How This Entrepreneur Started A $2M Craft Brewery

Diego Benitez

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Published: March 14th, 2019

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Diego Benitez

Founder, Progress Brewing

$120K

revenue/mo

Founders

Employees

Progress Brewing

www.progress-brewing.com

from Los Angeles, California, USA

started August 2013

$120,000

revenue/mo

Founders

Employees

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Hello! Who are you and what business did you start?

My name is Diego Benitez and I run Progress Brewing Progress brews and sells craft beer in a wide variety of styles exclusively at its tasting room in the city of South El Monte, approximately 12 miles East of Downtown Los Angeles.

We usually have close to 30 beers on tap including lagers, belgians, IPAs, stouts, sours - light and dark, low and high alcohol, something for everyone. We sell tasters (4oz for $2-$3) pints and tulips (16, 12 oz for $4-$6) to drink at the tasting room, and crowlers (32oz cans), grumblers (32 oz glass), and growlers (64 oz glass) to go.

We sell the most of our Blonde ale - a Kölsch-inspired beer - and Cavalry - a well balanced Double IPA. We opened our doors in August 2013 and we saw continuous growth of 12%~14% every month for 16 months straight.

We hope to break $2M revenue in 2019.

how-this-entrepreneur-started-a-2m-craft-brewery

What's your backstory and how did you come up with the idea?

I graduated with a PhD in chemistry in 2005 and after working in academia for a few years as a nanotechnology researcher, I joined a small angel venture investment firm as a technology analyst.

One option was to get a regular job, or… we could start a brewery.

I participated in the founding of a few angel-backed companies and as the venture fund dried up, I joined one of the portfolio companies as Chief Technology Officer. The company, Amicrobe, Inc. is focused on developing biomaterials to address antibiotic resistance.

With the help of another chemist, Kevin Ogilby, we revamped and scaled-up peptide synthesis to manufacture Amicrobe’s product candidates. Synthetic peptide chemistry is not a 9-5 thing, so we would have long schedules with long breaks in between.

Kevin and I would take several-hour-long lunches at a local Belgian Beer spot (Lucky Baldwins in Pasadena) and again, as the funds dried up, we started thinking about potential next steps.

One option was to get a regular job, or… we could start a brewery.

I had homebrewed for many years before, and did not take much convincing to get Kevin involved. We started home brewing together almost every Saturday and studying the Beer Judge Certification Program curriculum - this involved buying several examples of every beer style on earth (hundreds of different styles) and do tasting studies and quiz each other blind, hard work, I know. This lasted approximately 2 years.

At this point, the company we worked for decided to move to San Diego to start pre-clinical studies on the drug candidates. We used this opportunity to visit as many San Diego Breweries as we could, taking notes of what we liked and what we did not like.

This was great research on equipment, market, typical do’s and don'ts of startup breweries. After helping the company move to San Diego and transfering all our knowledge to a contract manufacturer, Kevin and I returned to Los Angeles focused on starting a brewery.

We visited many cities in Los Angeles County and settled on business-friendly South El Monte. South El Monte had the cheapest rents, ample parking, lots of residential areas around, and no breweries within 10ish miles. We had saved as much as we could from our salaries and took the plunge in July 2012 by signing a lease on a building with a little more than $100K in cash and $50K in credit card room of startup capital.

While waiting for permit approvals, we did a lot of small-scale brewing, and had parties to taste test beers we made. We saw that our chemistry backgrounds, and our drug manufacturing experience came in very useful in the design and early running of the brewery.

We especially valued the year-and-a-half long weekly beer blind tastings and study sessions to develop our general beer knowledge and palate. Being able to tell apart small differences in taste allowed us to ensure consistency and repeatability in our brewing process, key factors in developing beers as actual products.

At this point, we had settled on a few recipes that people really liked. I can’t stress enough how valuable it was to know everything we could about the brewing process and what others had gone through to open and successfully run a microbrewery.

Take us through the process of designing, prototyping, and manufacturing your first product.

Opening the brewery required federal, state, county, and city approvals.

Most government offices we visited would say “A BREWERY? NO YOU CANNOT DO THAT!” We were one of the few first microbreweries in Los Angeles County and we believed government officials thought we wanted to open a huge Budweiser-seized operation. We decided to print, highlight and show them the provisions in the law that allowed a small microbrewery.

