Hops and Grain Overview
Hops and Grain is an award winning craft brewery based out of Austin, Texas. Since opening in 2011, Hops and Grain’s sustainable brewing practices and experimental beers have kept their Austin tap-room full of on-site drinkers while they continue to expand their wholesale distribution. Revenues from that Austin facility exceeded $1.9 million in 2015 and now Hops and Grain are looking to open a new location in nearby San Marcos that will help them expand their capacity from 13,000 barrels of beer to 33,000+.
To help finance that new facility, Hops and Grain is offering up to $1 million in revenue based loans on WeFunder. Investors in those loans will receive 10% of all revenues earned at the new San Marcos facility until their loan has been paid back with an additional 100% return.
I invested $100 in Hops and Grain for the reasons outlined above and described in detail below. To learn more about this new world of investment crowdfunding and how I analyze potential investments, head to krowdfund.com/invest.
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 Hops and Grain. 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 Hops and Grain (although I have chosen to invest $100 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
Josh Hare opened the doors to Hops and Grain in 2011. With a focus on sustainable brewing practices, including canning (not bottling) their beers, that first east Austin location has gone on to hit nearly $2 million in annual sales and has created a lineup of beers that includes a World Beer Cup Gold Medal winner.
Although their limited production capacity has kept them from distributing widely, I’ve come across a can or two of the Pale Dog Pale Ale in my beer shop browsings and remember enjoying the balance between the crisp hops and malty backbone. But in today’s world of user generated reviews, you don’t have to take my word on the quality of the beer: Hops and Grain has averaged a score of 3.8 out of 5 on popular beer review sites Beer Advocate and Untappd. Considering my favorite local beer, the 7.2% Hop Drop ‘n Roll IPA which won a World Beer Cup Gold Medal in the super competitive American-style IPA category, scored just a 4.05 out of 5, that 3.8 average score for the entire lineup of Hops and Grain beers is pretty impressive.
Much like many of the other 4,000+ craft breweries in operation across the US, Hops and Grain sells their beer to patrons for on site consumption in a tap room, where profit margins can exceed 70%. However, according to Hops and Grain’s WeFunder investment page, 95% of their beer production gets sold to wholesale distributors, split almost evenly between draft kegs and canned beers. When distributors get involved, profit margins take a serious haircut, with Hop and Grain claiming their wholesale margins are somewhere between 4% and 8%.
It should be mentioned now that investors in Hops and Grain’s WeFunder offering will be investing only in the new San Marcos facility, or as the WeFunder page states “Separate entity, Same brand.” The new San Marcos location will be located between Austin and San Antonio and will also have a tap room, but in a town of just 50,000 (versus the 800k+ in Austin) we can assume that most of the 20,000 barrels of brewing capacity will be going out the doors to distributors. Hops and Grain’s brand recognition in Texas has allowed those distributors to get Austin-produced beers on the shelves of places like Whole Foods and Trader Joes, but as this new capacity will allow them to widen their geographic reach, Hops and Grain will surely face some stiff competition from those other 4,000+ American craft breweries I mentioned earlier.
But getting mass distribution of your brewery’s brew is the way to strike it rich in this industry. Just look at Ballast Point, the San Diego-based craft brewery that was recently purchased for one billion dollars by Corona & Model owner Constellation Brands. Unfortunately for investors considering hopping on Hop and Grain’s WeFunder offering, potential returns will be capped at just 2x your investment. More on that below, but for my product and market rating, while I think beer drinkers will always find a way to get their hands on good beer, it will still be an uphill battle for Hops and Grain to get more shelf space as they begin competing in the competitive nation-wide beer market.
