Breaking my Investment Rule for Hawaiian Beer?

Welcome to this week’s edition of CROWDSCALE, we’ve got our meaty paws on an interesting startup for you.

Ola Brew is a Hawaiian-based alcohol brand that’s taking the islands by storm - here’s what we’ve researched:

• ✅ The Good: Growth, flywheels, and a 6x more powerful plant

• ⛔️ The Bad: A hole in wholesale?

• ✏️ The Decision: Will I break one of my investing rules for Ola Brew?

There's a few rules that I follow…

One of them is that I refuse to invest in upstart alcohol brands.

It's a cluttered space, upside is usually somewhat capped, and it's difficult to maintain a unique/defensible product. But an alcohol brand on StartEngine caught my eye for two reasons:

1. Their valuation seemed fairly cheap (only ~4x their 2022 revenue while growing quickly)

2. They were able to raise $1M in 72 hours.

A fervent fanbase and a good deal? That's enough for me to dig deeper.

The company is called Ola Brew - they're a Hawaiian alcohol brand that leverages production & ingredients solely from the islands. Ola Brew's main offering at the moment is beer, but they’ve added seltzers, hard teas, and are working on a spirits drink.

There’s a lot to like about Ola Brew, and I’ll highlight the main things that get me excited about investing.

Their traction is impressive, revenues have screamed upwards from $56k → $8.3M in just 6 years. This amount is especially notable since nearly all sales have been confined to the islands. With a population of 1.4M, that’s nearly $6 per every resident of the islands (I’m ignoring the ~9.2M tourists that file into Hawaii each year, but it’s still a remarkable penetration for a product that did not exist 6 years ago).

Ola has experienced tremendous growth in its core beverage portfolio, and there are some really promising additions coming to market. Ola is close to introducing ‘Ōkolehao, a unique Hawaiian spirit to fruition. Ola Brew’s beer competes directly with both Kona and Maui Brewing, so I think its a smart move to expand into an area where their larger competitors aren’t focusing.

‘Ōkolehao is distilled from the Ki plant, a cousin to Agave. Ki maintains premium taste while bringing forth some beneficial unit economics. Ki grows 6x faster than Agave, which can take up to 6 years to fully mature. As a result, Ola Brew can operate smaller farms and expand rapidly if needed.

Lastly, Ola Brew is pursuing a clever strategy to grow organically. Their brewery is already a popular spot for tourists and residents alike. They recently purchased the historic Hilo Sugar Mill and have plans to convert into their distillery + event space. Nestled on the Hawaiian coast, their 10 acres of space is absolutely beautiful.

The Hilo Sugar Mill will be a top destination spot for locals, weddings, corporate outings, and other events. Its elegance helps elevate the brand and also seed awareness to the many travelers that will pass through. Ola Brew has capitalized on the 9.2M tourists that visit Hawaii annually by making their most important brand touchpoints desirable locations.

Lastly, the Ola Brew team are gifted community builders as evidenced by the outpouring of support in their equity crowdfunding raise. $1M raised in 72 hours is world-class for a startup of their size and lets me know that there is a fervent base supportive of the Ola Brew brand.

As with any startup, there are risks. Here are Ola Brew’s top 2.

If you dig into their revenue figures, sales still grew in 2022 - albeit at a much slower pace (15% vs 73%). Curious about the dropoff, I segmented their sales and discovered that all 2022 growth was driven by the brewery location having its first full year of operation. That contributed an extra $1.9M to the tally, and covers up something concerning.

Revenue in the wholesale channel actually decreased by $900,000 (-23%) in 2022. I interviewed the founders and brought this concern up to see why wholesale figures were moving in the wrong direction.

They addressed the issue directly, informing me that their distributor sold its business in 2022. Their distribution rights were acquired by the owner, and they were faced with the decision to continue the contract or begin self-distributing their product.

To self-distribute the product, they would need to pay a cancellation fee that was based on their trailing 12 months of revenue. To give them flexibility while deciding their next move, they decided to throttle back supply (thereby reducing their potential cancellation fee).

I understand the strategy, and they actually used this time to cross-train their production staff across the various brewing roles (turning setbacks into positives is a huge win in my book!) Ola has yet to sign a long-term contract with the new distributor, but wholesale shipments have resumed and the founders seemed optimistic that a deal will get done.

Certainly a remaining risk to not have a long-term distributor contract in place, but I believe this process has shown their decision-making & strategy is measured out carefully.

My other main concern revolves around their concentrated bet on a product that is not yet in market. Beer is their main beverage at the moment, but the future of the company lies in Ōkolehao.

Ola Brew will reach a revenue cap for the amount of beer they can sell on the islands, and it is too expensive to ship cases of beer across the Pacific Ocean to new markets.

‘Ōkolehao is a higher-ticket beverage, and so the unit economics of shipping globally are far more appealing. That means that the true upside of Ola Brew is largely determined by the success of that drink line.

‘Ōkolehao isn’t completely untested, as the beverage has won numerous awards at industry tasting competitions. However it remains to be seen how the general public will receive Ōkolehao and if there will be any demand for it. Investors should understand that the company’s upside is somewhat contingent on this outcome.

Again, I typically stay away from investing in the beverage sector so this one was a challenge for me.

Their valuation is extremely fair - at $37M that’s just 4.43x last year’s revenue. For comparison, Constellation Brands (Corona, Modelo, Svedka) has a revenue multiple of 4.78x and they are growing at a far slower clip.

I also believe that the brewery + distillery are critical flywheels to the brand. As desirable tourist attractions, they introduce Ola Brew to new customers. These visits grow the brand, causing more people to purchase Ola Brew. The more purchases, the larger the brand gets and the more people will want to visit the brewery/distillery.

Ola Brew’s declining wholesale figures are a valid concern for investors, but I would be more bothered if it were a result of diminishing demand rather than complications with the distributor.

AND - I actually received an update from the founders shortly after writing this article. Revenues for 2023 are on track to reach $4.2M - surpassing even the all-time high of $3.9M in 2021.

Lastly, talking to the founders for 30 minutes helped illuminate their skills in problem-solving, strategy, and long-term thinking. It gave me confidence that any problems that arise from the aforementioned risks can be addressed and dealt with pragmatically.

I get interested in business ideas. I invest because of founders.

All in all, I am going to be a naughty boy and break my own investment rule. The deal terms are favorable, the team is solid, and the risks are manageable - this one is getting added to the CROWDSCALE portfolio.

This is not advice to invest in Ola Brew, nor am I being compensated to write this - but if you would like to learn more about investing for yourself you can check out their page here!

Please note that CROWDSCALE is not recommending investment into any of the above startups. Investing in startups is risky and you should only invest that which you are able to lose.