Gourmet sodas are hot properties these days: Think Jones Soda (JSDA), Hansen's Natural (HANS), and SoBe. The latest small beverage outfit to hit the big time is Reed's Ginger Brew (REED), which has 34 employees and started trading its stock over the counter late last year. The Los Angeles company's chief executive officer and founder, Chris Reed, took a circuitous route to success, from brewing his spicy Jamaican ginger beers in 1987 to selling shares directly to his customers in 2006.
The bearded, t-shirted Reed says he wouldn't recommend that other entrepreneurs follow his exact process, but he has learned some valuable tips along the way to his company's recent initial public offering, which raised $8 million. He spoke to Smart Answers columnist Karen E. Klein. Edited excerpts of their conversation follow.
When did you first think about taking Reed's public?
We contemplated it way back in 1991. But the people I was involved with at the time scared me. They showed up with bags of money and started telling me that we'd need $2 million worth of assets to list on the NASDAQ. They wanted me to give up a third of my company, and they were going to put up the money based on oil and gas leases. I ran in the other direction.
Instead of going public at that time, you bootstrapped the firm. What did that involve?
We had a little money infusion from some angel investors and my dad. My family put in some money in 2000, and we purchased Virgil's, a private company that makes root beer and cream soda. Then we raised $400,000 from 200 people through a SCOR—a small corporate offering registration—that I basically did myself. I paid $5,000 to get legal help, and for about $20,000 total I put neck tags on our bottles in 10 Western states. They call that a "tombstone"—it's an announcement saying we're raising money. It was very organic, and it was the inspiration for going to the next level.
You didn't really go the traditional growth route.
No. It's hard to find people you trust when you're a hippie from California. And you know, Ben and Jerry funded their ice cream company with a tombstone underneath the lid of their cartons, and Samuel Adams did the same with an announcement in their six-pack holders. Still, it's a pretty sketchy way to do it, but I couldn't bring myself to just put my stock in the hands of Wall Street.
I'd rather have it in the hands of my true-believing customers. They're the best shareholders because they're owner-advocates. They e-mail me and say, "Hey here's a store you should be in!" They ask their storekeepers to stock our products. Now they can support their stock shares and their habits.
After the SCOR, you decided to pursue an IPO, again using the direct-to-consumer appeals. How did that come about?
I got the idea after watching Jones and Hansen's go through the roof in 2004. Also, bootstrapping is boring, slow, and we've been doing it for a bunch of years. All this opportunity was out there. We decided to go back at it, doing the neck tags again, and we got more people calling in. We got more leads but it still was not really happening.
I didn't have a clue about going public. I actually cold-called brokerage firms that had done small deals, and let me tell you, that's as bad an experience as you can get. Eventually I found a group called the National Investment Banking Assn. (www.nibanet.org), and I went to a trade show they put on and did a PowerPoint presentation in front of a room full of investment brokers. It was a great way to engage these people, being there in person, instead of being a disembodied voice on the phone.
Then I met a guy at a birthday party. He was in the investment business, and I told him what we were doing. He was between gigs and volunteered to visit our office. He really took over the process.
He's very savvy—he introduced me to underwriters, and syndication, and selling to Wall Street. Having him on our team, and seeing that we already had gotten thousands of leads through the neck tags, helped the deal go through—to my surprise.
What did you learn about what it takes to become a public company?
There's a lot to learn! For every small guy like me who figures this out, there's got to be 100 other people running businesses who don't understand it. First off, it's really hard to take a company public that's not sexy. If you're making furniture, or you've got a warehouse distribution service, it's not going to work. Wall Street is driven by sizzle. Saying, "We make the best ginger ale and root beer in the world"—that's a 30-second sound byte that brokers can work with.
Why not go with venture capital or private equity funding?
I didn't want to marry up with a venture group to do it. I'm too independent and I felt there were too many controls involved, too many low valuations, and too many clauses in the contracts that said if I didn't perform, they'd own me. Basically, I was scared into doing the IPO, even though I've seen small companies get killed once they go public.
The good thing about the IPO, that I wouldn't have anticipated, is that the public markets impose a discipline on running your business that sometimes entrepreneurs don't naturally have. They really whip you into shape, and make you accountable in ways you didn't think about. It has been a boon to my business to operate under this very healthy structure. Because of it, we'll be going through a cultural change over the next two or three years and becoming a real business.
What other benefits have you realized, other than raising money for growth?
It's extremely fun, kind of like a coming-of-age party, or a debutante ball. A lot of things have happened that would only have been possible because we went public. Of course, we are spending a lot of time and money on regulatory exercises, and there are battles with lawyers and accountants. It's great, but suddenly you have new, difficult personalities in your life. Of course, anyone you take money from is going to also have requirements. The public is just another entity.