My Product & Market Rating: 75
Former professional triathlete Josh Hare founded Hops and Grain in 2011 after he couldn’t shake the idea to start up a craft brewery in his neighborhood of east Austin. Since then, he’s brought on other team members that have helped him continuously expand Austin’s operational capacity, revenues, and tap room crowds. While that management team will help oversee the new San Marcos location (it’s just a 45 minute or so drive after all), the new location’s success really depends on hiring and maintaining quality employees for that new location. Hops and Grain recognizes that fact and states on their WeFunder page:
“The biggest thing that we’ve found, as far as the challenges, is finding and retaining good people. We’ve got an incredible management team in place in Austin that will be able to really help communicate the culture to the employees underneath them at both facilities. That’s the most important thing in retaining staff. Knowing that we don’t have to start from scratch on a management team at the new facility will really help mitigate some of the risk.”
While that management team certainly does mitigate some of the risk, it’s still an unknown for investors. And since WeFunder investors will be reliant on the San Marcos location to return their capital, I had to reflect that uncertainty in my team rating.
My Team Rating: 65
Again, WeFunder investors will be reliant on the yet-to-open San Marcos facility to pay back their loan and return a potential profit (more details in the Terms of Offering section). If instead we could invest in the total Hops and Grain business, including the Austin location that is expected to clear $3 million in revenues in 2016, this would be a slam dunk investment.
But the new San Marcos facility will still greatly benefit from the groundwork the Austin location has achieved. With good (award winning) beer and solid distributor relationships, San Marcos has put many of the normal risks a new brewery faces behind them. Now they just need to focus on building a high quality facility and hiring good people. If they can do that, and the craft beer industry doesn’t fall off a cliff, Hops and Grain San Marcos should be able to generate the revenue needed to pay back investors.
So even though there is still a lot of work to be done to get San Marcos up and running, the traction that Hops and Grain Austin has already established factored heavily into my traction rating.
My Traction Rating: 85
Terms of Offering
So we’ve got good beer, good people, and a good history, but the terms of Hops and Grain’s crowdfund investment offering is where things went south for me. Had Hops and Grain offered a tiny sliver of equity or a smaller percentage of revenues for their entire operation, I would be much more bullish on this crowdfunding investment opportunity. Instead, Hops and Grain, LLC (the existing business in Austin) has created a new legal entity specific to the San Marcos location, Hops and Grain Production, LLC, which is who WeFunder “investors” are lending to.
WeFunder investors will provide up to $1 million in cash to help get the production facility at San Marcos up and running and in exchange for that capital investment, Hops and Grain Production will, on an annual basis beginning one year from opening, start sending 10% of all revenues derived from that San Marcos location to those investors. Once investors are paid back their initial investment and a return of 100%, the revenue loan will be paid in full and Hop and Grain’s obligation to investors will have been satisfied.
While most investment crowdfunding offerings sell an actual ownership percentage of the business to investors, there is one distinct advantage to the Revenue Based Financing that Hops and Grain Production is offering. While equity investors may have to wait years for the company to turn a profit or get acquired before receiving cash flows from their investment, Hops and Grain investors will receive ongoing cash distributions equating to 10% of the San Marcos facility’s revenues. Unfortunately, as more people invest in the offering, there will be “more mouths to feed” from that 10% slice of the revenue pie, which means it will take longer for everybody to earn their money back (plus the promised 100% return). So how long will it take to pay investors back if Hops and Grain raise the full $1 million?
CEO Josh Hare stated on the company’s WeFunder page that he expects it to take between 5 and 6 years for investors to receive their full 2x return. When I asked for San Marcos’s sales forecasts on Hops and Grain’s WeFunder page, Josh replied “At max capacity in our new facility we can generate close to $6M annually. We will be building the facility out to have max production capacity from day 1 and I anticipate that we’ll reach that maximum revenue point between years 2-3.”
