Thursday, 14 July 2011

Equity For Punks : I'm Out

Dragon's Den or Doghouse?
It's a staple of Dragon's Den that a wide-eyed and keen would-be entrepreneur brings himself in front of the business giants and asks for £250,000 for 10% of his company comprising himself and his prototype of three wooden spoons strapped together with elastic bands (or some other outlandish combination), only to be asked by the first Dragon to speak how they can justify a valuation of their company at £2.5million.

This is usually followed by a great deal of uhm-ing and aah-ing, or more entertainingly an explosion of accusations that the Dragons don't know what they're talking about, shortly succeeded by raised eyebrows and an early shower.

So it's with surprise that, following a link supplied by James Watt on Twitter, I read Brewdog's Equity for Punks prospectus to find that they're issuing 90,000 shares at £23.75 a share, representing a total 8% interest in the company. Some quick sums (23.75 x 90,000 / 0.08) reveal this to be a rough valuation of the company at £26.7million.

Bear in mind that the company's turnover for 2010 was £3.3m and there's an enormous gap between that and the supposed value represented in the share issue. The projected turnover for this year is better, at £6.5m, but that still leaves a gulf of £20m that remains to be filled.

What Say You?
Armed with this quick arithmetic, I returned to the Brewdog blog and posted a comment which can be seen in the image below:

A plea for justification
Shortly afterwards I refreshed the page to discover that the comment had been deleted and further comments disabled. I can only take that to mean that somewhere in an office in Fraserburgh, someone is working very hard to produce the justification and it will be published forthwith.

Timely Endorsement
A while later, James tweets that the Times have recommended the investment. Great news, if in fact it is true.

A picture followed shortly thereafter showing Brewdog staff holding the Times open at the page of an article on the share issue (right).

That article (behind a paywall here) doesn't so much recommend the investment as point out that the "groundbreaking" nature of the share issue means it is unvetted by any financial authority and is high risk, further pointing out that the "prospectus" should more rightly be called a "financial promotion".

The actual "recommendation", if it could be called that, is found several pages earlier in the paper, and is a paragraph or so in Patrick Hosking's Business Commentary. Again, though, there is little found to "recommend" the investment. The furthest Patrick goes is to entitle the paragraph concerning Brewdog "Liquid Assets Worth a Flutter", which is hardly a ringing endorsement, especially given that in the text of his commentary he notes that there is in fact no liquid market for the shares (they can't yet be traded, and even when they can it will be only by matched bargain through the website).

Mr Hosking does say that investors might be persuaded by the phenomenal growth shown by the company and its distinctive marketing to have a punt of a hundred quid; this isn't so much a recommendation as an invitation to gamble if you have the spare cash.

Exit Strategy
"Investing" in Equity for Punks does bring with it some benefits -- 20% discount in their online shop* and 5% discount in their bars. If you can stomach the faux-punk nonsense then these meagre offerings might do something to offset the ~£18/share surcharge, which may in itself be considered an ideology tax by those who strongly believe in what Brewdog are trying to do, and want to see them go further.

Personally, I like some of their beers (the best pint I've had in recent memory was a pint of Punk IPA at the Steampacket Inn on the Isle of Whithorn) but their attitude doesn't sit well with me, so I'm afraid I'm out.

*Spending £500 in the shop would appear to be the quickest way to get a return on your investment.


  1. I'm in two minds about this. It's quite obviously a way to fleece money, but it's been done so many ties before, so is unsurprising. It's not an investment, it's a piece of memorabilia.

    However, your valuation is way off. Company value is not set by revenues, they make a very small part of it. There are other assets to consider, like physical assets of property, leases, shares in other companies...there could be loads. That said, there could also be liabilities as well, which cut into the deal. You also need to look at dividend potential, liquidity ratios etc.

    I'd agree that they probably aren't offering a sound investment and have over valued themselves, but I'd question the validity of your reasoning and I'd disagree with the newspaper that it's innovative (myfootballclub did this, but under a different name).

  2. You're quite right; the paragraph on the "gulf to be filled" originally had a section saying that the £20m could hardly be made up of assets, because if it were they'd mention them in the promotional PDF to allay the suspicions of investors.

  3. 5-6 times year 3 revenues for a startup company really isn't that bad, particularly as it's already profitable (which is the number that's really what you should be looking at, forward P/E is the critical value for stock pricing for most people).

    As a round one EFP investor I'm a little put out that the price is only very slightly higher than the round two offering, but the discounts taking the edge off that quite nicely ;)

  4. Just to clarify on discount, you only get 20% for an investment of 12 shares of more (ie minimum £285).

    I invested as I've already spent £300 on brewdog beer this year and I'm sure that level will continue and I'd recoup my money.

    There is the potential for dividends (albeit not until jan 2013 at the earliest) and as you mentioned there is scope for shares to be traded in the future.

    The main reason I'm investing though is that I want the new brewery to be built so that they can continue to become more widely available, whilst still being able to bring out new and innovative brews.

    That and I want to visit the brewery ;)