We made sure any permit application forms were filled out absolutely perfectly (basically requiring them to do the least work possible), heavily downplaying the size of our brewery. Once we figured this out, it was a breeze. Government officials became very very helpful and we understood that 99% of their time is spent answering the most basic questions, and correcting people’s mistakes on forms - very frustrating.

Our landlord was great help too. He lives in Colorado, so he knew what we were talking about, but other than that, most people thought we were trying to do something illegal or impossible. Knowing every detail of the legal intricacies and regulatory challenges of opening a brewery allowed us to go around the sea of negativity and get all of our approvals in a relatively short time.

Our research in San Diego strongly suggested that we must be able to make batches of at least 300 gallons of beer to be profitable (economies of scale play a very important role in beer production). We had VERY limited capital for a production brewery of this size, so we had to cut corners and use or develop new skills. We researched used equipment and it was well beyond our budget.

For example, we could not afford a building contractor for very simple tenant improvements, so I studied for the California Contractor License over a few weeks and passed the exam.

We also used a local welder to fabricate our own brewing equipment. It was not the most efficient or prettiest, but it worked well for less than 10% of the cost of a used system.

In June 2013, almost a year after we rented the space, we started doing test brews in our production brewhouse of our favorite homebrew recipes.

Describe the process of launching the business.

We opened the doors of our tasting room on August 30th 2013 with 2 beers: a blonde and an amber.

I believe products are not isolated things that people pay for, I believe customers pay for the value you create while satisfying a need or (hopefully) easing a pain.

In the beginning, adapting our small-scale homebrew recipes was challenging. Going from 5 or 10 gallons to 300 gallon batches changed the flavor dramatically. We knew the utilization of some darker grain and hops was higher in larger batches, but we did not know exactly how much. We made some initial corrections and batch after batch, we got closer and closer to what we wanted.

Learning how to use the equipment we had designed and built was another concurrent challenge. The advantage was that we could modify and install new features as we needed. If we needed a new valve somewhere, we could just add it in between batches. During the first few months, we tweaked our equipment, fine tuned our initial recipes and created new ones.

We owe to our scientific backgrounds and drug pilot manufacturing experience us being used to changing 1 variable at a time in small increments and then observing and writing down changes. Being able to taste and assess these changes requires very good batch-to-batch consistency and reproducibility because if the process is all over the place, then recipe modifications could fall within the variability of the process.

We used an IKEA table as a bar and sold $40 worth of beer on our first day open. We had spent all of our startup capital, we had maxed out all of our credit cards, and we were really low on working capital. We got ourselves into a financial corner where we had to sell more beer before we could purchase grain to make more beer. This made us realize how important working capital is!

We had made a financial model with 3 scenarios: best, realistic, and barely alive. We had sales milestones that we tracked to replenish our working capital, make rent, and break even. By the end of the first weekend, we had met our break even point, and by the second week, it was clear we were ahead of our projected best case scenario. We also met some of our personal milestones like “our first drunk” - we were happy to see that someone would like our beer enough to get drunk on it - now we realize it wasn't a very ambitious milestone.

We started planning a “Grand Opening” party, but we were in constant catch-up mode with production so we never got to do it - actually, we have never had an anniversary party either, almost five years after opening. We soon realized we had severely underestimated our beer sales and had to quickly increase our production. This meant we had to use every available penny and reinvest it to fund our growth. This was very painful because a small brewery is a very capital intensive business and there is a long lead time from ordering and paying for equipment to making and selling beer to recoup the investment. We managed to get out of expensive credit card debt purely on cash flow and slowly build up our production capacity. However, we were constantly running out of popular beers, and we had to live VERY frugally.

Since launch, what has worked to attract and retain customers?

We have spent probably less than $1000 on advertising since we opened, and we have been operating virtually at capacity. We have instead focused on applying our core values to every decision we make.

We want to have an inviting retail area (tasting room), offer a very high value of quality non-hype beer, and provide the best customer service we can. This ensures that we thrive on word of mouth, have a high customer retention rate, maintain a positive Yelp and Google profiles, and make regulars want to keep coming back for a relaxing time with tasty brews.

We have expanded to 4 contiguous buildings, totalling approximately 23,000 sq ft of warehouse space. This allowed us to open a larger tasting room with an outdoors patio. The retail area went from 600 sq ft to 5500 sq ft. This enabled us to double our revenue from 2016 to 2018 - around 40% CAGR.