If they are able to achieve AND sell through that max production capacity by year 3, Hops and Grain will have no problem returning the full 200% to investors well by year 5, regardless of how much money they end up raising. But as shown by the charts below, if sales are slow to pick up or Hops and Grain San Marcos experiences delays in opening their new facility, the length of time it time it takes to get paid back will stretch out and the rate of return investors will achieve will drop precipitously. Keep in mind that the figures shown below are my own “back of the napkin” assumptions, but they show how widely returns can vary, with “IRR” being the internal rate of return on the amount invested. IRR is a good way to analyze the average rate of return of an investment that doesn’t return its capital in one lump sum liquidity event (such as an acquisition or IPO).
My “Best Case” Scenario: Raise $1 million, no sales in Year 1 (buildout of facility), sell 50% of production capacity in Year 2, and sell 100% in Year 3 and beyond.
|Investment||10% of Revenues||Net Cash Flow||IRR|
Scenario #2: Raise $1 million, no sales in Year 1 (buildout of facility), sell 25% of production capacity in Year 2 ($1.5 million), 50% in Year 3, 75% in Year 4, and 100% in Year 5 and beyond.
|Investment||10% of Revenues||Net Cash Flow||IRR|
Scenario #3: Raise $1 million, no sales in Year 1 or 2 (delays in buildout of facility), sell 25% of production capacity ($1.5 million) in Year 3 and grow 20% each year from there.
|Investment||10% of Revenues||Net Cash Flow||IRR|
Based on those assumptions, it could take WeFunder investors anywhere from 4 to 7 years just to get their initial investment back and as much as ten to receive their full 100% profit. But those scenarios don’t take into account far gloomier possibilities.
What happens if we are in fact in a craft beer bubble and it pops? Or what if the San Marcos facility is a complete bust for some other reason? Hopefully that won’t be the case, but if that were to occur, investors couldn’t rely on the existing Austin operations to pay them back since that LLC is not a liable party on the loan agreement.
Instead, the only option investors would have would be to hope to sell off the assets of the San Marcos brewery (which the loan agreement grants them a security interest in). If the brewery does go belly up, I’m guessing it will be in part due to an economic environment that would be tough to sell used brewery equipment into, so investors would likely be better off just asking for the leftover inventory and having themselves a nice little going out of business party.
With that possibility in mind, a 21% return seems like a fair return given the risks involved. And while I will gladly take an 11% return on my investment and spend it on the cases of Hops and Grain beer that will surely be popping up in North Carolina by 2026, at that lower rate of return I would have been better off just sticking my money in less risky publicly traded stocks or bonds (which historically have averaged between 5% to 7% returns).
Given the variability of those returns and the risks involved, I had to score the terms of Hops and Grain’s offering pretty low.
My Terms Rating: 60
Risk Reward Profile
Given H&G Austin’s success since 2011, if Hops and Grain were offering even 3% to 5% of their entire operation (Austin and San Marcos) I would give this risk/reward rating a 90%. As it is however, investors are depending on the new San Marcos facility to open on schedule (within a year) and quickly ramp up production to get paid back and eventually make money. If any significant delays occur in construction or permitting or if Hops and Grain sees a drop in demand for any reason, it could take investors a decade or more to eventually receive the full 2x investment return they are promised.
On the other hand, if everything goes to plan and the world falls in love with Hops and Grain’s line of canned beers, equity owners of the company (mostly founders and management) will be Scrooge-McDuck-diving into their piles of gold long after the loan obligation to WeFunder investors has been paid and fully satisfied. My risk/reward score therefore reflects the fact that there is a decent amount of risk here but none of the unlimited financial upside that equity ownership offers.
My Risk Reward Rating: 65
With an overall score of 70, Hops and Grain still falls within the range I consider acceptable as a suitable crowdfund investment. Seeing as how I’ve always wanted to be a part owner of a brewery and since I should begin seeing some cash flows in as little as 12-24 months, I decided to add Hops and Grain to my personal investment crowdfunding portfolio with a $100 investment. 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 Hops and Grain or ask CEO Josh Hare your own due diligence questions, check out their WeFunder page. Or to learn more about this new world of crowdfund investing, check out Krowdfund’s guides and analysis on our Crowdfund Investing page.