Sam Holloway, Ph.D. - Crafting A Strategy
Several years ago, Helder Sebastiao and I wrote a paper about a paradigm shift in entrepreneurial thinking. Business models were replacing technologies as the primary source of value creation. Entrepreneurship was becoming less about algorithms and software and more about individual people, their hopes and their dreams. Entrepreneurs were beginning to make business model choices based upon their own values, beliefs and skills. Entrepreneurs were letting their personal values and personal goals influence the business model, instead of simply making the business model fit into what they thought could make them the most money.
We didn’t get everything right, but a lot of other scholars started thinking about business models at about the same time. There was a paradigm shift in how to create value, enabled by the Internet and IT infrastructures that could connect previously unconnected parties. In my own world of the craft beer industry, the brewpub business model disrupted an entire industry, allowing brewing entrepreneurs to become their own distributor and retailer, and keep more of the profits for themselves. By thinking strategically about how to organize a beer company differently, and changing the laws within their state, craft brewing entrepreneurs disrupted the three-tiered system and generated incredible wealth for them and for society. Imagine a world without Hefeweizen from the Widmer Bros. Imagine a world without IPA, certainly society has benefitted from this disruptive business model. What about traditional investors? Do they benefit from craft beer businesses the same way they do from a technology startup?
Keep Portland Weird
A couple of days ago I spoke with a colleague who advises new companies and consults on merger and acquisition (M&A) activity. He made a statement that got me thinking. He said he was considering getting out of the M&A game because there was no deal flow in a city like Portland. I remarked that in my world of craft brewing, most of the businesses were lifestyle businesses and the founders were genuinely happy to stay small and make a living – but many of these same entrepreneurs were uninterested in making a killing. They had neither the goals nor the business skills to turn their small craft brewery into an investable business. As my colleague sat back in his chair, we mused of a new paradigm in entrepreneurship: the non-scalable business model.
Portland, Oregon has historically been labeled a city that lacks a critical mass of scalable ideas. Businesses that start here seem to leave when the opportunity to scale requires access to traditional forms of venture funding. For example, Jive Software left Portland for Silicon Valley, suggesting that executive talent is lacking within this city. Many groups in the software industry are trying to change this, including the Software Association of Oregon and their Portland 100 initiative. Why are we so obsessed with one kind of business model – technology/software companies – and one type of investment capital, private equity?
Private investors seemed to shrug their shoulders at Portland, dismissing it as a small-time city that will never be a hotbed for traditional and scalable businesses. This was always seen as a weakness in Portland. But I think it might be Portland’s core strength. Portland is weird; entrepreneurship here is different. Why isn’t this celebrated more?
A New Paradigm is Making Investors Confused and Uncomfortable
Why are craft breweries making the large breweries and traditional investors so uncomfortable? We’ve recently heard from the MolsonCoors CEO that craft breweries are ‘massively overvalued’. We have responded to this by suggesting the business models and operating margins between Molson and a typical craft brewer are so different, it doesn’t make sense to compare them. So then, why are we still doing it?
Most craft breweries aren’t good targets for professional investors – at least not in the beginning. Professional investors ignore these non-scalable businesses because they do not provide a clear path to wealth generation. However, a traditional investor only really cares about financial wealth and he makes investments into businesses that can scale and produce financial returns. What about societal wealth? What about civic wealth? What if we redefine entrepreneurship to be about communities; where the societal benefit scales and the individual financial gain is more modest? My friend and colleague, Mike Russo writes about this phenomenon in his book, Companies on a Mission. But Mike writes mostly about individual companies, not an entire industry of mission-driven, non-scalable companies.
Collectively, Portland’s 50+ breweries and other industry stakeholders contribute billions of dollars to Portland’s economy. These companies provide jobs, pay taxes, and give neighborhoods a hugely valuable asset – a place to celebrate and congregate. Neighborhood breweries may be the new cathedrals of consumption, and they can charge high prices for a great product. Consumers don’t seem to mind paying over $5 for a beer, because the values represented by these local, hard working entrepreneurs align with their own personal values. We even have non-profit breweries in Portland, trying to capitalize on the values-based utility that breweries provide society. Keep Portland Weird – Your Damn Right We Should!
Paradigm Shift in Entrepreneurship
Business schools are teaching entrepreneurship differently. Business plan competitions are being replaced by business model competitions. Business plans are no longer the starting point for entrepreneurs, but rather reserved for a later time in the venture’s development (after the business model and market opportunity are better understood). Steve Blank’s Lean LaunchPad approach, which focuses on business models and eschews business plans, is sweeping the nation and changing how people think. The times they are a changin’ – and professional investors are left with nowhere to put their money. Maybe this is OK. Debt financing and banks may be the investment vehicle for communities like Portland. Craft brewery businesses can use debt instruments until their business model and the market provide enough evidence suggesting that scale is possible. Widmer Bros. Brewing grew this way, and eventually went public in a more traditional, scalable fashion once the market validated their business model. More recently, Ninkasi Brewing Company of Eugene, Oregon, perhaps the fastest growing craft brewery in American history, has ignored M&A and private equity in favor of debt . They recently invested over $20 million in themselves, using banks just like any other small business. Ninkasi is certainly scalable, they are enjoying a fast rise as America’s IPA, but they are still doing things differently. Keep it weird, Craft Beer!
I love the craft beer community and the businesses within it. These entrepreneurs aren’t weird, they just have different values. Community, society, and personal well-being trump profitability, scale, and traditional investment logic... Sounds pretty good to me.