Scotty’s Brewhouse in Indiana has become the first intrastate crowdfunding exit.
After raising money through Indiana’s intrastate crowdfunding exemption in 2014, Scotty’s Brewhouse, a chain of 18 brewpubs founded 20 years ago, recently agreed to be acquired by a private equity firm for an undisclosed sum. Scotty’s raised just a small amount of its total funding over the years through crowdfunding. And the offering, on Localstake, was a revenue-sharing deal— a loan with variable interest payments—so the investors did not have an equity stake in the company. Still, it is one of the rare “exits” for the young but growing crowdfunding field.
“We’re excited about being able to pay our Localstake investors as well as the silent investors that have been with me since 1996,” says Scott Wise, the founder of the chain (pictured above).
Scott Wise opened his first brewpub at the age of 22 near Ball State University in Muncie, Indiana. The concept was simple: craft beer and burgers, served up with a smile. It caught on, and Wise was soon opening more brewpubs—including Thr3e Wise Men Brewing and Scotty’s Dawghouse—in other Indiana college towns. Wise took an “anti-chain” approach, integrating his restaurants into the fabric of each community.
When Wise needed to remodel one of his brewpubs in Indianapolis, he turned to a brand new form of community-based funding: Indiana’s intrastate exemption had just gone into effect six months earlier, in July 2014.
One of Wise’s vendors, Moody’s Butcher Shop, had raised money on Indianapolis-based crowdfunding platform Localstake using a different federal exemption, and Wise figured he’d give it a try. “I’m a techie guy, I thought it would be a neat thing to try,” he says.
He offered investors a revenue-sharing deal, a loan that would be paid back as a percent of revenue until investors received 1.5 times their principal investment. In addition to the financial return, Wise offered discounts on food and even an opportunity to join him at a Pacers game. The campaign raised more than $380,000 from 116 small investors.
Wise discovered he gained more than investors; he now had an army of loyal customers. “I would see investors when I walked through the restaurant,” he says. “They would write and say ‘hey, I was there and the hand dryer wasn’t working’—it’s like more people keeping an eye on things for you.”
Twenty years after opening his first brewpub and 17 restaurants later, Wise decided it was time for a partner who could help him scale. But not just any partner would do. “There were certain things that were non-negotiable,” he says.
That including keeping his 2,000 employees in place as well as the core principals and values at the heart of the business. Scotty’s is active in local charities, collecting toys and personally delivering them to children in local hospitals, and feeding the homeless at Thanksgiving—last year it fed 1,000.
In 2014, after suffering a health scare, Wise made a commitment to hire people with disabilities—or special abilities, as he prefers to say. What started as an effort to give back has deepened into something much more powerful. “There was such an incredible thing that happened in our company. I saw all these things happening in my team, kind of a protective big brother, big sister phenomenon,” he explains. “It had a ripple effect not just in myself but across the company.”
Today, 7 percent of his workforce has special abilities. Wise hopes to be over 10 percent by the end of year.
With those values firmly in mind, Wise turned away acquisition offers. But after meeting with Arizona-based Due North Holdings, he decided he had found his ideal partner.
The principals of Due North had experience packaging and scaling chains such as Cold Stone Creamery and then taking them public, as they did with Kahala Corp. They were looking to once again assemble a portfolio of growing brands and repeat the process. Most important, they not only agreed to all of Wise’s requirements, they embraced them.
The goal is to take Scotty’s—which is on track to do $50 million in sales this year—from 18 restaurants today to over 150, says Wise, who has agreed to stay on for at least five years. The deal closed on December 1, and they’re already looking at new Scotty’s locations in Arizona, Florida, Illinois and Ohio. After that, Due North will likely take its collection of brands, which include Sobas and NCounter in addition to Scotty’s, public through an IPO.
Because Scotty’s intrastate offering on Localstake offering was a revenue-sharing deal, those investors do not have an equity stake in company, which would likely have resulted in big gains. However, they were paid back in less than two years, generating a 50% return on their investment. And crowdfunding investors often have motivations beyond financial return, such as having a brewpub to call their own.
Moreover, as Localstake cofounder Ryan Flynn points out, the deal should give comfort to entrepreneurs who fear that crowdfunding will scare off future investors. “This is a data point showing that taking on capital in this way doesn’t have to preclude the business from closing on other forms of capital or achieving an exit,” says Flynn.
Wise and his new partners will maintain the anti-chain approach. Writing on Facebook about the decision to sell, Wise wrote: “That’s what I’ve always wanted to drive us to be. Positioned for growth with structure, stability and now incredible expertise from our new partners at Due North. But, remain LOCAL with a feel of ‘mom and pop’ that takes on the characteristics of the community in which we reside and give back to and likewise, supports us. That’s what we will have moving forward.”
He added: “I want to make Indiana proud when a customer walks into a Scotty’s Brewhouse in Denver, Charlotte, Tampa or Scottsdale and we can all say, ‘Indiana born, raised and proud.’ ”