Craft brewer and pub chain BrewDog recently closed some of its pubs in a push to cut operating costs. Given it is partly owned by private equity firm TSG Consumer Partners , the loss-making firm is likely to face further organisational upheaval. After all, private equity firms generally specialise in cutting costs and selling assets.
Author
- Ross Brown
Professor in Entrepreneurship and Small Business Finance, University of St Andrews
This downsizing is indicative of the widespread demise of the on-trade beer market (that is, venues that sell beer for consumption on site). The sector is seeing six pubs close down in the UK each week.
It is also testament to the importance of a good finance mix and how this affects a firm's evolution. Throughout BrewDog's turbulent history the firm has rarely been out of the headlines, beginning when it launched its in-house equity crowdfunding model.
Labelled Equity for Punks , the scheme enabled non-professional investors to obtain small amounts of equity (that is, shares in BrewDog) in return for relatively small levels of investment (approximately £500). The firm says on its website that the scheme offered beer enthusiasts the chance to "own a slice of the brewery" and offered them "pretty awesome perks" including discounted beer.
From its launch in 2009 until the scheme closed in 2021, Equity for Punks raised £75 million and attracted more than 200,000 small-scale investors. This funding model had major upsides for the firm - generating tremendous growth and expansion over the past 15 years. This vast investment enabled BrewDog to open more than 100 bars and restaurants around the world, employing 3,000 staff .
But how does this funding model work - and who benefits?
First, it enables companies such as BrewDog to access substantial levels of funding from non-professional investors to grow the firm quickly. Second, it cements strong brand loyalty in its investor base. In return for relatively small levels of funding, individual investors obtained promotional benefits - access to new products and company events such as annual shareholder meetings.
Equity crowdfunding models like this are often pursued by growth-orientated, consumer-focused firms that want to expand very quickly. By contrast, most small firms favour more modest levels of growth that are more sustainable in the longer term.
The vast majority of small firms rely on debt finance from banks. But a minority of high-tech firms seek investment from professional investors - business angels (wealthy individuals using their own money) or venture capital (or VC - usually provided by an investment firm). For high-tech firms that want to scale up rapidly , sizeable chunks of VC (£10 million-£40 million) is often the most likely funding route.
The Equity for Punks crowdfunding initiative effectively enabled BrewDog to act like a firm-specific, in-house stock market for small-scale investors. But while some of these investors may have been happy just to support a business they believed in, many will have had little knowledge or experience of equity investment and the risks associated with it.
In essence, this generated easy access to finance for BrewDog, with few strings attached. While venture capitalists and angel investors take an active role in the firms they fund, the equity crowdfunding model offers little active participation for these small-scale investors.
Cautionary tale
As such, the benefits for these investors are less evident. Due to the structure of the subsequent fundraising campaigns, the terms and conditions for investors became less favourable and diluted their original equity stakes in the firm.
Although these small-scale investors still own almost one-third of BrewDog, due to the private nature of the firm the shares cannot easily be traded and they derive very little benefit from their investments. This is especially true while the firm is not making profits .
Unless the firm is acquired, creating demand for the shares, there is little opportunity for the equity punks to realise the value of their original investments in BrewDog. In contrast, under the traditional model of equity investment, VCs and angels would push for strategic measures such as a trade sale of the firm to generate a return on their investment.
The experience of BrewDog is a cautionary one for small-scale equity investors. While hugely beneficial for the recipients of the investment, individual investors might lack knowledge about the true value of their investments.
It is not just BrewDog that has provided small-scale equity investors with little return. In the UK, the main equity crowdfunding platforms have raised substantial capital for young businesses which has produced little return for investors.
Platforms like Crowdcube continue to expand rapidly and raise considerable sums for growth-orientated firms such as BrewDog. However, the benefits for investors are often illusory due to a lack of trade sales known as "exits", which allow investors to sell their stake.
These platforms are of course legitimate means of raising funds and are regulated by the Financial Conduct Authority.
Some academic research suggests, however, that a lack of due diligence on the part of the platforms can lead to firms with limited track records gaining substantial sums of investment. This can open up the potential for fraudulent behaviour , which economists call the risk of moral hazard.
Investors are not a homogeneous group and have vastly different levels of knowledge surrounding the risks associated with equity investments.
The BrewDog story has become a ubiquitous and commonly used case study by business school academics. Rapid access to vast sums of capital allowed the firm to grow at breakneck speed but with little in the way of stakeholder guidance, supervision and stewardship from investors.
If BrewDog had undertaken more sustainable growth using conventional sources of finance, it's possible that the firm would be in better shape than it is now. While growth is a policy mantra, the "rollercoaster" nature of rapid growth can entail considerable woes for the entrepreneurs and firms involved.
In a nutshell, small-scale investors were left exposed, with little in the way of concrete returns. For many of them, their beer dreams will have fallen flat. But nonetheless, the growth of equity crowdfunding in recent years has been huge. As such, there's a case to be made for greater investor protection in this arena.
BrewDog and Crowdcube were approached about the claims made in this article but declined to comment.
Professor Ross Brown receives funding from the ESRC under grant number ES/W010259/1 for the project " Understanding how constraints on access to finance and under-investment impact on productivity growth in smaller firms".
