03 Jun 2010 @ 10:30 AM 
 

Startup: The Order of Operations Problem

 

If you’ve never started up a brewery before, as I haven’t, you may be interested to learn of what I think is the most interesting challenge up front. I’ve been thinking of it as the “Order of Operations” problem. Allow me to explain:

In order to sell make/beer, you need to be licensed by your state to do so. This process can take months, depending on your state.

In order to be licensed by your state to make/sell beer, you need to be licensed by the TTB to do so. This process can take months (they quote 95 days).

In order to be licensed by the TTB to make/sell beer, you need to have a place of business outside of your home.

In order to have a place of business outside of your home you need money to pay a lease.

Okay, now go!

This, all of the “construction” or “buy equipment” or “make good beer” crap aside, might be the single most prohibitive process I can think of in new brewery startup. Why? Because it means that you can’t make your product, aka make money, aka pay your expenses from cash flow, until months after you’ve begun paying rent and, quite possibly, paying people.

Can you begin building out your brewery while waiting for licensing to come through? Certainly, as long as you have a floor plan design in place that you can submit to the TTB, but new startup brewers beware: You need capital up front to be able to pay for MONTHS of operations before you have the slightest possibility of being able to make any money back to put into your bank account and start to pay off your debts.

The thing that I hear most in brewery startup is that the #1 reason for failure is under capitalization. Now, I can be snarky and say that that should apply for any business, but it seems to me that in many other businesses you probably don’t have to pay for months worth of space and utilities while simply waiting for a piece of paper to come in that says you’re allowed to actually make/sell your product. Maybe I’m wrong. I feel like yarn stores don’t have this kind of long startup period.

To be fair, I don’t know how this works if you’re starting a nanobrewery, say, out of your garage. When I talked to my state board, they were very explicit about having a place of business outside of your home, but maybe it’s because I’m applying for a wholesaler’s license right off the bat and they don’t want you to distribute out of your living room.

So, potential startups, there’s your first warning from startup land: Be ready to pay out up front and be ready to wait.

Tags Tags: ,
Categories: brewery, startup
Posted By: erik
Last Edit: 03 Jun 2010 @ 10 30 AM

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Responses to this post » (7 Total)

 
  1. Robert Garren says:

    Everything I have read seems to talk about the massive amount of lag time in the initial start up. Is there any certain reason it takes so long?, or is it just due to government paperwork that takes forever to process. I feel this could be an area for craft beer fans and brewing guilds to take an interest in and possibly address with elected representatives. The money thing really is difficult to grasp with the time lag, and it makes me recall an interview with Spike from Terrapin in which he said the initial start loan for Terrapin was around 2 million dollars, and that blew me away.

  2. erik says:

    As Captain Snarkypants in that first post can surely attest to, a lot of that lag time really is just waiting for government entities to get off of their butts and do something with your paperwork, but it’s not everything.

    If you’re doing a lot of build-out, you’re also going to spend a lot of time waiting for your contractors to get off of their butts, too.. but, really, from the time that you submit paperwork to the time when you can actually make beer? You’re talking 3 months minimum, and I’d guess in some cases up to 6 months or longer.

    Also, Spike’s 2 million figure is a little high for many startups, but totally possible. Check out some of the startup threads on ProBrewer.com sometime and you’ll see $1 million to $2 million as the quoted startup cost for a microbrewery. Mind you, that’s often starting from absolute scratch and building your own space or building out a space that isn’t really made for your business. Some have started for as low as $50k, but they’re working their asses off.

  3. Seabass says:

    one thing I would like to add is brewing beer is a prime example of a business that manufactures goods. you need to look into that category to get a better sense of what it means to be in the business of making goods in large numbers. getting it right takes time and a base inventory whether you make shoes or detergent or beer.

    get a life Erik as Chris Lester always says “if it would be easy everyone would do it”. make a three year plan and the start up time will be the most comforting part if it.

  4. erik says:

    Oh certainly – in many ways, the startup time has to be the most comforting time. After all, in a lot of ways it’s the only time in the life of your business that you’re not fighting for survival.

    Part of the fun of startup, as far as I’m concerned, is coming across all of these new hurdles that you never had considered before (like the Order of Operations Problem) and adapting to them.

    It would be a whole lot nicer to just get on with making my shoes or detergent or beer, without having to jump through a whole bunch of hoops first, though.

  5. Butch says:

    Regarding your kickstart funding, I would have contributed but for some key things. A brewery in Hawaii ran into problems after getting the funding, because they had no permit. You mention federal hoops to jump through, but the fact that you left out the more difficult state hoops makes me (personally) worry if you’ve worked through all the details you should before raising the money. Likewise, you glossed over the massive challenge of distributing your beer to local businesses–they have space for only a few very competitive taps, and they want to fill them with whatever drink will turn the most profit and keep customers coming back. How thrilled will they be about a constantly changing product? Are they receptive to getting their patrons hooked on a beer they may never see again, or getting a beer they’ve never tasted before and which may sell little or nothing? If these things aren’t addressed as part of a comprehensive and well thought out business plan, funding could be the absolute least of your challenges. Another point is that you totally left out your experiences–you just mentioned that you made some homebrew. Well, so have hundreds of thousands of other people. But have you amassed sufficient knowledge and experience to efficiently and effectively create and distribute GOOD beer? How does the regional or microbrewery with whom you plan to contract brew feel about the competition for limited tap space in the area? If they were to contract brew, wouldn’t it be in their best interest to contract with proven recipes that have potential for persistent distribution, and with the best brewers or group of brewers in the local brew club (that may be you, I don’t know)? That’s the point, I need to know more. Before I give money to such an effort, I’d want to know that it’s not only a dream (which EVERY homebrewer has after their 10th compliment or 3rd batch, whichever comes first), but a well researched dream that has a very good chance of being successful. Personally, I think that needs more information than what you provided on the kickstart site that I got to from Facebook. How many batches have you made? What’s the largest batch? Have you any formal beer industry training? Have you only done extract brewing, or how much experience do you have in whole grain brewing and batch recipe conversions?

  6. erik says:

    Butch,

    Thanks – I appreciate your criticism.

    First: Federal hoops come before state hoops. State hoops come before local hoops. It’s part of the order of operations problem and, thus, the point of the post. You need a local address before you can start the federal hoops, which you need to get through before the state hoops, etc.. etc. So, welcome to capital investment months before anything gets off of the ground.

    Anyway – yes, I’ve glossed over a lot of information in the Kickstarter and Facebook posts. I’m assuming that nobody wants to know the detailed every minutiae, but rest assured that it is present where it counts: In the business plan. I’m not looking for equity investors through Kickstarter, I’m looking for people who will help me achieve the dream. I’m focusing on displaying my passion, not my resume.

    If it makes you feel better: I have been brewing for just a smidge over 10 years. I can’t remember the last time I made an extract batch, I have used one kit in my life, and the last time I did something other than making my own recipe from scratch was in my first year of brewing. I have brewed hundreds, if not thousands, of batches of beer. I have brewed the same beer over and over again for consistency. I have brewed 1 gallon batches for experimentation and I have brewed 7 bbls batches that were served in brewpubs, and have converted my own recipes from homebrew to commercial scale with success.

    A lot of this other stuff lays in the realm of business and what I would consider confidential information. My equity investors get a lot of answers that nobody else in the world gets. If that’s going to stop you from throwing $5 at what I think is ultimately a fun project for people get behind, then I’m sorry.

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