Lessons for Startups from the Craft Beer Industry

“Beer is proof that God loves us and wants us to be happy.”

Attributed to Ben Franklin, likely erroneously!

One of the great things about the west coast of the US is the incredible variety of beer available locally for beer enthusiasts. This is rooted in some legitimate local beer history — San Francisco is home to the Anchor Brewing company, which became one of the first modern US microbreweries after it was purchased by Fritz Maytag in 1965.

Setting the stage for Disruption

At the time that Maytag acquired Anchor Steam the beer industry in the United States was not very exciting — there were fewer than 90 breweries in the US towards the end of the 1970s, and most produced a succession of essentially interchangeable light, fizzy beers. This was not always the case, as there had historically been lots of great breweries across the US. Similar to tech startups, many of these were founded by immigrants who brought knowledge of the industry from their home countries. Prohibition killed off most of these breweries though, and drove consolidation of many of the survivors. Post-Prohibition the patchwork of licensing and regulatory frameworks at the national and state level meant that large incumbents dominated the beer industry — and made it ripe for disruption!

As happens with many industries, a combination of macro-economic and regulatory changes and some exceptional, visionary entrepreneurs were the catalyst for changes.

Perhaps the most significant macro change was in 1978, when Congress repealed federal restrictions and excise taxes on homebrewing. This legislation was targeted at beer brewed for personal or family use, but many early craft beer entrepreneurs got started as homebrewers and honed their skills with feedback from friends and family. Some of these enthusiastic homebrewers recognized that there was an opportunity to turn their passion for beer into a career and a self-sustaining business, and the number of small breweries began to increase. Similar to the archetypal Silicon Valley founding team, many craft beer entrepreneurs started in their garages or kitchens, brewing small batches of unique and novel products.

Industry Hype and Challenges

The success that some of these early innovators saw in the market attracted other investors and entrepreneurs — so many that the fledgling craft beer industry went through its own version of the Gartner Hype Cycle. Entrepreneurs without passion and the dedication to the product and their customers started to produce bad beer, and the entire industry started to contract as the customer experience suffered.

This existential crisis was actually good for the industry as only the fittest came through this crucible successfully. Similar to the technology industry during the bursting of the late 1990s internet bubble, or in the downturn in 2008–2010, the really passionate innovators and the differentiated producers survived, and breweries that truly had a strong product/market fit thrived. Often these brewers made beers that appealed to a very specific taste — they over-indexed on hoppiness, or added unique flavors for example. They lived the advice that gets given to lots of startups — find the customers that will love your product, and build your business from there.

Industry Incumbents Respond — Competition and Acquisitions

The increasing success of the craft beer segment meant that the beer industry incumbents started to slowly respond. From less than 0.1% of the total beer market in 1987, the craft beer industry has grown to over 25% of the $116B US market in 2019. Large incumbents have launched their own in-house craft brands, or acquired leading craft beer breweries — Constellation Brands bought Ballast Point for close to $1B in 2015 for example.

Lessons for Tech Founders and Funders

The craft beer industry is a fun lens to use to think about disruption and innovation. Changes in the macro environment and regulation, and the entry of passionate and committed entrepreneurs has revolutionized what was a pretty staid and slow-moving industry a few decades ago.

The industry saw over-funding from investors, and an early flood of entrepreneurs who saw the hype as a way to make easy money. The true innovators survived this boom and bust, and have thrived through a maniacal focus on product and customer — much like lots of the deep-tech founders that we like to work with!

If you are a founder working on something interesting get in touch and we can share a beer (either in person or virtually) and talk about how you are inventing the future, and how we can help.

References:

[1] “An Illustrated History of Craft Beer in America”, https://firstwefeast.com/features/illustrated-history-of-craft-beer-in-america

[2] National Beer Sales and Production Data, https://www.brewersassociation.org/statistics-and-data/national-beer-stats/