The craft beer bubble is just a symptom of a much deeper malaise
The latest crowdfunding push from craft brewer Brewdog says a lot about the ease of raising money, says John Stepek. From junk bonds to sovereign debt, there are signs of a huge bubble getting ready to pop.
When I first started drinking in pubs, choosing a beer was easy.
In most of the fine establishments I frequented around Glasgow and its environs, you had a choice of two. There was a watery yellow fizzy drinkcalled lager'. And there was a watery brown fizzy drink called heavy'. Oh, and sometimes there'd be Guinness.
I used to favour heavy. It was the sophisticated man's choice, after all. (And they were both equally revolting.)
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Those days are gone (thank the Lord). The craft beer revolution means choosing a beer these days is almost as tricky as buying a coffee. Some of it even tastes good.
But does that mean it's worth investing in?
Buying shares in BrewDog is it a good idea?
We interviewed Scottish brewers BrewDog in MoneyWeek magazine back when they were just starting out. They had a flare for headline-grabbing manufacturing various stunt beers with near-lethal quantities of alcohol.
But they've made plenty of more widely drinkable beer too, and they've grown fast. The company was set up in 2007. It's now Scotland's biggest independent brewer. It made nearly £4m in operating profit last year, and employs more than 360 staff. As well as the brewery, it has 27 bars around the world. Turnover is expected to come in at more than £50m this year.
The company is a pioneer in another field too crowdfunding. In 2013, it raised £4.25m from investors in less than six months via its own independent crowdfunding programme ie it didn't use a platform (such as Seedrs).
And now BrewDog wants to raise another £25m. For £47.50 a share, (minimum purchase, two shares) investors can buy a stake in this fast-growing punk' brewer. Not only that, but you'll get discounts in its bars, and a ticket to its AGM.
Is it worth backing? Let me cover the details and you'll probably be able to guess my answer. This is an attractive company. It's fast-growing, it makes money, and the founders seem to know what they're doing.
But every company has its price. Pay too much and you'll lose out in the long run. And if your method of investing is illiquid (ie it's hard to sell out) and untested (crowdfunding is still very new), you should be expecting a discount over and above, for all that hassle.
As far as I can see, that's not what you're getting here. As the FT notes, the current fundraising would value the company at more than £300m. That puts it on a historic price/earnings ratio of 116. Now, it's growing fast, but that's punchy for a tech stock, let alone a brewer. And naturally, as a small fast-growing company, it doesn't yet pay any dividends.
On top of that, the shares will be hard to sell they're unquoted, and a full public listing is not on the cards imminently. So you'd have to find a buyer willing to take them off your hands.
And as the FT points out, as an owner, you don't have much power. "More than three-quarters of the company is owned by founders and staff, so they could have the ability to push through initiatives you don't like."
Virtual spaceships and fancy beer
Now, don't get me wrong crowdfunding is a fascinating innovation. I read an article in Wired magazine the other day about a well-known computer games designer who is creating a huge new online science fiction game. He's doing it all via crowdfunding. His smart fundraising gimmick is to design spacecraft that you'll be able to fly in the game, then advertise and sell them in limited quantities to backers.
People who want to play the game (because they're fans of this chap's work) are shelling out literally thousands of pounds to buy these virtual spacecraft. And just to be clear, these spacecraft don't even exist in the game yet it's not yet been finished.
That sounds mad. But the key difference is that these guys are hobbyists. Yes, you might think they're mad to be spending thousands of pounds on virtual spaceships that don't even exist in virtual form yet.
But they understand what they're doing. This is not an investment. They are not buying a stake in the company making the game they are paying in advance for a product that they want to see in the world', as it were. To that extent, it's no more insane than any other time and money-gobbling hobby (and if one person is willing to spend a few grand on a virtual spaceship, no doubt they'll be able to find someone else to offload it to if the game takes off).
What's different about the BrewDog offering is that, technically, it's an investment. You are buying a stake in the company. But really, on these terms, it's no less of a hobbyist' investment than buying a virtual spaceship.
In short, if you really like BrewDog beer and you can get your money's worth out of the discounts, you might be happy to buy a couple of shares. But if you genuinely want to invest in small fast-growing companies; or the drinks business; or even just have a promising punt there have to be better options for all three out there.
Bubbles in the beer business and beyond
Does this point to a bubble in the fancy beer industry? Quite possibly. If scientists are saying we've reached peak beard', then peak beer' can't be far behind. But the end of the hipster bubble is no more of a worry for most of us than the bursting of the cupcake bubble (what do you mean, you missed that one?).
What's more worrying is what it says about the ease of raising money in general. Frankly, investors right now aren't being very demanding when it comes to what they get in return for their money. From the likes of BrewDog to the junk bond market to negative yields in sovereign debt all the signs are of a much bigger bubble getting ready to pop.
Our regular contributor James Ferguson of the MacroStrategy Partnership is currently putting together a piece on the dangers of the bond bubble for MoneyWeek magazine. It'll be out very shortly and it's one you don't want to miss so if you're not already a subscriber, sign up for your free trial now.
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John Stepek is a senior reporter at Bloomberg News and a former editor of MoneyWeek magazine. He graduated from Strathclyde University with a degree in psychology in 1996 and has always been fascinated by the gap between the way the market works in theory and the way it works in practice, and by how our deep-rooted instincts work against our best interests as investors.
He started out in journalism by writing articles about the specific business challenges facing family firms. In 2003, he took a job on the finance desk of Teletext, where he spent two years covering the markets and breaking financial news.
His work has been published in Families in Business, Shares magazine, Spear's Magazine, The Sunday Times, and The Spectator among others. He has also appeared as an expert commentator on BBC Radio 4's Today programme, BBC Radio Scotland, Newsnight, Daily Politics and Bloomberg. His first book, on contrarian investing, The Sceptical Investor, was released in March 2019. You can follow John on Twitter at @john_stepek.
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