By Elijah Brumback Friday, May 22nd, 2015

Telegraph Brewery founder and CEO Brian Thompson says quality and business savy are the keys to success as a craft beer maker. (Nik Blaskovich Photo)

Firestone Walker Brewing Co.’s flagship beer, 805, is the best thing that ever happened to Figueroa Mountain Brewing Co., according to Jaime Deitenhofer, founder of the growing Buellton-based label.

The adoption of 805 by traditional macro-beer drinkers as their go-to adult beverage has given Fig Mountain and other startup craft breweries in the region pretty big coattails to ride on, he said, but that doesn’t mean everyone that gets into the business is going to be successful.

“Looking at the marketplace, there is still a huge amount of Coors Light and Budweiser drinkers, all those people are still possible converts to craft beer,” Deitenhofer said. “We’re seeing that now and I think that will slowly continue to happen. There are a lot of gateway beers that are bringing people over.”

However, the industry isn’t all sunshine and hops. Craft brewing is a capital intensive manufacturing business and competing beyond the brew pub market for shelf space in grocery stores and other chains is expected to get messy within the next five years as the number of individual labels keeps growing.

Deitenhofer was just one of four panelists at a recent StartupSB event, the focus of which was the developing business of craft brewing in the region. He was joined by Brian Thompson, founder and CEO of Santa Barbara-based Telegraph Brewing, James Burge, owner and brewmaster of newly-formed Pure Order Brewing Co., and Jeff Jordano, president of Santa Barbara-based distributor Pacific Beverage Co.

While all the brewers on the panel were positive on growth of the regional market — craft brewing is still a very territorial industry — the business of craft brewing today isn’t as lighthearted an endeavor as many prospective homebrewers might believe. The takeaway: craft brewing at scale isn’t a hobby, it’s manufacturing and the business model has to be just as solid as the passion.

“There are a lot of people getting into the business,” Deitenhofer said, “but at the last Great American Beer Festival, Paul Gatza, director of the Brewers Association, said after traveling the U.S. and tasting a lot of the startup breweries out there; he was disappointed as far as the quality.”

According to Gatza, there were a lot of people just pushing out liquid because they wanted to get a business open.

“You have to focus on the quality and don’t rush into it,” Deitenhofer said. “Make sure your liquid is the best thing you can possibly put out. Ask a lot questions and never be in a rush to get there because that will put you out of business real quick.”

With the craft brewing landscape becoming more populated; quality, differentiation, branding and securing the right capital, the panel agreed, are the most important areas to develop.

“Throwing lemon grass and ginger and basil into your beer isn’t necessarily a differentiating factor, so in my mind it really comes down to the quality of your product,” said Telegraph’s Thompson. “If you’re making interesting, unique, well-made beers then you’re probably gonna succeed. But if you’re playing the ‘me too’ game, — and this is the same thing with industries like software and everything else — if you’re trying to chase Candy Crush with your app you’re probably not going to succeed. The same goes for beer, you have to find you own path.”

Telegraph, which produces about 3,000 barrels annually, is still a burgeoning brand and is currently raising another $500,000 to expand its facility in Santa Barbara’s Funk Zone. The brewer also recently redesigned its labels and marketing materials, and is looking to start canning some of its mainstay beers. Thompson, who has a background in business and briefly worked on Wall Street as analyst, said the company is targeting roughly 25-30 percent growth per year.

As Telegraph positions to grow, Thompson said his past experience is what gives him a lot of confidence to pursue the retail route, whereas many new entrants to the industry will opt for the brewpub realm — a less risky prospect with opportunity for earlier cash flow that avoids shelf competition with other labels.

“Inevitably this is a very capital intensive business, and when I sit down with potential investors or bankers, they’re speaking a financial language and I think its hard to convince somebody to invest in me or loan to me or the company if I can’t have a conversation at their level,” Thompson said. “I think a business background opened doors that probably aren’t open to someone who is just a really passionate homebrewer. That guy might be able to make great beer, but he might not be able to run a business.”

As the craft beer market progresses, the entrance of private equity has already reared its head. Mergers and acquisition activity is also working through the ranks as bigger craft labels and major labels like Anheuser-Busch offer buy out deals.

Whether there is a craft beer industry bubble on the horizon, the answer is more nuanced than boom and bust. The craft beer industry in general has plenty of capacity and brewpubs have an almost unlimited runway. The bubble is in certain specialty beers like Anheuser-Busch’s popular Belgian wheat beer Shock Top and the similarly-styled Miller-Coors owned Blue Moon brand.

“Those types of beers are filling the void that a lot of craft brewers don’t have the capacity to fill,” said Pure Order’s Burge. “I think we’ll start to see those types of markets close in and craft beer going in instead.”