Even with a good product, a solid business plan, and decent start-up capital, a new craft spirits operation can fail due to any number of challenges, including inadequate workspace and equipment, wasteful, unsustainable production practices, and regulatory misunderstandings—not to mention and of course, the thorny task of getting people to actually drink the product.
To avoid the many pitfalls of the craft spirits start-up, a number of artisanal brands are turning to a business model borrowed from Silicon Valley—they’re working with incubators (companies designed to grow start-ups through mentoring and networking connections) and accelerators (these are similar to incubators but focus on rapid growth and usually offer capital) connected to larger companies. Ideally, these companies enable craft brands to grow without altering the entrepreneurial DNA that makes independent artisanal spirits so exciting in the first place.
“The category of what we call discovery brands—premium craft spirits—is the fastest growing in the industry,” says Dennis Carr, the president and CEO of Anchor Distilling Company, a producer of craft spirits in San Francisco, including Old Potrero Single Malt Whiskey and Junípero Gin.
With more than 1,300 craft distilleries operating in the U.S., craft spirits sales grew at a rate of 28 percent annually between 2010 and 2015, reaching 3 percent market share, according to the American Craft Spirits Association, whose experts believe that market penetration on a par with craft beer’s 12 percent is within reach. Social media is a major driver of this growth, allowing craft brands to place their products before bartenders and customers far beyond their local market.
“Big spirits companies have the data to recognize [the impact of craft brands],” says Carr, “but the challenging part for them is innovation. In the past, they had large R&D budgets. Now they can buy a brand for less than what they used to spend on R&D.”
The rise of craft spirits in the U.S. parallels what happened in craft beer over the past decade, Carr continues. Bored and frustrated with available beer options, home brewers around the country started going pro. The number of American craft beer producers now tops 5,200, up from fewer than 2,500 in 2012, according to the Brewers Association. Multinational corporate brewers have responded by buying up smaller independent breweries that started to prove competitive in the marketplace. These acquisitions have been met with some consumer backlash—accusations against the smaller breweries of “selling out,” and questioning the integrity of the beers postsale—but it’s understandably hard for entrepreneurs to walk away when millions (if not billions) of dollars are on the table.
Craft distillers intent on growing their businesses face a similar challenge, in terms of preserving not only product quality but also credibility. Until recently, that meant remaining independent, which could translate into slower growth or limited distribution opportunities. But today, incubator and accelerator models are allowing small brands to access corporate money, either through capital investments or by selling a majority stake, while remaining in control of the business.
Distill Ventures (DV) bills itself as the first accelerator dedicated to small and start-up spirits brands. Founded in London by three friends whose backgrounds include food blogging, entrepreneurship, and working for big alcohol brands, the firm was created not only to funnel capital to craft brands but to mentor them as they grow. DV, an independent company, partnered with Diageo as its exclusive investor, which means that Diageo foots the bill for all DV’s investments and that any brand that works with DV is prohibited from entertaining other funding offers. An agreement provides a brand with access to both DV’s and Diageo’s expertise and global network of industry insiders, from distilling to legal to marketing experts. DV creates bespoke strategic plans that might include connecting a brand with a distillery supplier so it can scale up production or helping the brand select and manage a distributor.
Several brands that work with DV were well-established entities when they came to the company—but perhaps only regionally—and were looking to build new markets. Others have come on board even before they had a finished product, in which case DV assists with development and packaging design. Because the company does not disclose which brands it takes on, a start-up can benefit from Diageo’s backing without the risk of putting off a portion of its customer base.
“The exciting thing now is that the biggest suppliers [like Diageo] and distributors [Southern, Republic] appreciate the value that scalable craft brands are bringing to the market,” says Distill Ventures’ North America managing director, Gonzalo de la Pezuela. “That’s new. That didn’t exist five years ago.”
