Colorado Sake is offering common equity at a pre-money valuation of $12 million. The business has a revenue-to-valuation multiple of around 20x based on 2020’s figures. That multiple is far higher than investors should expect for a startup in the alcohol industry. The average revenue multiple for alcohol companies is 3-5x. However, a $12 million valuation is reasonable in comparison to other early stage startups that are raising funds in the online private market. Balancing these factors together, Colorado Sake receives a middle-of-the-road price score.

The US alcohol market stood at $252.9 billion in 2019. Rice wines, which includes sake, are not a large part of that market. The rice wine market is valued at $1.4 billion and is growing only  2.01% each year. Demand for rice wine is waning somewhat in Asian countries, and the US is currently the world’s largest importer of sake. As such, Colorado Sake is not just competing with domestic brewers but also with Japanese brewers that face shrinking opportunities at home.

In sum, the market score for Colorado Sake is low. The rice wine market is small, and the growth rate of 2% is not encouraging, especially as Colorado Sake likely faces competition from domestic and foreign brands. These incumbents will make it difficult for Colorado Sake to capture a significant share of an already limited market.

Colorado Sake’s CEO and founder William Stuart has led the charge to legalize the sale of sake in Colorado. He and his fellow co-founder, Director of Sales Heather Dennis, discovered sake’s potential while working in Japanese eateries, including Matsuhisa Denver. The pair filed the paperwork to open a brewery of their own in 2016 but found t Colorado law had to change to allow for a domestic brewery. While the pair have overcome significant challenges in establishing the business, they appear to be new to the startup game and have no educational or business credentials.

Production Manager AmaDee Sims studied fermentation sciences and technology at Colorado State University. Prior to joining Colorado Sake as a brewer, she worked in the restaurant business at Famous Dave’s. Director of Digital Marketing Joshua McElreavy does have several years of experience in his field. He worked as the director of digital media for Denver Outfitters and as the head of production for CheshPo Creative. Sales Representative Missy Stewart has a somewhat longer resume than her colleagues. She holds a bachelor’s degree in political science from the University of North Florida. After getting her start in retail, she spent more than a decade in the restaurant business, barkeeping and filling sales and marketing roles.

Overall, there’s limited information on Colorado Sake’s leadership team, suggesting inexperience at the top.  As such, the overall team score is low.

While Colorado Sake had to change Colorado law to open its location, it’s hardly the first sake brewery in the US as a whole. Sake breweries dot the country. Most are located on the coasts, with a large number in California. Competing domestic breweries include Takara Sake USA, Setting Sun Sake Brewing Company, and Blue Current Sake. Colorado Sake also competes with US branches of Japanese breweries and supermarket brands imported from Japan. The company does, however, have strong reviews from its customers. Currently, the company has 808 total reviews on Google, resulting in a 5.0 star rating.

As a traditional beverage, sake isn’t going to be a very defensible product, and there’s no patent protection to be found here. However, Colorado Sake does set itself apart from traditional brewers by infusing its products with unique flavors. Its sake is also priced similarly to that of competitors. 

The high number of competitors paired with the low defensibility did stunt Colorado Sake’s differentiation score. The company score slightly below average in differentiation as a result.

Japanese rice wine and American-inspired flavoring may seem like a strange combination, but consumers are loving it. Colorado Sake brought in $598,172 in revenue last year, as it became profitable for the first time (a net income of $25,194). This was a significant increase over $295,965 in 2019 revenue and represents a 310% increase in sales over three years.

In addition to its 14,000-square foot location, Colorado Sake has made headway in distribution. Its sake is sold in Whole Foods, Total Wine, Natural Grocers, and other retail chains in Colorado. That said, its distribution has yet to reach outside the state, and the business has no partnerships to help it scale to its aspirational, nation-wide goals. Still, being profitable is a huge win for any startup and an indicator of future success.