Notably, we have gotten a good share of free advertisement. KCET wrote an article on us focusing on the South El Monte community and how we have catered to the locals. ABC7 also did a short TV segment on latinos brewing beer in Los Angeles and they highlighted Progress Brewing (links below). Probably the most unexpected exposure was when we had a 3-second long take shown during the 2018 Oscars.

We believe that the craft beer space has become incredibly competitive, saturated, and ultra-differentiated, to the point that we have had to augment our product with the experience associated with coming to our tasting room, effectively transitioning from a product business to more of a service business. Not that our beer selection and quality became unimportant, but the experience of having a beer at our tasting room became just as important. For example, we have vintage arcade games that people can play, we also have an electronic jukebox, a large patio with hops growing.

Therefore, the same amount of effort invested in making the best beers possible, also needs to be applied to make people enjoy their time here. This way, we can sell our beer with DTC retail margins (50% operating margin) and customers get to have the experience for free.

One other way of differentiating our product has been by having a barrel program. I am not entirely sure, but I think we may have one of the largest barrel programs in Los Angeles County. Currently we have 300 barrels and a 1000 gallon foeder (a large wooden barrel) all full of beer aging. Our oldest beer is close to 5 years old, although we usually age beers for 12~18 months. Especially, we have had great success with our sour program. We make around a dozen different sour beers and release them at different points in the year. We name our sour beers with first names of artists - Vincent, Leonardo, Frida. We also have dark and strong barrel aged beer (stouts, porters, doppelbocks, belgians) but these are more standard in the modern craft beer world.

We have looked at other channels, especially retail sale of packaged beer (bottles and cans) and keg distribution, but the costs and margins do not make sense, at least while we are still moving close to our production capacity in our highest margin channel.

Access to capital to expand and be able to supply other channels is a big issue, we estimate that we would have to grow by 10X to achieve a 2X increase in Net Income. There are other less expensive opportunities out there.

How are you doing today and what does the future look like?

We broke even within the first couple of weeks, and we could have paid back the initial investment within the first few months of operations.

However, the rate of reinvestment has been very high and we have not seen any significant net distributions. Last year, we decided to look beyond brewing and into expanding our retail channel by opening a bar and (soon) making our own distilled spirits. To supply the needs of the bar and the adjacent distillery, we improved the capabilities of our brewhouse by installing a new, semi-automated, larger brewing system that should be able to keep up with approximately 5X demand. We paid for this in part with cash, and with a Square loan.

We tried to get a secured equipment loan, but we could not find anything that was simple and cheap to offset the slightly more expensive Square loan quasi-secured with our credit card processing income. Working capital suffered a little during the month we used all our liquid cash and we got an Intuit loan. This was one of the easiest loans to get - a loan officer looks at your Quickbooks file and decides based on that.

We received a $25,000 deposit to our bank account in a couple of days after an easy online application. These are not the cheapest loans available, but they were the easiest to get. These loans work on a flat rate that works out to be around 15% APR if paid within the predetermined term. Not the worst for an incredibly easy to get unsecured loan.

As of now, Progress has 7 full-time employees, and a few part-time people we have on call for when things get crazy. Managing people has been the real challenge. It was easier when we had only 3 or 4 employees, but after 5 employees, there starts to be culture nuclei and more personal issues occur.

We try to have a very horizontal management structure, and promote and support people who take the initiative to make things better. We have seen that most employees still like being told what to do, so we have found a few that work well in a team setting, have common sense and problem solving skills, and possess good decision making abilities.

If we have learned anything about having employees, it is:

If it is not a good fit and it is not working out, cut ties sooner than later, and
If you find a quality person, value their contributions, pay them well and keep them happy.

Our employees make about double than the industry average for a similar position, which we believe has made our operation “cheaper” to run: less turnover, less absenteeism, higher strategy buy-in, more reliance with higher responsibilities, and most importantly: happier staff.

Through starting the business, have you learned anything particularly helpful or advantageous?

I believe products are not isolated things that people pay for, I believe customers pay for the value you create while satisfying a need or (hopefully) easing a pain.

Therefore, we try to figure out the real reason why people come to our tasting room and pay us for our beer, and we try to do more of that and better all the time. Many entrepreneurs are very product focused without thinking about the market. Some spend countless hours and large amounts of capital making a great gadget that nobody wants, or, sadly, that not enough people know they want. Therefore, we are conscious that great beer alone would not make a great business and we need to figure out the specific reasons why people come visit us and not just buy any of the other great beers out there at a supermarket and drink it at home.

