FIVE x 5 Solutions has partnered with Whiskey Capital Secured Financing Fund to bring non-traditional distillery funding to our clients. Whiskey Capital specifically provides funding for American Whiskey distilleries who have capital tied up in the whiskey aging in their rack houses. Fx5 Solutions CEO Caroline Calhoun recently sat down with Whiskey Capital Secured Financing Fund General Partner John Shumate to discuss how he is helping craft distilleries free up the capital in their barrels so they can reinvest in their business.
Caroline Calhoun: John, let’s start by you telling us a little about yourself.
John Shumate: I’m John Shumate. I’m a general partner of Whiskey Capital Secured Financing Fund. My background has traditionally been more in the venture space but being headquartered in Kentucky you can only stay away from the business side of whiskey for so long.
Caroline: Tell us a little about Venture First as a business and what brought you into investing in spirits.
John: Venture First really started as a financial services group for technology ventures and their investors. But something we eventually realized is there’s just a major working capital problem in the whiskey industry. If you’re making a four-year bourbon, whatever you’re selling in four years you have to be laying down now. And for some whiskey it’s a lot longer than that, so that’s a lot of capital tied up. Then obviously there’s a lot of working capital required for the business, including sales, marketing, equipment, and other things. So, we had gone out to some different regional banks and said, “Hey, we know you’re used to lending against real estate and equipment. Why not lend against the inventory as well?” The consistent answer was it’s not really what they do. Our answer was that there’s a market need here on both sides, so we started doing it ourselves.
Caroline: What led you to venture capital generally? How did you end up in the space
John: It’s something I’ve always had a fascination with it, investing in entrepreneurs, high potential people and companies.
Caroline: So how does a spirit fund like Whiskey Capital work exactly?
John: Even though it’s a different business model than going with a typical bank, in many ways, it’s actually much simpler. We’re not typically taking a blanket lien across all assets or a bunch of complicated covenants. We are lending against the inventory and nothing else. This means a bank will usually have a personal guarantee, whereas we don’t. For example, if somebody is spending $1,000 a barrel, they’ve got to come up with $300 a barrel and we will provide the other $700. Then we take a first lien position on the barrels.
Caroline: The fund is called Whiskey Capital, but does the fund look at other aging spirits?
John: Right now, the fund is just for American whiskey primarily although I think there’s a good chance that we expand that into some other types of whiskey as well. We’ve given thought to expanding into other spirits but we’re not there yet.
Caroline: How does funding distilleries differ from lending to other businesses?
John: I think there’s just some nuances in the industry and it’s a very capital-intensive space. It’s one where the qualities of the of the liquid are very important. There’s probably not a lot of lenders out there who will know what you’re talking about if you spout off your mash bill to them, but we do.
Caroline: What, in your experience, typically leads a distillery to reach out? Who are they
John: Typically, it’s a distillery brand in need of capital. The big dogs don’t necessarily need the additional capital, although there are some very successful brands where there’s still a big working capital problem if it’s a rapidly growing brand laying down all that liquid. We try to have a pretty streamlined two-stage diligence process. The first stage is we ask for a very short list of financials, inventory detail, those sorts of things. After that, within about a week, we typically have a pretty accurate sense of whether we’re going to be able to lend to them. If we can, then the second stage is to ask for some additional diligence items before the final approval and then we can move to close.
Caroline: What’s that typical cycle time?
John: It could be as fast as 30 days, although it usually takes longer. The hardest part for us is getting good information out of out of distilleries. That’s why it’s so important for distilleries to have good inventory systems, good accounting systems, and have all their all their ducks in a row. When they are able to flip the information we need over quickly we can go super-fast.
Caroline: I suspect that for a lot of those craft distilleries who do come to you it’s the first time they’re exploring a non-traditional lender; this isn’t an SBA or bank loan. What are some of the questions those distilleries typically have when they reach out to you?
