Q&A with Rob McMillan, Executive VP and Founder, Wine Division, Silicon Valley Bank

As the founder of Silicon Valley Bank’s Wine Division based in Saint Helena, Rob McMillan it’s now regarded as the leading provider of financial services to the Fine Wine business on the West Coast. McMillan supports Silicon Valley Bank’s wine business by managing a portfolio of client relationships and assisting the rest of the Division’s clients and bankers: sharing views on the macro factors impacting the Fine Wine business, offering customized management presentations for clients, writing, and speaking. Rob is author of the Bank’s highly anticipated Annual State of the Wine Industry Report. His perspectives regarding the direction, opportunities and threats in the Fine Wine business continue to be cited in the national wine press.

view counter

The role of financing in the wine business is certainly not a sexy subject. How important is it to have financial stability prior to starting a winery? Can’t a winery just wing it and hope for the best?

If economics is the Dismal Science, financing can’t be far behind. Maybe financing should be called the Depraved Science? Then again, you have to be of a depraved mind to even think about starting a winery. Why? Because the wine business is one of those business communities that have luster to it. From an economic perspective people will accept less in profitability just to be in the business. I haven’t looked, but I suspect you will find the returns in the crematorium business much better because you don’t find people dying to get into that business <ba-dum, crash>.

But seriously folks …. there are a few things that are a little different in winery finance that require those entering to do so with caution and eyes open. First is the amount of hard assets needed to produce wine. You need vineyards, barrel storage, inventory finance while fermenting and aging, winery structures, stainless tanks, and much more. Second is time in two forms; you only get one vintage a year and sell it a couple years later, and if you start in the vineyard trying to predict demand, it will be 5 years after planting that you get your first mature crop. In both cases you are trying to predict consumer preference and volume needed for 12 months sales but years out in the future. That component in the business creates a high opportunity for volatility in prices and sales. Going into the wine business without a plan and without experienced bankers, investors, and employees is a recipe for failure.

For more than 25 years, The California Wine Club founders Bruce and Pam Boring have explored all corners of California’s wine country to find award-winning, handcrafted wine to share with the world. Each month, the club features a different small family winery and hand selects two of their best wines for members.

There are certainly many existing wineries that look to expand their production. How does a bank help in this expansive effort as opposed to securing private capital?

Private Equity in a professional sense doesn’t really exist in the wine business except in very small doses. The vast majority of the wine business is family-owned so the capital for running an operation comes from a limited number of places; 1) family, 2) professional financiers (Banks and Insurance Companies), 3) company profits, 4) others to include customers and casual investors who want to be associated with a winery and don’t mind getting sub-market returns in exchange for psychological rewards.

To the question of help though, Silicon Valley Bank is not just renting money. The Wine Business is all we do here on the North Coast. We believe we help our clients probability of success by being patient and knowledgeable capital providers, providing our clients with industry insight found nowhere else (see our State of the Wine Industry Report for an example), help our clients sell wine with SVBWines.com, and help them build their direct sales by leveraging the Venture Capital, Technology and Private Equity side of our bank. We have, as on-staff concierge, a full-time director of wine programs, and a certified sommelier who together with those deliver win-win opportunities for high value wine consumers on one side of the bank to marry up with the winery owners.

From a numbers perspective, what is the biggest mistake that novice winery owners commit when forming a new venture?

The biggest mistake is probably more strategic. Novice owners spend their time thinking about making wine and hiring the right people to do that, then ignore that which has become the dominant issue in the business in the past decade; selling wine. Anyone can figure out how to make it, but that’s not going to be enough to make you succeed.

The ‘numbers perspective’ question you posed has at its core the same kind of answer about travelling to Hawaii: Take twice the money and half the clothes. It’s really common to see novice’s think they have their bases covered only to be surprised and have no “What-If/Plan B” on which to fall back. You have to have something to fall back on, ‘twice the money’ just in case things don’t go as planned.

There is a pervasive notion that starting a winery is a rich mans game. How true is that in today’s economy?

The ending lyrics to “If I were a Rich Man”, Fiddler on the Roof are: “Lord who made the lion and the lamb, You decreed I should be what I am. Would it spoil some vast eternal plan, if I were a wealthy man?” If it’s not a rich person’s game, it’s close to that. There are occasionally some who you see in the industry who have good experience and no cash, then pair up and organize interested groups of outside individuals with cash to form a winery. In a time where there are structurally more grapes than the markets need, it’s easier to see a successful startup even from the less-healed. But today in a tight market for grapes where we now find ourselves heading, it’s very hard for a newbie to experience success. But for those without the wealth to ever expect to own their own winery, my advice is to be careful what you wish for. Like the character in Fiddler, it’s easy to look from the outside and desire what you imagine that life to be. The reality is far different when you look under the hood. It’s a very tough business, it consumes all your waking hours and takes decades of dedication to succeed. Few actually become materially richer for their efforts. At the end of the day, many are left wondering, “If I were a rich man.”