Most new winemakers—and even some legends—have to find alternative means of financing their fledgling businesses.
There’s an old saying that’s oft repeated in the wine industry and it goes something like this: “If you want to make a little money in the wine business, you have to start with a lot.” But these days, fresh off a major recession that battered investments and retirement plans, coming into the wine business with a lot of money is something more rare than common.
It’s also increasingly hard for new wineries to secure traditional bank loans, as lending institutions have tightened their purse strings and aren’t eager to open their wallets for small ventures. This means new winemakers—and even some legends seeking a second wind after an illustrious career—have to find alternative means of financing their fledgling businesses.
Dr. Armand Gilinsky, professor of business at Sonoma State University, has taught strategy and entrepreneurship at the collegiate level for the past 24 years. As a past director of SSU’s Wine Business Program, which started in 1996, he’s seen his share of winery startups, successes and failures. He’s also studied all sorts of financing models—from Silicon Valley “high-tech gazillionaires” flush with cash to entertainers or retired professional athletes who need tax shelters to those of more modest means who started with “$50 and a motorcycle.”
The four Fs
“If I were to get into the wine business today as a founder, I would get together with family, funders, friends and fools,” Gilinsky says. “I call them the ‘Four Fs,’ with the fools being the biggest X-factor. I’m talking primarily about folks who are seeking a tax shelter. There are a lot of people out there in the arts and high-tech industries who want to be associated with the wine industry, because they want to be able to tell their friends, ‘I own a winery!’”
For many startups (not just in the wine industry), putting together an investor pool can be difficult, but it may be easier than trying to get traditional financing. “Getting a bank loan is difficult for any small business, much less a new winery. One problem is that banks have built up huge war chests [since the recession] and aren’t lending out to smaller new businesses. At the same time, angel investors and venture capitalists typically don’t invest in these types of businesses [food and beverage, of which wine is a sector] because those businesses need high sales volumes to make any money,” Gilinsky explains.
“There’s also a big failure rate, particularly in specialty foods, because they’re so trendy: One year, kale chips are hot; the next year, it’s bacon ice cream. It’s hard to know what will have staying power, and banks like to invest in something that will have longevity so they can get a return on their investment.
“For angel investors and venture capitalists, it comes down to what the business will sell for when it gets taken over or goes public, and wineries have a very poor track record when it comes to going public,” Gilinsky opines. “The only time I think it really worked was when Beringer Wine Estates went public after a leveraged buy-out from Nestlé’s and the people who took it public—bankers, lawyers and insiders—did well. And then they made even more money when they sold it to Foster’s: It was sold for billions!”
With all the challenges Gilinsky describes, two paths to raising money for winemaking seem to be gaining the most traction in the North Bay, and both could be described as forms of crowdfunding (although in traditional crowdfunding, investors aren’t allowed to receive alcohol as compensation for their investment). One fairly new method is nakedwines.com, which involves “angel investors” who provide cash on a monthly basis in exchange for wine. The other method has been around for decades—selling “futures” on wine to be released at a later date.
On the wings of angels
Nakedwines.com, which originated in the United Kingdom, advertises itself as a customer-funded winery that wants to make expensive wine accessible to normal people. It does so by funding independent winemakers, who get to make wines the way they want to and then give preferential pricing to the angel investors who funded them. Its customers become “angels” who provide funding (at a minimum of $40 per month) to support the winemakers. In return, their monthly “investment” is used to purchase the wine.
In other words, winemakers who sign up with nakedwines.com don’t have to worry about marketing, sales and distribution—perhaps the most expensive part of the wine business—because it’s all taken care of by nakedwines.com, whose angels have already committed to buying the wine.
According to Ryan O’Connell, marketing manager for nakedwines.com (and one of its winemakers), nakedwines.com is set up as a winery (it’s currently leasing the old Blackstone Winery in Kenwood for production and has a tasting room in downtown Napa as well as at the Kenwood facility) and is filling orders under its own wine license. However, O’Connell is quick to point out that nakedwines.com is really more like a private equity firm whose “customers trust us to get them something cool in exchange for their cash.”
It’s a simple concept. “Angels” are billed monthly, but that money is set aside for them in a personal account. “It’s like a savings account,” O’Connell explains. While the customer leaves the money in the account, nakedwines.com uses it to invest in winemaking projects with about 40 different winemakers (currently). The wines are then offered for sale to the “angels,” who use the funds in their personal accounts to purchase whatever they want. There’s a flat shipping fee of $9.99 per case—or no charge if the “angel” makes a purchase of $100 or more.