John: I think they’re just trying to understand how we’re different than a bank. They want to understand why we’re not charging the same 4% interest rate that their home mortgage lender is charging.
Caroline: The first thing that helps applications move along is having that good data. What other challenges do you typically run into with distilleries looking for capital?
John: I think that’s the big one and then another one is a lack of projection and planning. We talked briefly about that production curve, how if you’re making a six-year whiskey you need to be laying it down now. Getting to know their plans for the future, their anticipated purchases, their capital needs, their dump schedule, all that stuff is what we’ve got to work through.
Caroline: Sure, and I would assume there’s some tension between craft distilleries feeling like they could do something if they could invest, but with the spirit held up in barrels they don’t have access to that capital.
John: That’s certainly the case, and you’ve got to be careful as a lender not answering questions for them.
Caroline: What resources do you direct those craft distilleries to? I assume that there are a fair number of distilleries who go through the initial qualification process and have the inventory and have the assets to lend against, but can’t show how the business is going to be an appealing investment. What do you typically tell those businesses?
John: I think that for a lot of them it makes sense to find either a full time or a fractional CFO, or controller, who’s used to doing some of those things. Sometimes they already have that person in their ecosystem and maybe they’re not leveraging them on that side of the business. We do have a fractional CFO service so sometimes we will help them there. But there are other folks out there who can help them through that sort of thing. Good finance and accounting professionals are worth their price.
Caroline: What makes a distillery an appealing investment opportunity?
John: It’s typically a group that’s either laying down very quality liquid themselves or they’re buying a known commodity from one of the top contract distillers like MGP, Bardstown, Castle and Key, whoever it is. Having quality juice is important. Obviously, if the inventory is attached to a thriving business that’s generating revenue and growing, that probably buys down the rate a little bit too. Having strong operating partners who can do what they say they’ll do and do it on time with regularity also helps.
Caroline: Not having good data means go find it, and not having a sales forecast means go build it. What other reasons do you see for disqualifying a distillery?
John: Those are the big pieces. Distilleries will sometimes get to a point size-wise where they’re so big or they have so many assets that one of the big money lenders is going to lend to them on more typical banking terms, so this is one way we see craft distilleries move past our solution. On the other end of the spectrum, we see craft distilleries without a dime of revenue but they’re trying their hand at it, and this probably disqualifies them from our services too.
Caroline: Why partner with FIVE x 5 Solutions?
John: Distilleries that use one of FIVE x 5’s distillery management software solutions already have organized and systemized a lot of their data, which is a good foundation for them having good information for us. You are probably not surprised when I say a lot of distilleries don’t have great access to information. But it is great for us if they already have your product in place because it means they’re organized, and we know that their inventory and their processes are in place, the data is much more accessible for us, and you just see they know what’s going on in their business. Having a good software solution is key.
Caroline: Where do you think Whiskey Capital is going to be in five years?
John: I would guess that we will probably have somewhere in the neighborhood of a couple $100 million deployed. But it really depends on the market, it could be way more or way less.
Caroline: Of course, on the bright side we have learned over the last couple of years that booze seems to be fairly recession proof.
John: People forget that at the inception of our country, when the currency was basically worthless, people traded barrels of whiskey.
Caroline: Anything else you want distilleries to know?
John: I think for the most part people generally think of lenders as these evil boring folks, but you know, at the end of the day we’re very passionate about the industry. We have to stick to our fundamentals to protect our investors, but if we can figure out a way to be helpful, we want to and we want to be good partners to work with.
Caroline: I know there are a lot of small craft distilleries out there who could use the boost.
John: We enjoy helping those folks out, and if there’s a non-financial way that we can help by making a contact or an intro to somebody in the industry we always try to do that too.
FIVE x 5 Solutions has partnered with Venture First to bring non-traditional distillery funding to our clients. Venture First’s Whiskey Capital Secured Financing Fund specifically provides funding for American Whiskey distilleries who have capital tied up in the whiskey aging in their rack houses. To learn more, visit their website here.