Cleveland Whiskey Investment Rating
Patented technology enables "on demand" supply of whiskey inventoryCompany is profitable and hit $1M+ in annual sales in <3 years with improving gross marginsHuge market with strong exit opportunities from larger competitors wanting to purchase (or license) technology
The spirits market is very regulated. Could be difficult to gain wide distributionTeam appears to have limited experience in beverage / spirits market$8.5 million valuation is on the steep side when using price:sales comparisons of larger competitors
85%Overall Score
Product & Market85%
Team65%
Traction90%
Terms of Offering90%
Risk Reward Profile95%

Cleveland Whiskey – Company Overview

Cleveland Whiskey is a startup whiskey distillery based in Cleveland, Ohio. The company is using a patented process to rapidly “age” their whiskey in a day, whereas most whiskies sit in warehouses for upwards of a decade to properly pull out the flavors from the wood barrels they are stored in. Cleveland Whiskey is seeking between $100,000 and $1 million on WeFunder in exchange for up to 10.5% of their business.

I invested $200 in Cleveland Whiskey for the reasons outlined above and described in detail below. I was also very excited to have CEO Tom Lix as my guest on Episode #9 of the Krowdfund Pitch Podcast, which you can listen to on iTunes or embedded below (pro tip: listen to the episode on the embedded player while you read through my in depth investment review below).


Necessary legal-ese disclaimer: The views expressed in this post are my personal opinions I arrived at when deciding to invest my own personal funds in Cleveland Whiskey. Since I am not a professional & licensed financial advisor and since I do not know your unique financial situation, none of the opinions expressed on my site should be taken as personal investment advice, nor should it be considered a solicitation for investment as I am not affiliated with Cleveland Whiskey (although I have chosen to invest $200 in the business). You should conduct your own due diligence and/or consult a professional financial advisor before making your own decision to invest. 

Product & Market

Cleveland Whiskey Underground

Cleveland Whiskey’s new Underground line of whiskey (All photo credits to Cleveland Whiskey and WeFunder)

My home bar currently has around a half dozen bottles of whiskey including a 12 year Japanese whisky, a 16 year scotch whisky, and a “double oak” aged bourbon whiskey. Those years aren’t how long they’ve spent on my bar waiting to be slowly slipped into oblivion. Instead they refer to how long the whiskies spent aging in barrels before they were bottled up and shipped around the world. That barrel aging process is what turns the clear liquid many would refer to as moonshine into the flavorful, complex liquor that has become the world’s favorite fireside beverage.

But with whiskey demand rising around the world, having to wait 6, 12, or 18 years for each batch to be ready to drink can cause frequent shortages in supply levels and as a result, large increases to the prices consumers end up paying. What Cleveland Whiskey is doing though completely eliminates that time-to-market issue. Instead of aging their clear un-aged whiskey in oak barrels per the norm, Cleveland Whiskey places the whiskey distillate and whatever wood chips they want to use to impart flavor into the whiskey into a special stainless steel tank. That tank then rapidly “ages” the whiskey by increasing and decreasing both pressure and temperature, which moves the whiskey in and out of the wood chips floating around in the tank.

Another benefit of Cleveland Whiskey’s production process is that they don’t lose 30% or more of their original whiskey content due to evaporation (known as the “angel’s share”) that traditional whiskey distillers have to deal with when busting open a barrel after their long aging process.

While many whiskey purists scoff at the idea of drinking anything that wasn’t put into a barrel last decade (or last century), the company’s whiskies have already won gold medals at multiple spirits competitions and even beat out bourbon staple Knob Creek in blind taste tests.

Cleveland Whiskey launched their first 100 proof traditional oak whiskey in 2013 but are now creating unique whiskies with alcohol and flavor profiles using woods like hickory, cherry, or maple. Unfortunately, I haven’t been able to sample any of their original or new “Underground” line of whiskies since they are not yet available in my strictly-regulated home state of North Carolina, but when they hit the shelves of my ABC store I’ll certainly be buying a bottle (or three).

Cleveland Whiskey currently distributes their bottles in 12 states and 6 countries, meaning they have just begun to scratch the surface of the global whiskey market, which their business plan (available for download here) estimates at over $25 billion in annual sales. Even if they can claim just a sliver of that market share, they can turn this into a massive business (not to mention other opportunities in other aged spirits like rum or tequila).

My Product & Market Rating: 85

Team

Tom Lix CEO of Cleveland Whiskey

Tom Lix, Cleveland Whiskey CEO

After a successful 20+ year career in marketing, CEO Tom Lix started Cleveland Whiskey in 2009 and considering any other whiskey startup would still be sitting on their first batch of whiskey after seven years, what Lix has achieved so far has been monumental. However, based on the limited information available on the company’s website or WeFunder about the rest of his team at Cleveland Whiskey, it appears the company lacks substantial operating experience in the beverage industry. While that hasn’t appeared to stifle their growth to date, as they begin to distribute more widely, they will likely need to hire additional sales & distribution staff with existing relationships in the industry to really hit a massive scale.

My Team Rating: 65

Traction


Financial Performance

Based on documents provided to potential investors on WeFunder, Cleveland Whiskey hit over $900,000 in sales in their first year after launching their first product (2013), $934,922 in 2014, and $1,031,111 in 2015. While those are impressive sales out the gate, what I’m more impressed about are their gross margins.

