Natural Foods Merchandiser

Reed's brews business with creative IPO

Chris Reed is a ginger evangelist. In the first few minutes of speaking to him, he lets you know that his company, Los Angeles-based Reed's Inc., has single-handedly brought a million pounds of ginger to the American diet in the last year. He tells stories of rock stars who insist on having his Ginger Brew backstage at their concerts—information that doesn't show up in the Backstage Pass section of The Smoking Gun. He talks about cancer patients who recover because drinking the brew enabled them to tolerate chemotherapy. And he says the 6,000 people who bought stock in his company last year by mailing in the tags he hung around the necks of his bottles are true believers, too. "They tend to buy the stock and hold it," he says.

It was an unusual way to launch an initial public offering, to be sure. But certainly no one expected Reed to adhere to convention. He traded in his career as a cryogenic engineer for a California hippie lifestyle years ago, and began brewing ales in his kitchen, convinced of ginger's healing properties. Today, he still looks the part, wearing tie-dyed T-shirts, sporting longish hair and peppering his speech with occasional F-bombs. And he still believes in ginger's—and other herbs'—power to heal. "I'm brewing fresh roots up, man! I'm using the whole stuff. And the herbs I add are doing things synergistically with the ginger," he says.

So, does selling stock mean he's sold out on his naturals values? Hardly. Reed envisions a time when Americans embrace ginger as enthusiastically as he does, consuming 10 or 20 times the amount they do now. And he may not be way off base: The National Cancer Institute is conducting clinical trials on the use of ginger—"instead of drugs!" Reed exclaims—during chemotherapy. But until recently, Reed's ginger ministry was limited. "I can't do it without money. If the world wants it, I'll do it, as long as they put their money in it."

Scoring from the public
The world spoke. Loudly. In 1999, Reed raised $900,000 through a SCOR, or small corporate offering registration. The procedure allows companies to sell shares without the usual federal scrutiny—and the associated costs of having audited financials —that accompanies most initial public offer?ings. The catch is that sales are limited to a maximum of $1 million.

The simplicity and lack of expense appealed to Reed, who admits, "We didn't really know what the heck we were doing." But Real Goods Trading raised money that way, and so did Ben & Jerry's. And those companies shared a common trait: intensely loyal consumers who want to be part of a business they believe in.

"My customers like me, too," Reed says. "I don't have their names and addresses, but I could surely get to them with a neck tag." And so a financing concept was born.

Reed says that when he saw how easy it was, he thought, "Why not do a real big public offering?" But just when he was ready, the market turned. The Sept. 11 terrorist attacks, followed by the Enron corporate scandal, and then the start of the Iraq war, soured him and many other Americans on IPOs. Finally, market conditions began to improve, and he decided the time was right to launch a full-blown IPO. In December 2006, he got approval from the Securities and Exchange Commission, and soon began hanging neck tags around his bottles again.

Not only did those 6,000 true believers buy in, but so did Wall Street. "Beverage stocks are hot," Reed says. This time he was able to get a syndicate of brokerage firms to sell his stock to institutional investors and market traders, who bought about 50 percent of the offering. Net sales were about $6.4 million.

"It's just amazing," Reed says, that more natural foods companies don't do the same thing. "Natural food is just starving for cash on the entrepreneurial level," he says. "Smaller companies could tap into their customer base and SCOR off of them."

Doing it the Franklin way
But why not just use more traditional means of capitalization? A brokerage firm, Reed says, "won't get into it unless you're gonna raise at least $5 million, and they won't put their people on it unless they really believe in it."

Venture capital, another popular financing avenue, is often off-limits to quirky naturals companies. "Venture deals are just really rough," Reed says. Venture capitalists like to talk to the management team, look into their background, examine their previous successes and failures, he says. "A lot of [naturals] companies don't fit the mold of your traditional Ivy League management team." That includes Reed's, which doesn't have a crew of C-level executives. "I'm not gonna put that kind of money into a management group until we're bigger," he explains.

For a smaller company, Reed says, it just makes more sense to rely on friends and family, or on a loyal fan base, for money. "This is the way you did it in America when Ben Franklin was hanging out. People would say, 'OK, we want to support this enterprise.'"

Reed says a SCOR is a great strategy for start-ups. "It's a radical approach after they've cashed out their credit cards and friends and family."

However, Reed cautions that going public might not be the best approach for other natural products companies. He says that because of some last-minute miscommunications with the Federal Trade Commission, his recent stock offering almost tanked. "It's not good to have a hiccup in the middle of an IPO. If it weren't for our product and our story being so strong, it would've killed us."

Reed enumerates other methods of raising capital, such as private placements with brokerages. Another option, he says, is a "reverse merger," in which a small company gets acquired by a publicly owned shell, and then that shell raises the money.

Moving far from gingerly
But for Reed, going public worked like a charm. His company's revenue has tripled since its first stock offering, to $10.5 million, he says. Reed's now produces six flavors of all-natural ales brewed from fresh ginger root, four flavors of ginger juice brews (lemon guava ginger juice, anyone?), ginger candy and ginger ice cream. The company also manufactures Virgil's root beer and cream sodas, as well as China Cola, a line of natural soft drinks infused with Chinese herbs. In April, Reed's announced expanded distribution in New Hampshire, Massachusetts, Oregon and Washington. "It's on fire," Reed says of his company.

And he hasn't felt any public backlash as a result of selling stock.

"Going public was my way of having my cake and eating it, too. Now I can do everything I want to do and more, and have some liquidity," he explains. And if the world stops putting its money behind ginger, Reed is ready with his next step: "I've always wanted to do wind energy." And now he knows how to finance it.

Reed thinks Wall Street is ready for more companies that are willing to be creative to raise money, and that just as he followed the examples of Real Goods and Ben & Jerry's, other companies could now follow on his coattails. "Sometimes," he says, "the world needs someone to step up."

Natural Foods Merchandiser volume XXVIII/number 7/p.17-19

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