By stripping out the marketing and sales costs that “add nothing to the flavor or quality of the wine,” nakedwines.com is delivering a product that’s “void of pomp and circumstance,” O’Connell says. “It’s all about making good wine.”
“There’s a terrible premium that’s paid when you look at American wine prices, especially when it comes to a Napa Valley Cabernet Sauvignon. To buy a decent one, you’re looking at $50 minimum per bottle—and the truth is, it can be made for less than $10 per bottle, buying the best fruit in the valley and using the finest winemaker. Almost all the costs are sales, gatekeepers, paying to keep up the relationships with distributors and the costs of going on the road with the distributors to keep sales going. What we do is tell our winemakers that they won’t ever have to do that again. They’ll be able to spend all their weeks in the cellar and out in the vineyard, and they’ll never have to worry about doing a road trip or trade show again. Winemakers get that.”
While nakedwines.com is particularly attractive to young, new winemakers who have yet to establish themselves, even the “rock stars” of the industry—those with stellar reputations and loyal followers—have started kicking the tires on the nakedwines.com concept. And we’re talking big names: Randall Grahm (Bonny Doon Vineyard), Daryl Groom (seven-time Winemaker of the Year, best known for his work at Penfolds Grange in Australia and Geyser Peak in the United States) and Ken Deis (Napa Valley wine pioneer with Flora Springs), among others.
“A dream come true”
For Groom, nakedwines.com is “a dream come true.” For many years, the celebrated winemaker with a charming Aussie accent was a darling of the wine industry, holding down demanding jobs and fulfilling corporate responsibilities, all while practicing his artistic craft. But about eight years ago, his young son, Colby, had back-to-back heart surgeries. And Groom, by his own admission, was forced to reevaluate his core values—“I needed to spend time with him and help him on his journey.”
Since then, Groom has spent more time at home while still actively making wine. He and Colby have made a wine called “Colby Red,” which raises funds for heart charities (more than $500,000 to date). He also has his own labels—Groom and DRG (for Daryl Rex Groom).
His new life “gives me the freedom to take Colby to school, and then do what I want during the day. At the same time, I’m still extremely passionate about and love making wine. But I don’t want to deal with the responsibilities that come with a full-time job,” he says.
Signing up with nakedwines.com gives Groom the opportunity to continue his father-son project with Colby on his own and, at the same time, gives him the flexibility to “not have to deal with employees and run a facility—yet still make great wine.”
He likes walking through vineyards, making wine and interacting with consumers. “But all the other stuff that’s in-between is really tough going and a headache—the traditional three-tier system, compliance, invoicing, bill-backs, ugh! Plus, if you’re a small producer like I am, and you want a voice through a distributor and want to get on-premise accounts, you can’t get any attention unless you want to travel all the time,” Groom explains. “Naked lets me make wine and takes over all that in-between stuff. It also connects me directly with consumers. If people go into a retail store and buy a bottle of wine, they never contact you as the winemaker. They feel awkward and intrusive. The Naked model encourages them to email the winemaker directly. And I really enjoy hearing what they have to say, both good and bad.”
Feedback is also important to Ken Deis, whose illustrious winemaking career with Flora Springs spanned 28 years. After leaving that gig, Deis became a consulting winemaker. He was approached by nakedwines.com when it first launched in the United States two years ago.
“We get to make the kind of wines we like, and Naked finances it,” Deis says. “We don’t have to worry about marketing at all. The consumers who buy the wines post their comments and we’re able to get into a dialog. It’s interesting that a lot of the people don’t know a huge amount about wine, but they want to learn, so they ask lots of questions. As time has gone on, I’ve noticed that the comments are getting more technical, when at first they were rather amateur. You really don’t have contact with consumers quite the same way if you’re working for a winery.”
Both Deis and Groom also enjoy the camaraderie of their fellow nakedwines.com winemakers. Deis worked on a Zinfandel project (called Ken and Derek) with Derek Rohlffs, who owns a small winery on Treasure Island. “He’s a young winemaker. And I’ve been around for a long time. We had lots of fun throwing ideas at each other,” Deis says.
“Naked pulls all its winemakers together a few times per year,” Groom adds. “We had a meeting just before last Christmas to discuss the harvest, and it was so rewarding, appealing and exciting to have a pool of top winemakers from regions all around the world. I feel like I have a whole new set of brothers and sisters through Naked. And I can use them to taste my wines, bounce ideas back-and-forth and have as contacts for wherever I may travel.”