One of my business mentors always told me, “Know when to stop working for the business and start working on the business.” This was key and now we regret not hiring good employees earlier. We are still heavily involved with everything that happens at the brewery and at the tasting room, but we found out that trying to do everything ourselves to save $1, ended up costing us $5.

Looking back, I see that we put ourselves through crazy financial risk - many situations where we did not have more than $20 liquid - and under intense personal pressure - working 12-14 hours every day for close to 3 years without taking a single day off. We are now smarter and got an equity partner to open the new bar with proper funding. We learned not to be scared of giving up equity and focused on picking the right partner, which adds more value than money alone. A well connected (preferably wealthy) partner will be your biggest advocate and promoter, many times opening doors to unimaginable opportunities: 100% of $1 is less than 50% of $10.

We also learned not to be afraid to say no to projects that did not pay us back enough profit. Many people do not realize that if you sell your products or services for less than you should, you erode the value of your business, especially when you are close to capacity and adding capacity is expensive. In finance terms, only take on projects that earn you at least your cost of capital.

What platform/tools do you use for your business?

As scientists, we are very used to oldschool paper and Excel. We have a series of spreadsheets that track every beer we have ever made, costs, volume produced, and how long until it ran out. We also have a set of paper notebooks with all our process information from brewing sessions.

Don’t launch a prototype, thinking it is an MVP - there is a huge divide between a prototype and a product. Most consumers will only give you a few chances to test your product, so make sure it looks more like a product than a prototype.

We have a standard format of note taking that we use as if it were a chemical reaction where we record temperatures and other important brewing parameters. This is then compared to sales data and direct feedback from us, employees, and customers to decide if we need to modify the recipe, brew it again soon, or retire it.

We use Quickbooks to track our basic financial and tax accounting, but we use Excel data from our managerial accounting to populate COGS and inventory data on Quickbooks.

For marketing, we use mostly informational content on Instagram and Facebook. We have tried to boost posts, but have not seen much difference, especially with Facebook. Instagram has a much better ROI, but because our customers have to drive and come to our retail location, there is only so much social media can do.

What have been the most influential books, podcasts, or other resources?

I am a quarter away from completing the UCLA Anderson MBA program and will graduate in June. This has been life-changing, and by far the most influential experience I have had in my business career.

I think I had good business intuition before, but now I can explain exactly the reason why something is a good or bad idea. I have focused my MBA on marketing, finance, and entrepreneurship.

Looking back, I wish I had skipped the entrepreneurship classes because launching a business is something you just do and there is really not much learning to it. Entrepreneurship is the application of strategy, finance, marketing, and a lot of management to an early-stage, high-growth venture. Most of the skills needed are how to tolerate stress, lack of sleep, uncertainty, and not fall apart working very long hours, on anything and everything needed. Marketing classes have been incredibly helpful because it has brought to my attention how critically important and powerful it is to be able to identify your best customer and target the right segment.

The MBA has been a significant investment of time and money, but the people I have met and relationships I have made (professional and personal) are invaluable and for the most part overshadow the amount of classroom learning I have obtained. The value of MBA degrees has become very controversial. I believe there is an enormous range of benefits one can obtain from an MBA (or any degree) and it has more to do with how much you extract out of it. I do believe the value tails off exponentially if you do not engage and cultivate a great network, especially in the not-top-tier schools.

Learning some accounting, especially managerial cost accounting, has also been great help.

Farhat Accounting Lectures https://farhatlectures.com/
Books on Blue Ocean Strategy
Crossing the Chasm. Marketing and Selling Technology Projects to Mainstream Customers by Geoffrey Moore
Positioning. The battle for your mind by Ries and Trout
Never Split the Difference. Negotiate as if your life depended on it by Chris Voss

Advice for other entrepreneurs who want to get started or are just starting out?

Make sure that whatever you create is what other people want. Make sure enough people will pay you well for the value you create with your product or service.

Don’t launch a prototype, thinking it is an MVP - there is a huge divide between a prototype and a product. Most consumers will only give you a few chances to test your product, so make sure it looks more like a product than a prototype. Make it easy for people to adopt - most people are change-averse, and create obvious value - there needs to be something easy to identify that consumers will value.

Never stop improving your market position by: