When our other investment ideas take off... buy a vineyard?

The good news: there's still a lot of diversity in the land pricing within California. While we may never be able to get an acre in Napa, Central and San Joaquin valley still look affordable.



The best news: wine-producing land is even cheaper in some beautiful places like France and Oregon


Some other things to keep in mind:

• It takes ~5 years to convert unharvested land to productive vineyard
• Average returns on the sale of grapes alone is 4-5%
• "Most of the time investing in other alternatives is going to reap longer term returns that are higher," Kristein Nelson, head of Wealth Management at Bank of the West 

Sources:

• California Chapter of the American Society of Farm Managers & Rural Appraisers

• La Safer (cited in Forbes, French agricultural organization that tracks vineyard transactions)

• NYTimes

Wines in the Sky!

I'm heading to Hong Kong on an early spring break and thought it would be worth checking out the wine list for the flight since I lucked into an upgrade. I was curious whether the "up front" experience actually had decent wines and how different it was from economy class.

Amusingly the business class list included Wente Vineyard's 2016 Estate Grown Chardonnay [$25.99]. Rounding it out were a Charles & Charles Riseling (Washington) [$13.99], Colby Red Blend (CA) [$10], Chehalem Pinot Noir (OR) [$32.99] and an unnamed selection of champagnes. I was surprised by the range in price and am curious about the quality implications. It could just be the handy work of an expert somm who finds the value.


In contrast, on United's domestic economy flights you can purchase a 187.5mL bottle for $7.99. Brands are undisclosed online. On premium transcon flights (e.g., SF to BOS), choices are Redwood Vineyards Cabernet Sauvignon 2015  [$14.99 for 750mL] and Laboure Roi Chardonnay 2017 Vin de France [$4-9 for 750mL]. Again, huge variability, and likely awesome profit margins since I'm assuming United's scale does better than the typical BTG rule of thumb for their COGS.

In sum, it seems like you should go with the clear brand names and brace yourself for some high variability in these settings.

WineInStyle: Nearly Ten Years Later - It's Time to Sell

Eberhart should sell. Not only is the business itself in precarious financial condition with a lack of working capital, he would also get a reasonable payout. And perhaps most importantly, Eberhart's personal motivation seems to be waning and has a desire to spend more time in America with his family.

• Little cash on hand: it seems like a lot of us int he class are in agreement that without the necessary working capital to finance large orders like the Costco order, WineInStyle is in the unenviable position of taking out credit just to finance purchase orders. Further rounds of venture funding may also be difficult to raise at increasing valuations if the company, almost ten years into its existence, hasn't yet proved profitability.
• How much would he get? In 2005, the last round of investors invested $2M for a post-money valuation of $10M. The only information we have in the case about Eberhart's likely equity stake is that he put in an initial $135k out of the initial funding of $250k. Let's assume generously that he may have up to 40% of the equity since he does not have a co-founder and invested heavily himself at the outset. 
• Assuming the new group of investors is buying a controlling stake at the prior year's valuation of $10M, they might be giving the company a cash infusion of 60%*10M = $6M. Eberhart would then be entitled to $2.4M - which roughly translates to $267k per year over the 9 years he worked on WineInStyle full time. 
• Personal motivation: Eberhart gave it a great run, but his heart isn't in it anymore. Having a family photo drawn without you in it is brutal! 

Lessons learned

One thing I loved about this class is that we didn't just learn about wine, we also learned lessons that are broadly applicable to business and life. Here's a wrap-up of ten of the most important things (both non-wine and wine) I intend to remember:

• We're underpaid early in our careers (and overpaid late in our careers), so now is the time to take risks and gamble for a big payoff
• Your family and non-work life are a valid, important part of career decisions (side note: I loved that several of our cases included these details when framing the problem)
• Investors might care about financial returns less if we could send them great bottles of wine with their dividends!
• When you get your first term sheet, call the Topol brothers for help
• Most wineries don't turn an economic profit -- and profit motives may well push wineries to lower rather than raise quality
• That $6 glass of wine you got in a restaurant came from a ~$6 bottle. If you want slightly less absurd margins, you should buy by the bottle
• For value for money, buy the retailer house label brands
• Red Burgundy is Pinot noir; white Burgundy is Chardonnay
• The Bordeaux varietals are Cabernet Sauvignon, Merlot, Cabernet Franc, Malbec, and Petit Verdot (bonus: Carménère)
• It's up to us (millennials) to drink the wine industry back to growth

Thanks for a great quarter! I've really enjoyed talking strategy and drinking wine with all of you!