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18th November 2013

FLOATING ON A CLOUD

Arran Brewery plc is to seek “Cloud Funding” and is set to launch its offer later this month.  Cloud Funding, also known as “Crowd Funding” is a newish method for a company to use to raise finance where a large number of subscribers place a small investment with a company usually via the internet and electronic share management.  The first breweries to use this method were in the USA in 1995 when Spring Street Brewing Company, a microbrewer, successfully used the internet to raise $1.6m from 3,500 investors in a direct IPO. They sold over 870,000 shares at $1.85.

The most well know example of this type of funding in the UK is Aberdeenshire based Brew Dog, who raised several million pounds using this method and indeed has an offer open at the moment and are seeking to raise £4m.

Crowd investment is based on the principle of a large number of investors giving a small amount of money. This provided the company with the required capital from a very large base of investors.  As these investors or shareholders are often consumers then the company has a duel benefit of not just acquiring the capital it needs but a loyal customer base as well, a double whammy as they say.

Investors in Crowd Funding, are often looking for benefits not normally associated with the normal hard headed business investors.  Thus, in the case of Arran brewery investors will be being offered product and service discounts and not simply a share in the company. The benefits often take precedence over any financial return from the shares which are often bought as gifts for beer lovers.

To date Cloud funding has been used for businesses where the traditional financial model or access to capital would be difficult.  In the case of the Arran Brewery its stated aim, over the last year, has been to open new breweries, a distillery and its own chain of public houses which may not be too attract to institutional funds or suitable for bank lending.

The Arran Brewery clearly has ambitions plans and with the craft beer market segment forecasted to grow by 12% over the next three years ( Keynote, a leading provider of market intelligence) they are in the right market place.

What is clear is crowd/cloud investment is creating a new breed of company, more responsive to their customers, more focused on doing the right thing than just turning a profit, and more likely to take the long term view than be worried about quarterly earnings or day to day share price.  Being in business for the people and being owned by the people is perhaps finding a way of working where there is a balance between the profit motive and being a good citizen.

This new type of investor are not looking only for return on capital and earnings ratios they want more and in the case of Arran Brewery  are looking for great quality beer, responsible governance, long term development, social responsibility,  and  all with a discount on their beer thrown in.

We will see many more cloud or crowd flotation’s in the beer industry over the coming years as growing breweries seek to raise funds, expand their customer base and take advantage of these new and exciting opportunities to raise capital and avoid borrowing from the banks, even if they where to be lending.

Valuation of a Crowd Funded Business is not the same as a traditionally funded model said Gerald Michaluk Managing Director of the Arran Brewery plc and International Marketing Consultant. 

“In a traditional model if you sell 5% of your business for £4m than the market analysts may value your business at twenty times that, a cool £800m or by contrast you could take the net assets of the business and divide them by the number of shares issued and get a huge loss in the new shareholders value and a huge hike in founders share value on day one. On top of this there are at least another six methods regularly used to value businesses all with their specific advantages and disadvantages and favoring the seller or the buyer to a greater or lesser extent.

These old fashioned methods of valuation are simply not applicable in the case of a Crowd Funded Business. It should simply be valued at its worth, a multiplier of its profits plus its newly acquired cash assets. So let’s say a business has a profit of £60,000 and is in an industry with a multiplier of say 15, then the business is worth £900,000 if it raises £4m from cloud funding then it is worth the £0.9m plus the £4m i.e. £4.9m the number of shares in this model is a distraction as shares can carry differing values should the company be sold provided its constitution permits. This is an important clause to look out for in the “drag along” sections of the offer documents. Also traditional valuation models fail to take account of the shareholder perks which often represent real value to the shareholder who may recover their initial investment many times over in discounts given.

What is clear is that Crowd investing carries high risk of the investor not getting back what they have invested on the one hand and the potential to do rather well on the other hand.  However, as most investments of this type carry shareholder perks it is quite possible that they, if taken up, more than compensate the investors for any value loss in the paper value of their shares”. 

Thus, Crowd or Cloud Investing is not an investment for the faint hearted nor for someone who is not passionate about the company’s product they are investing in”.