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With Angels, the Devil’s in the Details

Beverage World:

By Bill Anderson

Most brands start with the good luck of a few family members and friends who provide the seed capital for the first year or two of a brand’s life cycle.  The next step is often a raise from an angel investor, defined by Wikipedia as “an affluent individual who provides capital for a business start-up.”  There are literally hundreds of thousands of angel investors in the US, and many are now organized into angel investor networks.  Most angels require a high return since they are bearing much of the start-up risk.

Many angels are attracted to the beverage industry for all of the right reasons. Many are interested in the health benefits they’ve experienced in a brand, or they’ve seen the explosion of SKU’s in their local market, or they’ve studied the outsized returns of certain brands in sales to strategic acquirers.

But many angels are also unfortunately attracted to a brand for fairly superficial reasons.  They may, for example, be attracted to the status of telling a friend at a bar that he or she owns part of a tequila, without knowing much at all about the difficulties of navigating the three-tier system or the costs of complying with state and federal regulations.  This lack of knowledge can often be the first sign of trouble in the relationship between the founder and the affluent individual.  Where a father or an aunt in the family raise is more likely to be supportive, the angel investor may wake up after the investment has been made with a slightly more aggressive – or let’s just say strikingly less supportive – approach once the angel learns how difficult it can be to build a great beverage brand.

But the biggest problems occur with angels who have invested at a valuation that is out of sync with industry valuation comps.  Even though angels have had business success in another industry, they can often invest in a beverage brand at a wildly high valuation. In other words, smart people making dumb money decisions.

What often follows is the next round of capital is a ‘down round’ – at a valuation below the valuation paid by the angel – because the next capital is coming from investors who do know industry comps.  At some point the lack of knowledge catches up to the uninformed angel investor, and the relationship between angel and the company gets considerably less positive.

The clear lesson here is to pick your angels carefully. The more knowledgeable and patient, the better.