Since it launched in 2013, Distill Ventures has invested more than $70 million in 15 different companies through Diageo, its investment rate increasing yearly. The company doesn’t disclose individual sums, but says that some brands have received as little as $225,000, while others see investments of upwards of $12 million, depending on their goals and potential. The deals are structured so that Diageo is a minority investor, leaving the entrepreneurs in control of their brands, but include an option for Diageo to acquire them outright should they grow large enough. The first DV client is expected to be purchased within the next year or two. Only a few have gone public about their relationship with DV—Stauning Whisky from Denmark, Starward Whisky from Australia, and Seedlip, the nonalcoholic distilled spirit that DV is predicting will launch the “non-alc cocktail” category.
Seedlip’s founder, Ben Branson, says that his U.K.-based brand now exports to 13 cities around the world and that the team has grown from one—Branson making bottles in his kitchen—to 20 in the U.K. and U.S., including marketing, operations, sales, and management staff. “And DV has been set up to ensure that raising capital to grow is as straightforward as possible through Diageo,” he says, “instead of having lots of different investors. For a start-up with no time to waste, it can make all the difference.”
Other large companies, like Pernod Ricard, have used the acquisition of smaller established brands as a means of boosting revenue with new products. Pernod’s New Brand Ventures (NBV), announced last year, is designed to act as an incubator for promising brands. This side of its business is structured in a way that allows acquired brands to keep the original management team in control, an alluring option for owners who want to sell but also want to stay involved in the brands they’ve built.
“What we’ve found is that the most successful new brands in the marketplace are those that have been cultivated by start-up founders,” says Jeff Agdern, who heads NBV. His portfolio includes recent acquisitions, like Del Maguey, a mezcal brand, and Smooth Ambler Spirits, which operates out of West Virginia, as well as brands the company has owned for years, like Plymouth Gin and Aberlour Single Malt, which, Agdern says, have “always had potential, but … we haven’t been able to dedicate the bandwidth needed to develop them [until now].”
Pernod declined to disclose any purchase figures, but Agdern allowed that both Smooth Ambler and Del Maguey were motivated to sell by a need for improved distribution. Smooth Ambler was also looking to finance a distillery expansion. Del Maguey was adamant about preserving traditional production methods for its beloved mezcals, scaling up only by adding stills, fermentation tanks, and man-hours. Agdern says its management team, network of producers in Mexico, and company culture will be left entirely intact.
“It’s easy to be pressured to walk away from your core values when you’re owned by a big corporation mostly concerned with profit share,” says Carr of Anchor Distilling, voicing an idealistic notion held by many consumers. But if anyone can appreciate the complexities of accepting funding versus bankrolling one’s own business, it’s Carr. Anchor had its beginnings as a brewery before expanding into distilling and, later, purchasing foreign brands, like Nikka whiskies and Luxardo Italian liqueurs. Recently, the company sold its brewery to Sapporo, but Anchor Distilling remains independent. Its portfolio of imported brands includes mostly family-run artisanal spirits companies.
“It’s not fair to say that being bought out means you’ve sold out,” says Mark Shilling, the president of the American Craft Spirits Association. “What’s important is being honest and transparent about what you do and how you do it.”
Creating new—especially, experimental—products is costly, Shilling adds. Craft distillers have shown that they can test and roll out new products and ideas on a feasible scale that would be too expensive for high-volume producers to pull off. Expanding the reach of a product, however, can be tricky for indie distillers in today’s economic climate. The relationship between large corporations and small craft brands can be seen, then, as symbiotic.
“Not everyone is on the same page.… What people decide is ‘craft’ varies,” says Shilling. “It’s just like rock ’n’ roll. At what point do you become a sellout? It depends on what your audience wants from you.”
A Montreal native now based in New York, Chantal Martineau writes about wine, spirits, food, travel, and culture. Her writing (sometimes accompanied by her own photography) has been published in Vogue, Food & Wine, Departures, Saveur, and The Atlantic. She is the author of the 2015 book “How the Gringos Stole Tequila,” about the rise of Mexico’s most famous liquid export, and is at work on a new book about mezcal.