The raise page suggested that a line of seltzer would be available in summer 2021. To date, no seltzers are available in the online store. This product launch is likely delayed, though when it does go live should contribute to revenue growth. Just a few weeks ago, Colorado Sake received some press regarding preparation for this product launch.

In sum, Colorado Sake’s performance score was the strongest across all five metrics and is driven by the profitability of the company. 

As it has grown profitable even in the midst of the COVID-19 pandemic, Colorado Sake is now immune to some of the usual startup risk. It is still worth observing the lack of educational and career credentials among the team. In addition, the startup has chosen a difficult market to corner. Sake is a fiercely competitive space where domestic and foreign brewers alike fight for control of an extremely limited market.

If Colorado Sake does want to grow beyond mere profitability to real success, it needs to scale geographically. Such scaling requires significant funding. Given Colorado Sake’s limited revenue by comparison to competitors, expanding will present a financial challenge to the business, which the funds from this raise may not fully cover.

Overall risk associated with the company was moderate. The score was driven primarily by funding risk, as Colorado Sake has no prior funding and is capital intensive. In sum, despite this early profitability, risk still exists due to the overwhelming need to expand geographically which will increase burn.

Although $600,000 in revenue is impressive, investors could hope for more from a startup that launched three years ago. Colorado Sake’s growth has been fairly slow, casting doubt on the possibility of nationwide expansion anytime soon. Currently, it looks likely that Colorado Sake will remain in its home state for some time. Its valuation is such that limited market access will probably not provide satisfactory returns to investors.

In addition, investors don’t have the helpful reassurance of a weathered and proven team to guide the business. Credentials don’t count for everything, but a group of young folks new to the startup game are not points in the business’s favor. The business’s current turn towards hard seltzers just means the startup is moving from one crowded market into another, although hard seltzer offers a larger market than sake.

Finally, and perhaps most importantly, there is social risk in Colorado’s Sake’s American-oriented marketing. Fusion of a traditional Japanese beverage with American experimentation could be viewed as carrying connotations of cultural appropriation. If Colorado Sake is not careful in its marketing, it could risk being branded as exploitative with dire commercial consequences.

Colorado Sake is meeting important milestones. The business became profitable last year during a pandemic that was devastating for the restaurant industry overall. It has generated significant traction, including the support of state legislators and some positive press. The brand does appear to be catching on, at least in its home state.

While it’s a divergence from tradition, Colorado Sake is somewhat unique in its targeted American branding. Investors may see Colorado Sake as making a new beverage category more accessible to a nation always on the lookout for novelty.

Finally, there are clear plans for product expansion in the near future, with a hard seltzer line planned for this year. The team has already established relationships with known wholesalers like Kroger to get existing products on the shelves. These existing relationships make the process of breaking into wholesale with new products a bit more streamlined.

Denver-based Colorado Sake is brewing traditional Japanese rice wines with an American twist. Its sake is made from locally-sourced ingredients, lightly pasteurized, and undiluted. The brand offers a range of four distinct flavors, all clearly labeled in English and infused with fresh new ingredients. In addition to the brick-and-mortar location, products can be found at local wholesalers to include Kroger and Whole Foods, as well as online. Since its initial opening in 2018, the brewery has expanded to a 14,000-square foot location and has become profitable.

While Colorado Sake has generated great traction within its own state and is distributed in major chains, it faces significant challenges. Thus far, its distribution has been limited to Colorado. It also faces significant competition from domestic and foreign breweries within a very limited market. To face these challenges and provide returns on somewhat unfavorable terms, Colorado Sake depends on a team that is unproven. In addition, some may consider giving sake an American twist to be a form of cultural appropriation. However, the business has differentiated its sake from existing products through new twists on traditional offerings. An investment in this startup is a bet on a new beverage category. Therefore, Colorado Sake is a Neutral Deal.

For questions regarding the KingsCrowd staff pick or ratings for this company, please reach out to support@kingscrowd.com.

Analysis written by Benjamin Potts.