Distill Ventures invests into the shifting drinks landscape 

Image courtesy of Distill Ventures

Olly Wehring:

About seven years ago, a friend of ours started a company that we had a really small investment in. This company, which designed apps, got all this money, network and support. At the same time, another friend launched a gin brand. It took our gin friend months just to secure the paperwork to get a bottle of gin out of the distillery.

Despite the fact that a lot of the innovation in the spirits category comes from outside the big companies, there was very little support out there. We (Lampen and DV co-founder Shilen Patel) started to think how we could pull together something that had all the support, network and so-on that tech start-ups had that really focused on drinks. So, we started talking to the people we knew who'd started drinks brands to see if there was an appetite - there was.

We got to the point of asking how we were going to fund this. Although we were really interested in the new stuff, we both really liked whisky and were really excited about what was going on in whisky. Obviously, you need serious finances to start playing in that area. We thought it made sense to talk to an industry partner to see if there was an appetite for a partnership. We had some relationships with Diageo, they'd been a client of our agency business. So, we approached them to see if they'd be interested, they said they were. They've been in since the launch of it, but this was something that we decided we wanted to do and we approached them to see if they wanted to get involved in some way. They said they'd like to be the sole investor in it, so it became the kind of partnership that we originally didn't think was possible when we approached them.

It's worked well, I hope, for both of us over the last six years.

From an entrepreneurial sense, there wasn't the support. In tech, you hear investors and entrepreneurs talk a lot about their eco-system - if you need something done, there are suppliers who are really focused on working with businesses like yours. If you need funding, there's all sorts of funding and there's a very structured system of finance. Also, partly due to its nature, there are vast resources online - it's credible to teach yourself coding because you can find resources to do so online.

In drinks at the time, there was very little of this. The drinks industry is quite weird for its size compared to other industries - there's a relatively small number of global players. Because of that, there were barriers to entry for other investors, who felt the territory was occupied.

Also, the industry as a whole didn't really have anything like that eco-system. That made things hard for those who had an idea - but were totally new to the industry - to be able to penetrate it and work out how to get something made, how to get it to market, how to deal with the legal issues, and where to get the money for all that.

Regulated industries are always harder - you can't just sell what you make at a farmer's market, you have to account for every drop of alcohol that passes through your hands. Then, there's this concentration of ownership, which has historically made drinks less attractive to other investors. The model is that one or two investments in every ten will succeed. In this sector, there are five, maybe six global players, it's an almighty concentration compared to other sectors.

There's been a big consumer shift. The 'drink less, but better' thing is definitely true. Part of the reason many consumers choose their drink is to discover new things or to connect with the maker or make explorations with flavour - challenging your palate, almost. We see that kind of consumer behaviour across all industries, particularly in food and drink. Spirits is not immune to that.

There have also been changes in how can you reach those consumers, both in a marketing sense and in route-to-market. Since we've started, the development of Amazon as a channel has been transformational. So, even with that concentration of ownership at a brand level, there are now more opportunities out there.

We're independent, we take the idea to them. Ivan [Menezes, Diageo CEO] has described the partnership as an independent accelerator in which Diageo is the sole investor.

The existential question for the big companies is: How early is too early to get involved? Also, once you get involved, what are you actually going to do with it, once you closed the deal? In a climate where there's such a focus on performance, how can you ensure that if you do a deal on something really small, you give it the right kind of care and attention as well as the right environment to grow? These things take time, you can't push too fast but, at the same time, you've got to maintain momentum. Can big companies get that balance right? Where this structure has an advantage is that we are totally dedicated to supporting companies at that precise stage. We don't have to worry about Smirnoff or Johnnie Walker delivering their numbers this year - we're not responsible for that.

I'm not going to be shuffled to be the general manager of Japan, this is our company - we set it up and we're in this for the long haul.

We start with a discussion each year with Diageo to find out what their priority categories and price points are for the next decade. As part of those discussions, we feed in market intelligence showing where we see hotspots of entrepreneurial activity. The brief has always been to be open to things that are not in the strategic plan. I think part of why they thought this partnership would be of benefit to them is that it could give them another input on where the industry might be going - non-alcoholic is a great example of that. There was nothing in their strategic plan about looking in the non-alcoholic space.

The Starward Australian whisky brand makes a good case study. We were looking at the time at which provenances worldwide could be of interest in the future for whisky. The world is changing and whisky is going to come from other countries than Scotland, Ireland, Canada, the US and Japan. Because of its perception in wine, Australia struck us as a provenance that could be interesting. We started working with people in the market - who knew the market - to get a picture of the scene there. That way, we could see beyond things that were already on the shelf, to companies who'd been producing whisky and laying it down, even companies at the planning stage.
We then had calls with a few founders to try to understand more about their businesses. Then, we went to see a bunch of different producers. What we're thinking about is, who's got a vision and product that could have an impact globally? We're looking for a simple idea that would resonate outside of home territory.

The next stage was to look at the inventory to ensure consistency. Finally, we put together a vision with costings in an investment case. This was presented to an investment board of senior Diageo people. They liked it, so we took it through the process of negotiating a deal.

On a timeline to making an investment, Diageo comes in at the two-thirds point. We've done the filtering and spent some time with them before we start showing things to Diageo. With Diageo as our sole partner, their motive is to look for companies they might want to own one day. Once we're feeling good about it, then we'll share it.

At some level, there's contact on a daily basis at different levels of the organisation. There's obviously the process of making new investments, there's also the process of companies already in the portfolio continuing to be supported financially - they're generally going to need more finance each year. Then, occasionally someone's looking for technical advice or has an IP issue that Diageo can help with.

Finally, there's governance and oversight that plays a part. We need to ensure their money is being used wisely. 

The investment board meets four times a year here in the UK, and then the same in the US. These meetings are the focus of the engagement between us in terms of investments in new companies.

The most important thing is the team. An average proposition in the hands of a good team will always beat the best liquid in the world with somebody who doesn't know how to sell it. Team accounts for well over half the weighting for us. Then, there's the liquid and the overall proposition that carry equal weight.

Products don't have to be fully-formed when we see them, but they've got to have resilience - there are going to be ups and downs. The team behind a brand needs to have a sense of self-awareness and know what they're good at versus what they're not good at. We're less interested in being presented to with an investment deck than we are meeting people and seeing them try to inspire belief.

The most important thing is the team. An average proposition in the hands of a good team will always beat the best liquid in the world with somebody who doesn't know how to sell it. Team accounts for well over half the weighting for us. Then, there's the liquid and the overall proposition that carry equal weight.

Products don't have to be fully-formed when we see them, but they've got to have resilience - there are going to be ups and downs. The team behind a brand needs to have a sense of self-awareness and know what they're good at versus what they're not good at. We're less interested in being presented to with an investment deck than we are meeting people and seeing them try to inspire belief.

It varies by category and price-point. When an investment is made, we have a collective discussion about the scale the brand could reach and when it would make more sense for it to be part of Diageo than independent. For Diageo's Reserve Brands tier in Western Europe, for example, that might be 30,000 cases a year. For vodka in North America, that number might be 70,000 cases. The discussion also covers whether to expand the brand into other markets.

Generally, we've got a pretty good record of bringing things before them that are worth investing in and them saying yes to it. Of course, we can look back at things we've fallen in love with - be it the taste, or the distillery. There were a couple of gins in the early days that didn't stack up. We've been incredibly lucky in most cases, but there's always one or two.

I'm all for keeping life simple. If we make a success of this, that's more than enough for me.

This article originally appeared on just-drinks.