMillan with Silicon Valley Bank is more cautious about this less than traditional business model.
“The vast majority of these projects are not successful,” McMillan observes. “But it’s early yet. From what I’ve seen, the successful ones have been able to get the attention of investors, versus those who are trying (through crowdfunding) to market their product.”
Others, like George Christie of the Wine Industry Network (WIN), say that crowdfunding is not significantly different from what wineries have been doing all along.
“Crowdfunding has been a part of the wine industry for years; we just called it something else,” Christie asserts. “It’s our wine clubs that commit to buying wines they’ve never tried or purchasing futures on barrel samples, sometimes a year in advance of a release, to get preferred pricing or an invitation to a private party.
For many wineries, especially the small ones, these programs have been key component of their financial plan from day one. I can only imagine the excitement if actual ownership becomes an option. It seems to me that crowdfunding and the wine industry are a perfect pairing.”