“So You Want to Start a…” is a series sponsored by Upsourced Accounting as a way to highlight the business side of the local alcohol industry. Making the right business decisions can be the difference between success and failure. While beer, wine, and spirits are fun, a lot of work occurs behind the scenes in order to provide you with that early morning hangover.
Since Watershed’s inception in late 2010, it seems that every Columbus area bar and home bar is stocked with at least one of their four spirits. The distinct flavor of their gin is something I’ve been unable to match from another brand, the vodka is as solid as you’ll find, the bourbon barrel gin is an unexpectedly delicious unique experience, and the new bourbon is absolutely delicious. I sat down with Watershed owners Greg Lehman and Dave Rigo to learn more about their business.
What may people not realize about your business from the outside?
Greg: People see our stuff on the shelf and they’ll come up to us and say ‘You guys must being doing great, you have a really successful company.’ And Dave and I are looking at each other like – ‘It would be nice to take a paycheck.’ I’m glad that people see it like that. But it was almost three years of two guys working on it full-time to get to the point where we were taking some money. When we left our jobs, the idea was 6-12 months, we’ll be taking paychecks. It wasn’t really until the end of 2012 that we started being able to take money out.
Starting your own distillery seems incredibly risky, does it not?
Greg: We started out to prove concept with as little investment as possible. That’s relative, but we wanted to make sure we could do this. How do we do this as low risk as possible? Some people look at us and they think Dave and Greg are huge risk takers, but I don’t think we think about ourselves that way. We look at it the opposite; we say how do we take as much risk out of this as possible before we make this step. For us it was selling our first bottles in December of 2010, it took a long time to get to that point but we also had full time jobs up until that point, I didn’t leave my job until February 2011 and Dave didn’t leave his job until June 2011. We were working over 40 hours a week on Watershed, in addition to our regular jobs. We just decided that before we take the huge risk of leaving our jobs, we wanted to initially prove concept. We bought used, minimal equipment so we could get up and running and get product on the shelf, get a name for ourselves, and get through all the regulation.
What are the big steps in regard to regulation?
Greg: You have to have a permit from the federal government to turn the still on. You have to have a permit from the state to turn the still on. Then you have to have permits from the federal government to put a label on a bottle. The equipment needs to be ready before you get the still permits, so obviously there’s a lot of investment that you’ve done while you’re waiting.
Perhaps the trickier part on paper, and we had some investors that said they couldn’t invest because of this, because it’s an unknown. But once you get everything done you have to go to the State of Ohio and you have to sell them on the product. It was Dave and I with our bottle of gin and vodka, with the state, we showed them our product, let them taste the product, showed them our business plan, and they make the decision right there in that, not more than 15 minutes, yes or no.
Our fate decided in that one moment. We had been in sales for a long time and in high-pressure situations, but that was the most nervous I had been in a long, long time. We had all our investors money, our money, everything tied up in this. I say we weren’t big risk takers, that would seem risky and we were nervous. Yet we sat down with those guys before we had the presentation to make sure we had some comfort level with what those guys were doing at the state. So we were trying to make sure our stuff lined up well with that. Once you get past those steps, those are the major hurdles.
We get asked a lot, how many states are you in, how many states are you going to go to? Well the liquor laws are all made by each state individually, so for us it’s costly to do business in other states. Just like Ohio you have to go there and sell to a distributor or the state. For us, we haven’t really pushed on a lot of other states; it’s just been Ohio. The market is so big, we’re starting strong, and we want to do it right. We do sell in Kentucky, they have the ability to sell online, so we sell to the Party Source, and they sell it online.
How were you able to fund the business in order to get started?
Greg: We didn’t take any loans out. We had a unique approach. We went and learned how to make the spirits first. Then we started researching everything. We wrote a business plan. Every business plan there’s different levels of detail you go through. You can guess on a lot of stuff, but every assumption we took with our business plan, whether it was day one or year 3, we tried to be able to explain every single thing that led to that… We had this business plan put together and we were convinced that we could make it, we went out and we contacted some people within our network that were really successful at business or ran businesses and we said hey we have a business plan, we have an idea. Before we pitch it to true angel investors or people that will invest in our company, can we present it to you and get your feedback and let you shoot holes in our plan?
So we had a couple of those lined up. The first guy we went to and did that with, he really liked the plan. At the end of it he asked, “Hey is it possible for me to invest in this?” He had some real tough questions, but he said if you can answer those, I’d like to get involved. So we said yes, so we worked hard to answer those questions, what we thought may take 6-12 months took a couple months. And we’re sitting there with money in the bank, enough money to start it, a good business plan, people that believed in the business. Dave and I run the business, and we have a group of 8 different investors. They own part of the business but they’re not active.
What was it like to have to go out and sell the product?
Greg: It was going out to a lot of restaurants and letting them know what we’re doing. Letting them taste the product and asking if they’ll carry it. I think people appreciated that even though they had a lot of gin and vodkas behind the bar, they appreciated that we were taking the chance and doing this. It was something that we made and took the time to stop and tell them about it, and ask them for their support and their help. I think it went a long way and I think it’s still going a long way.
How does being in liquor stores work?
