Start-ups have ‘no fear’ of Diageo connection

Frank Lampen, co-founder of Diageo’s Distill Ventures investment arm, talks to SB about the challenge of maintaining a hotbed of creativity inside the world’s largest drinks group.

Frank Lampen, co-founder and chief tasting officer at Distill Ventures

*This feature was first published in the February 2016 issue of The Spirits Business magazine

One need only skim headline news stories to see that the spirits industry has witnessed an extraordinary number of acquisitions over the past year or so. In particular, smaller brands are being swallowed whole by large multinationals at a rate of knots. While Bacardi, Gruppo Campari and a number of mid-tier companies have entered into high-profile takeover deals with independent distilleries, Diageo has been quietly making waves in the indie sector with a unique and “disruptive” investment arm, Distill Ventures.

In 2013, Diageo partnered with London-based “innovation specialist” Independents United to launch the initiative, which offers investment and mentoring services to both fledgling and established independent spirits brands, allowing them to rapidly accelerate growth. Distill Ventures claims to ease financial constraints in a brand’s formative years, at the same time giving them access to Diageo’s expertise.

Global expansion 

While Distill Ventures initially offered £200,000 to no more than five European start-ups, the business has expanded across the globe with investments totalling £10m pledges each year. Diageo is the sole investor in the brands Distill Ventures supports and acquires a minority stake in them, with a view of buying the brands outright in the future. Until they are fully acquired, the brands operate independently.

Frank Lampen, co-founder and chief tasting officer at Distill Ventures, has steered the growth and direction of the company with its CEO Shilen Patel and COO Dan Gasper. He says of the company’s genesis: “We started the conversation with Diageo and asked if the company would be open to very new world innovations. We had our first serious discussion in January 2013 and we started looking for our first investments in July that year. So it was a very quick turnaround and I think this was because there was a real appetite on Diageo’s side to engage with entrepreneurs.”

Soon after launching in Europe, Distill Ventures – which offers ‘Seed’ programmes for new brands and ‘Growth’ programmes for established brands – expanded its business to Asia. At the start of this year, the company began its search for spirits innovation in the US. Lampen claims that while Distill Ventures has not disclosed the precise number of brands it has invested in, these are now in double digits.

Diageo has invested in Danish whisky brand Stauning through Distill Ventures

Entrepreneur engagement

“We haven’t done any North American investments yet, but this should change in the first half of this year and will be our main focus over the next 12 months,” says Lampen. The unit has so far committed more than £20m and is “finding more than enough opportunities” to fulfil its investment ambitions each year. Lampen adds: “One of the major questions for us when we first started out was ‘Will entrepreneurs want to engage with us?’ But we got a very strong response straight away. We thought we’d have to work harder to build our profile and credibility.”

December 2015 proved to be one of the most significant months in Distill Ventures’ short history as the company publicly revealed two of its largest investments to date. Within the space of just one week, the company announced that it was to give Danish whisky distillery Stauning £10m to massively expand its capacity and also invested an undisclosed amount in Australian whisky brand Starward, allowing it to similarly grow production.

World whisky innovation

“The latest wave of innovation we are seeing really comes from whisky produced outside the heartland of Scotland,” believes Lampen. “Often in those new places you find entrepreneurs who take something that is unique about their location and introduce it to the whisky-making process. For example, Starward represents a new area on the whisky map, not only being from Australia, but also in terms of flavour. It’s exciting to come to a category with a blank slate; this constitutes a good opportunity for us.”

It’s no secret that in Diageo’s portfolio is a demonstrable lack of world whisky brands. The goliath’s Crown Royal Canadian whisky and McDowell’s No. 1 Indian whisky are leaders in their respective categories, but Diageo has lagged behind rivals in the American, Irish and other world whisky sectors. Lampen claims that while Diageo’s executives offer insight with regards to which trends they believe have legs, Distill Ventures has the freedom to explore “wild card” opportunities.

“Distill Ventures allows Diageo to, in a pretty low-risk way, take some bets on things that are outside the corporate attitude, but which might become really big,” he says.

“On the one hand we are very strategically focused, but on the other we also look into those wild cards. Fundamentally, what all of our investments have in common is having an amazing team at their hearts.”

Distill Ventures has only disclosed a small number of the brands it has invested in

‘No fear of Diageo connection’

Despite investing in at least 10 brands so far, Distill Ventures rarely discloses the names of its funding recipients. In addition to Stauning and Starward, the only other brand the company has publicly announced investment in is German vermouth Belsazar. Are these independent, heritage-driven spirits worried about compromising their identity through association with the maker of Johnnie Walker Scotch whisky and Smirnoff vodka, as seen in the recent spate of ‘craft’ beer buyouts?

“We let the entrepreneurs control their own narrative, so if they want to announce they are part of the programme and who their investors are, that’s fine and we will coordinate with them,” claims Lampen, “but we won’t do it if they don’t want it to be part of their message.

“I don’t think these entrepreneurs have a fear of their connection with Diageo; it’s more they have a fear of getting sidetracked into talking about things that are not what they really want to discuss, which is their amazing product. I think the difference between what we are doing and those craft beers is that in some cases those brands have been bought out entirely, but Diageo only takes a minority stake through Distill Ventures.”

Exit strategies

Nevertheless, each brand that receives funding is locked into an agreement to eventually become totally owned by Diageo, as long as certain targets are met. Terms of the programme specify what “level of sales make sense for Diageo to buy”, says Lampen, adding that there is a “fine print” outlining circumstances in which Diageo’s right to buy falls away, leaving the brand fully independent and on the market for other takeover opportunities.

“Across the company we have spoken to thousands of entrepreneurs and I have spoken to about 500 personally,” he says. “Only two have told me they don’t want to continue the conversation because they have no interest in selling. The ability to tell an entrepreneur that you can put them on the runway to an exit, but leave them independent and take away a bunch of constraints until you get to that point, is very attractive.”

While Diageo has its own in-house team dedicated to innovation, Distill Ventures will clearly play an important role in the group’s future, particularly as the market becomes more complex and independent brands grow. At an investors’ conference in New York last year, Diageo CEO Ivan Menezes said: “The world has shown that a new emerging business can take share from established industry players if the established player is not alert to disruptive plays. We need to have our own disruptive plays.”

But for Lampen, the most exciting part of Distill Ventures’ future is not necessarily how it will develop Diageo’s business, but its ability to make an indelible mark on the industry. “Some of the people we are working with, they have got so much passion to make an impact, and in some cases launch whole new categories,” he enthuses. “It’s a privilege to sit on the front line and help them do this.”