For those unaware, gross margin is a measurement of the cost of producing the final good for sale and is a good measure of how profitable a company can become after covering overhead, marketing, and other expenses that aren’t directly related to the production of their product.

In 2014, Cleveland Whiskey’s $963,434 in sales led to just $374,015 in gross profit, which equates to a 38% gross margin. In 2015, that ratio increased all the way up to 56%. While that is still well below the impressive 69% margins of Brown-Forman (the parent company of whiskey brands including Jack Daniels and Woodford Reserve), it’s still quite remarkable for such a young company just now beginning to flesh out their manufacturing process. As they become larger and more efficient, I expect that margin to meet and exceed other larger competitors given Cleveland Whiskey doesn’t have to spend massive amounts on warehouse storage for the 6-12 year aging process.

That improvement in margins is exactly what Cleveland Whiskey’s business plan outlines, with pro-forma projections showing margins hitting ~60% in 2017 and reaching 69% by 2020. But those margin figures are based on an aggressive sales forecast showing sales hitting $2.4 million in 2017, $4.3 million in 2018, $8 million in 2019, and $16 million in 2020.

Let us also not forget that Gross profit does not equal Net profit and so far to date, the company has been operating at a loss after all expenses are taken into account. On a positive note though, that net loss dropped from ($577,998) in 2014 to just ($85,411) in 2015 and company states they are now profitable in 2016. Cleveland Whiskey is planning to spend some of this fresh capital on marketing and increasing production capacity, so profits are projected to remain quite small in both 2016 and 2017 before really improving in 2018 and beyond.

So yes, the company needs to perform to really start making money, but since they are operating at or around breakeven already, so long as they are able to avoid any major issues with supply or demand or incurring any large unexpected expenses, they should be able to self-fund their growth using profits. For that reason alone, the risk profile of Cleveland Whiskey is vastly superior to the majority of the other crowdfunding startups who are in the early stages of developing or launchign their products and are still operating at a loss.

Other Validation Points

  • The Company already distributes in 12 states and 6 countries. While international expansion is important, achieving a much wider distribution network in the US will be key for hitting sales forecasts.
  • 8 gold medals won including Berlin International Spirits Competition in 2016 (Whiskey Distillery Innovator of the Year)
  • Cleveland Whiskey even got a visit from President Obama in early 2015 during a tour of Ohio’s innovative manufacturing facilities (video above)

My Traction Rating: 90

Terms of Offering

Cleveland Whiskey is offering common ownership shares in their LLC at a valuation of $8.5 million. Based on their 2015 sales of $1.03 million, that valuation equates to 8.24x revenues. While that seems like a high price to pay when comparing it to Brown-Forman’s 6.55x Price:Revenues ratio, I think it is actually a fair price given:

  1. The company just raised $1.2 million from professional investors (also common stock) at a $7.5 million valuation in early 2016. While WeFunder investors shares will cost a bit more, the increase in valuation is justified since the company has won three additional gold medals since that fundraising and has also since become profitable.
  2. Cleveland Whiskey’s technology differentiates them from more traditional distilleries. As CEO Tom Lix states on the WeFunder page “We’re a technology company disguised in a whiskey space.
  3. The company’s business plan states that they have “purposely developed a plan to position the company for an exit in a 3 to 5 year time frame” and with a lot of merger & acquisition activity in the beverage industry, I don’t see any reason to disagree with that possible timeframe should they hit their forecasts. If Cleveland Whiskey hits the $5 million in EBITDA (earnings before interest, taxes, depreciation, and amortization, a common metric used to judge core operating profits) as forecasted in 2020, the company could see acquisition offers somewhere in the range of $72 million to $190 million based on recent distillery sales with Price:EBITDA multiples as low as 14.5x and as high as 38x. That would provide a 8x to 22x return for WeFunder investors (assuming no additional dilution occurs), which is in the range most venture investors look for.

My Terms Rating: 90

Risk Reward Profile

Overall, I think this is one of the least risky investment opportunities I’ve seen in this first class of investment crowdfunding offerings. Cleveland Whiskey has already launched multiple products on the market, is generating over $1 million in sales, operating at a profit, and has a succinct exit strategy. Even if they are unable to find an acquirer for the business that will provide a return to shareholders, it is likely they could license their technology to other whiskey, rum, tequila, or even wine companies that sit on millions of dollars of product in barrels just “waiting for the right birthday.” By no means do I consider this a safe investment, since anything can go wrong with startups, particularly those selling booze, but given the risk profile and the potential $100+ million exit opportunity, I personally think this is a worthy first investment for my crowdfunding investment portfolio.

My Risk Reward Rating: 95

Conclusion

As you can see, I’m pretty bullish on Cleveland Whiskey and their ability to provide me with a positive return on an investment. Since they rated higher than an 85 overall on my personal investment rating, I decided to invest $200 in their offering instead of the normal $100 I plan on putting into other crowdfund offerings. To follow the progress of my entire portfolio, check out my Portfolio Page.

If you want to learn more about the opportunity to invest in Cleveland Whiskey or ask CEO Tom Lix your own due diligence questions, check out their WeFunder page.