Back to the futures
Selling futures on yet-to-be-produced wine is nothing new. Although Mondavi Winery claimed to have sold the first futures in 1987 (for a 1985 Cabernet Sauvignon), it was really almost 20 years behind the real futures pioneer, Davis Bynum.
In 1966, while still in his warehouse winery in Albany (Bynum later would open the first winery on Westside Road in Healdsburg in the early 1970s), he found himself short of cash. “The specific purpose of selling the futures was to pay for the grapes,” Bynum recalls. “I needed money for Cabernet Sauvignon. So we sold futures priced at two cases for $30. We raised about $5,000, which paid for the grapes and left us with a profit.”
Bynum says his winery sold futures almost every year thereafter, but the practice became an even bigger business—and more popular with other wineries—when Wine Road Northern Sonoma County started its annual barrel tasting event 36 years ago. “It’s a great way to establish repeat customers,” Bynum says, which is exactly what Rodney Gagnon, owner of Glasshaus Wines, is hoping will be the case for his new wine venture.
Gagnon, a veteran of software startups and a native of Boston, has been on a nine-year journey to become a winemaker. In 2005, while still working in the tech field on the East Coast, he enrolled in a two-year wine appreciation course at Boston University. In 2010, he launched his own wine blog. The wine bug captivated him so much that one day he typed “French wine internship” into Google’s search engine. He then sold his Boston loft and went to France to work with Crushpad Bordeaux. Working his way back to the United States, Gagnon first went to Portland and eventually landed in Sonoma County, working at Crushpad’s initial site. After completing a UC Davis winemaking course, he decided to launch his own brand.
“We all know this is a capital-intense business, and I didn’t leave tech with bags of cash,” Gagnon says. He looked into traditional crowdfunding platforms like Kickstarter and Indiegogo, but two problems surfaced immediately: The benefit to the benefactor couldn’t be alcohol, and 5 percent of the money raised went to the crowdfunding platform. So he decided to sell futures and bill himself as a community-supported winery (CSW), leveraging the same principles of CSAs (community-supported agriculture). Instead of tomatoes, eggplant and zucchini, his CSW members get wine.
While one of the benefits of nakedwines.com is that it takes away the need for the winemaker to do any marketing, Gagnon’s financing model requires the exact opposite. “It’s hard to sell my wine to someone who doesn’t know me unless I get in front of them to tell them my story,” he says. So, Gagnon has been on a road show, traveling all over the North Bay, as well as to Los Angeles, San Diego and his native New England.
Another challenge is the fact that he had to sell futures on a 2013 wine that just went into barrel last fall. That meant there were no barrel samples he could share with potential CSW members. So he took the Bordeaux he made in 2010, plus a Dry Creek Zinfandel he made with Crushpad Sonoma in 2011, so he could show the style of wine he preferred to make. He also took wines made by other wineries that were purchasing fruit from the same vineyards (owned by the Sangiacomo family) he’d selected for his Pinot Noir and Chardonnay, explaining they weren’t his wines, “but helping them to understand that this is where the grapes were from.”
His investors (numbering 65 as of January) were asked to pony up $364.80 per “share”—with a share being six bottles of Pinot Noir and six bottles of Chardonnay (average $30.40 per bottle)—or a 1.5 share for $537.66 (12 white/six red; average $29.87 per bottle), or $556.74 for 12 red/six white (average $30.93 per bottle).
With year one under his belt, Gagnon expects a slightly easier ride in 2014, “because I’ll have barrel samples. I’ll make the same trip and ask my customers to bring their friends, sort of like a Tupperware party. Hopefully they’ll sign up for next season. Year three is when I hope to really get momentum,” he says.
Gagnon’s futures prices reflect a 20 percent discount off the price when the wine is released at full retail, plus a new brand pricing at about 9 percent less than the average charged by other wineries selling wines under the Sangiacomo vineyard-designate. “I have to do that because I’m new,” he says. Sales for his 2014 vintage are restricted to his 2013 supporters until May 15, when he’ll then open it up to new investors. Each year, returning CSW members will earn an additional discount of 2 percent. He’ll cap the discount at a total of 30 percent.
In addition to giving his CSW members a 20 percent discount, Gagnon is also setting aside 20 percent of his profits to give to nonprofit youth mentoring organizations in California and on the East Coast. “I believe in using business for good, not using good because it’s good business,” Gagnon concludes.
In the end, SSU’s Dr. Gilinsky offers the best advice: “If you want to get into the wine business, it’s best to start small and do it with other people’s money. Find the worst piece of property in the best possible place, buy low—and hopefully you can sell high.”