Greg: The state tells us which ones were going to be in. Once you’re in the system you can help work with stores and restaurants to expand your base. But the state really determines where you go. Even today we’re on the phone to see if we can be in a couple more stores. And the restaurants purchase from liquor stores in Ohio. So we try increasing interest by talking with restaurants directly.
What’s your distribution process like?
Greg: Dave and I drive booze to the warehouse, we always make sure there is booze in the warehouse. When there’s not much, we load it up in our SUVs and we drive it down there. We’re doing it every month, almost every week. It’s a lot of trips. There are four warehouses. Columbus, Cleveland, Cincinnati, Toledo. We pay to drop it off there, and we pay to store it in those warehouses. We try to make our trips worthwhile to places like Cleveland since we’re driving up to deliver product. So we’ll visit restaurants in the area if we’re in Cleveland. You don’t want to run out, because if you don’t have product in there, you don’t get a purchase order.
Explain to me your process in managing inventory and production.
Greg: At the beginning we just produced a bunch because we had more capacity then we needed. So we’d produce and then go sell. Very quickly we got to the point where we had to be producing more often. Every week we have to produce so much. Things are always going on in the back. There’s a lot more of me focusing on production and Dave focusing on sales. For a while there we were just focusing on production, trying to keep up with everything. And then we were like wait we’re not out selling, and we noticed it was affecting things. So now we’re trying to balance by dividing our roles and trying to get it to that next level. We have guys coming in and helping us with the production side. Because we both like to be out selling, and we both know that’s ultimately what’s going to be what drives the business.
How is it been challenging to grow the business in a way that makes sense?
Greg: Building a brand is tough because you don’t know what you’re going to sell next month. There’s a scared feeling every single day, like what if there is no PO that comes in today? It doesn’t matter what you’ve done last month, you still have to go out and make sure that the business is going to be there. That keeps us going.
Dave: When we sell an actual product versus a service, managing growth has some capital implications that you have to deal with and as a first time entrepreneur you don’t think necessarily think about. Luckily for us, we’ve been able to out sell those issues. We’ve sold more than we planned to. So the capital issues we’ve had to deal with have been okay because we’ve had enough cash coming through. The amounts of growth that you go through, a lot of people think, “Wow, you did double what you did last year, that’s amazing.” But the cash isn’t there necessarily. A lot of people think, “You must have made a lot of money.” We technically did, but a lot of it is just in equity or equipment.
How many hours a week are you guys working?
Greg: It changes weekly. An easy week for us is 50 hours. It’s rare that one of us is not working a least one-day a week and weekend. There are 2 or 3 late nights until 7-9, and then constantly working at home. It’s so easy to get here at 6 AM and leave at 6PM or get here at 7AM and leave at 7PM. That’s a 12 hour day right there. You do that 5 days a week and then come in a couple days on the weekend? All the sudden 70 hours isn’t that difficult. On average we’re probably 60 hours a week. But during more busy times like December, I felt like we worked the entire month of December and really November. Even if I go home and have dinner and hang out with the kids, it’s coming over here at 8:30 and getting some more stuff done.
What are your future plans?
Greg: I think we’ll definitely be looking to reinvest in the business over the next 2 years, 3 years, 5 years. There will be a lot more put back into the business. I think we’re going to continue to develop the markets for our four products, and push them. Right now we think we’ve just scratched the surface with those four. We love the idea of creating new products. They’re a couple we kick around, and we think we’re ready for, but short term over the next year or two, it will be these 4. There could be a limited release of some other products however. Long-term I’m not sure; it’s always tempting to make new products.
Biggest difference between starting a distillery and a brewery?
Greg: You can make money starting a brewery (laughs). We could make money faster. Maybe it’s a grass is greener scenario.
Dave: Breweries’ tax implications are not nearly what we have. When we talk about their products, they have less alcohol in them per volume. If you buy a bottle of vodka it will last a month or so. A case of beer may only last a weekend or two. When you think about it in those terms. We have to have a lot more restaurants and bars to make it worthwhile. A brewery could have 100 really solid bars and restaurants and be huge. We have to have a 1,000 bars and restaurants to reach a similar level. It’s more people to manage, more customers to manage, which means more time.
What are the biggest things you’ve learned through this – what type of advice would you give to someone else who want to do this?
Greg: Someone gave us advice right when we were starting. 1) Don’t get too high on the highs and don’t get to low on the lows. I remember coming out of a few focus group meetings on top of the world. We hadn’t made a dime yet. We were in debt. But we were on top of the world on this thing was going to be huge. And then you have moments where a certified letter comes in the mail and tells you to shut everything down. And you’re just sitting there and you can’t even talk, you don’t know what to say. Neither one of those moments was anywhere near as impactful as you thought in the moment. 2) Control your destiny or someone else will. There’s never going to be a good time to start a business, there’s always going to be excuses. When I still had my full time job I always thought oh man if I would have started a business back before I was married with kids, and before I bought a house, it would have been a lot easier. And that’s why I wasn’t doing it. Then I said to myself, why not? Why can’t I do this right now? Instead of “it can’t happen now.” I changed to, “If it’s going to happen now, how could it happen now? I’m going to try and make that happen.”
This is a guest post by Craig Baldwin. Craig is a former public accountant who’s currently 1/3 of Upsourced Accounting. He’s also a freelance writer, BBQ enthusiast, and gives golf lessons on the weekends.