To Find the Best Deals, Know What to Avoid

We talk a lot about what makes a good investment… but what makes a bad one?

In this unique installment of Venture Spotlight, we take a dive into a crowdfunding deal that raises some serious red flags.

It’s critical insight for investors in this exciting space.

To find the best of the best… we need to know how to identify the deals we should avoid.

The upbeat and fast-paced video is below.

Enjoy!

TRANSCRIPT

Alex Moschina: Hello, happy Friday and welcome to this week’s special edition of Venture Spotlight. Why is it special? Just because. As usual, I am your host Alex Moschina, the Associate Publisher at Manward Press, and I am joined today as always by Mr. Andy Snyder. How are you doing, Andy?

Andy Snyder: Doing good. How are you? Doing well?

Alex: Yeah. I mean, it’s Friday, I can’t complain. It’s winter again, I’m not happy about that, but at least we had two nice days this week. But yeah, you guys didn’t tune in to hear about the weather. I basically, as always, want to just keep this quick, keep it informative. And I really want to pick up where we left off last week.

So we were talking about the three criteria for a successful pre IPO investment. And again, those are does the company offer something novel, does it have a huge market waiting for it, and does it have a strong management team? And I think we’re going to come back to those criteria often here on Venture Spotlight. And I think we’re going to be a good deal about them today, because you made a promise, Andy.

Andy: I got to keep the promise. We’ll get into it, for sure.

Alex: I didn’t mean for that to sound so threatening. But yeah, you promised that you’d walk us through a bad deal, which is almost as good as walking us through a good deal. So we want to talk about a bad deal or at least a deal that you don’t like that’s open right now, and why. So are you ready to do that for us? You want to take the reins here?

Andy: Sure. What would happen if I said no?

Alex: A lot more riffing from me, which the audience does not want.

Andy: [crosstalk 00:01:40]. So yes, I am ready. You mentioned the idea that looking at a bad deal is almost as good as looking at a good deal, you’re absolutely right. The reason we had to look at these… I wouldn’t call this one a bad deal. This is somebody’s passion and somebody was very excited about it, and there’s a lot of money going into this deal. It’s just not a deal that is up to our standards. And we want to put the risk reward as far into our corner as possible. So this gives us a good opportunity to kind of sharpen our knife, as we mix the metaphors here, sharpen our shovel as we dig into the sector and some of the opportunities.

But like you said, there’s really three things we’re looking for. A large total addressable market, TAM, T-A-M, we’re looking for something novel, something different, something new, something that the market hasn’t seen before, and then we want to see the management team that ideally, like we’ve seen with some of our previous recommendations, has a management team that’s done it before, has taken a company successful, has done something really big, made investors a lot of money. You don’t always see that, but we want to see some proof. We don’t want some guy that was just watching Monday night football out there inventing something new without a whole lot of industry experience.

Alex: You want people who are at the tip of the shovel in their field.

Andy: Tip of the very sharp shovel, yes. So let me share my screen. I’ve got one here. Everybody likes beer. It’s a Friday, so we’ll talk about beer. And I’ve kind of made fun of this sector of the market before, because you look at these equity crowd funding deals, there’s a lot of them out there, distillers, whiskey, microbreweries, that sort of thing. So we’ll dive into one here and you can see what I’m looking at and what is important to look at. Let me share my screen. All right. You should be able to see Cerveza Tulum, is that correct, Alex?

Alex: That’s right. And we should you point out too, so you’re looking at this on one of the many portals that you frequent. This is Republic, just in case anybody hasn’t checked out some of the private equity portals that we’ve been talking about.

Andy: Yeah. So Republic is very similar to like Wefunder, you can go through all sorts of… They kind of have their pitch here. I won’t play the video. Republic does a good job with the Q&A, there’s some good things there. Then you have all the basics. A lot of this is just kind of selling you on the brand behind it all. One thing off the top, we can see some of the marketing here, they’re not really talking about the beer, they’re talking about how it’s made. Clean energy, water treatment. Their big thing is they’re taking sea water, taking the salt out of it, and using that for their beer. And that has some implications if we go into the margin and that sort of thing, which we can look at. But the main thing is here you can see that their marketing is much more… what’s the word? Fluffy. It’s-

Alex: It’s very sustainable, sustainable beer. You can feel good about drinking this beer, which I always want from my beer.

Andy: Yeah, feel good from it. But the main thing, so what we want to do here, there’s a lot of marketing fluff and that sort of thing. But over here we see the Form C, you can click on it here, so it takes a little bit to load. This is a couple dozen pages. So I have it open here, and you can scroll through, and there’s all sorts of things. But there’s a couple things I want to point out here within the risks. So with the SEC, they have to show all the risks and disclosures related to that, related to the business. So we see a pretty big one here. I don’t know if I can highlight it.

Alex: And just to be clear, so the Form C is a form that the company has to file with the SEC whenever they are raising funds, right?

Andy: Absolutely, yep. And so there’s a lot of things in here. Some of it is just plain boiler plate, talking about who their competition is, some of the business risks. One of their risks is if the market suddenly doesn’t like alcohol, or if beer falls out of favor with the market. I don’t see that as a big risk, but it’s a risk that investors need to know about. So really, my job and our job as investors is to go through here and put weighting on those risks. And through my experience and knowledge, I know that some of these are bigger red flags than others.

So here’s a pretty big one that we should be familiar with. “Our auditor has expressed concern about our ability to continue as a going concern.” This is called the going concern clause. Anytime you see this, it’s a red flag, in stocks, whatever. Doesn’t mean that they’re going to go bankrupt tomorrow, it just means they need money. And it means their current path is not sustainable, they need to do something. So with Cerveza Tulum, they’re getting money, and you can see back over here, they got more than they… I think they were only going for about 50,000 or so, they got more, maybe 25,000, than their minimum. Their maximum, of course, is 5 million, which is set by law. But you can see that they need the money.

And so if we go through here, there’s some other risks. I have one… let’s see here, competition. This is probably the biggest. So again, kind of going all over the place here, but the three things that we’re looking for is total addressable market, beer, right? So that’s huge. That’s a huge industry, lots and lots of beer gets drank every day. So we know the adjustable market is big. But what is Cerveza Tulum doing to get a bigger share of that? So where there’s a big market, there’s often a lot of small players in there, and that’s especially true in the microbrewery, the brewery industry right now. And so we can see a lot of the competition, Anheuser-Busch, that’s huge, Molson Coors, Sam Adams, The Boston Beer Company. There’s a lot of players in this.

And so what this company’s trying to do, should have kind of went over that first, Cerveza Tulum, they’re down in Mexico, just south of Cancun is the Tulum area, one of my favorite places to hang out and drink a beer or two. So they have a lot of competition in Corona, Sol, all those guys are down there. But they’re trying to raise money. This round of funding is trying to get them into the United States. And as soon as they get into the United States, that’s where that competition really hits, trying to import. How many imported micro brews do we see when we go to the store? So that total addressable market is huge, but it’s very hard for them to take a large niche of that. And so they had to have a really, really good beer to get towards their exit path.

So if we remember, a lot of these companies, the way they are going to cash out, how we make money on our investments is either they go public or through a merger and acquisition, they sell the company. So the chances of this one going public, pretty slim. So if we go up here just a bit, they have one beer, Tulum Lager. So that’s not a huge business yet. And as far as acquisitions, why would Anheuser or any of these companies want to merge with a company that has one beer that if you read through here, isn’t being sold in all that many places? I think it’s like two or three places it’s being sold right around Tulum. So again, we see that their marketing is really what they’re selling here, this seawater based beer.

Alex: It’s almost like a sub market. You talk about the total addressable market, the only reason any company would probably acquire them is so that they can have an eco-friendly beer brand in their portfolio, which I hate to take a cynical look at the market, but that’s not necessarily the first thing someone who goes to the liquor store is heading for. Where’s your sustainable beer cooler?

Andy: Exactly. And there’s room for that, but it’s not huge. And then you had to think about the competitive advantage. What is this company doing that most aren’t? And Alex, you and I talked about this offline via email, that they’re not the only company that’s turning sea water, turning salt water into beer. I was in Aruba last summer, and basically all their water comes from one desalinization plant on the island, and that’s where they make the beer from that. So it’s almost in Aruba, they do it because they don’t have a choice. It’s expensive, it adds cost to take salt water, it takes a lot of energy to turn that into fresh water. Whereas Coors, they get it right out of the mountain, right? Other companies are using the system, and the water is ultimately the same. So the beer doesn’t taste different or doesn’t have a benefit, it just sounds good. And so ultimately the market ends up seeing through that.

So TAM, the total addressable market, isn’t great. Is it a novel product? Beer certainly isn’t novel, but like you said, it’s almost a sub niche of this environmentally friendly beer. And that has some merit, but there’s no competitive moat around that. Anheuser-Busch could easily go out and do that, and that’s probably what they’ll do. Sam Adams, Boston Beer, they could easily go do the same thing. So it’s kind of hard to see that. And then we get into the management team. So already we have two strikes against it, that’s enough. One strike is enough that we don’t want to dive into it.]

Management team, they have some interesting folks. They have some good marketers, for sure. Dive into the resumes, they’ve got some marketing prowess. They have some folks that have worked for the big beer companies, which is absolutely a requisite for what they’re doing. But I don’t see any signs of that they’ve taken a single product… They didn’t sell their last beer to Anheuser-Busch. They’re not the people behind Corona or anything like that. So again, that’s just a very quick high level look at what’s going on there, but it gives you a sense of those three things and really how easy it is to fall short. So again, we’re looking for the ones that hit every box and hit it out of the park on every one, because these can be risky deals and we’re putting our money into them for a while, we want to hit the very best ones that there’s no compromises in.

Alex: Yeah. If this was a small local business that you were investing in personally and it’s only going to be distributed in your town, maybe worth checking out. But for something where you’re going to be joining hundreds of thousands of other investors, maybe not quite the big boon or windfall that we’re looking for.

Andy: Yeah. And reading through their disclosure, one of their big things is they want to get onto Amazon’s platform and sell their beer that way, which is unique. But there’s all sorts of regulations for that. And so diving through here, you see that this is basically an American subsidiary of an existing, very small beer company that they’re trying to get up in. And that subsidiary has no revenue, no profits, no assets at this point, they’re all raising it. So you’re starting at ground zero with that into a pretty high risk franchise. It makes sense that the company would go this route, you can see they’ve already gotten over a hundred thousand dollars in investments, but in the beer world, that’s not going to go very far. So that going concern idea, the auditors are right to raise that.

Alex: Well, I think what was hopefully useful for everyone watching is just once again, returning to our checklist. So we’re turning to those three criteria, because you come to a page like that and you have all the… Of course the company’s going to put its marketing forward. They had some lovely infographics talking about the addressable market, talking about their share of it. I mean, you could read through that and very quickly become distracted and say, “Oh my gosh, I think this is going to be the next big thing.” But if you stick to those three criteria, it is allows you to frame your research in a way where it makes sense. Literally, write them down on a piece of paper. And as you go through a pitch or go through that Form C, you can say, “Okay, nope, they’re not hitting this. They’re not hitting this.”

Like you said, if it’s one strike, that’s almost enough to kill any potential there. And we always preach just in general not to get emotional about investments and not to become involved in one. So you may see and probably will see a very exciting and heartfelt pitch, and no doubt, many of the people who are entrepreneurs and are starting these companies and trying to take them to the next level through crowdfunding, they have the best intentions. But that doesn’t necessarily mean that they are the best business runner, and certainly not a place you might want to park your money.

Andy: Yeah, yeah. In no stretch is this a scam or something like. Again, it’s not easy to make a buck. And if we’re going to invest that dollar and turn it into more, we want find the very best opportunities. It’s gotten this far. It’s, like I said, somebody’s passion, somebody’s baby. I’m not trying to put it down, I’m just saying for our money, there’s better opportunities out there. And that’s what those three criteria are for. We stick to them, like Alex said, write them down, stick to them, and they’re the guiding light, for sure.

Alex: Great. Well, I think that’s a perfect place for us to wrap up for this week. We said we were going to go through a bad deal or not a great deal, and that’s what we did. Good luck to those folks, and appreciate everybody tuning in to watch. For next week, between now and the next episode, I would love to see some reader feedback or viewer feedback. If you can tell us are there any deals you want us to checkout? Are there any questions you have about this type of investing, or what we’re doing here in general? You can send those to mailbag@manwardpress.com. We read everything that comes in and we would love to address your commentary and questions in the next video. So we hope to hear from you, but until then, I hope you have a great weekend, have a great next week. And we’ll see you this time next Friday.