Venture firms back new crop of wine startups

After years of lagging beer as America’s favorite alcoholic beverage, wine has finally drawn even.

A full 35% of Americans say wine is their drink of choice today, while 36% prefer beer, according to a recent Gallup poll. That compares with the 47% who opted for beer in 1992, versus just 27% who chose wine then.

It’s a statistic that’s not lost on venture capitalists, who are backing a new vintage of wine startups with names like Delectable, Invino, UpRoot Wines, Club W, and Vivino that aim to profit from the beverage’s surging popularity.

Here’s another statistic that VCs are lapping up: The U.S. wine market is expected to reach $33.5 billion in 2013, according to industry research firm RNCOS, yet less than 2% of all wine sales are happening online.

Some view this as a sign the wine industry is ripe for disruption, although others say wine may be one of the few products ill-suited to the Web.

“The best way to make a small fortune in the wine business is to start with a large fortune,” joked Adam Goldenberg, a venture partner at CrossCut Ventures who recently invested in online wine community Club W, and who owns his own boutique winery in Paso Robles, Calif.

It’s true that online wine startups have given more than a few investors a hangover. Industry pioneer Wine.com, for example, raised about $75 million in venture funding over its lifetime, but struggled to make money because of the high shipping costs and complex regulations associated with dispensing it online. The company has been in and out of bankruptcy and is now reportedly being shopped around at a fire sale price by its private equity owner Baker Capital.

Meanwhile, Lot18, another high-profile online wine company, raised $46.6 million in funding from Accel Partners and New Enterprise Associates, but is now reportedly in trouble. The company laid off half of its employees and recently shifted strategy to regain traction.

Steve Schlenker, managing partner at DN Capital, believes this new crop of startups has found a tool that will make all the difference—big data. Unlike many other products, wine is all about discovery and education, he said. Yet, when most people walk into a liquor store or even shop online, they are overwhelmed by the selection.

“The best way to make a small fortune in the wine business is to start with a large fortune.”

Adam Goldenberg

Venture Partner

CrossCut Ventures

“There are millions of bottles of wine, but most consumers don’t know which ones are right for them,” he said. “Some wines are great with this food, but lousy with that food. Or some wines were amazing in 2007, but terrible in 2008. Most people need help to understand what they should be consuming. Wine is product that really needs curation to work well as an ecommerce business.”

That’s where his investment in Delectable, a wine app that leverages big data and personalization, comes into play. The company, which recently raised $2 million, boasts a database of more than 2 million wines. Consumers can use their smartphones to snap a picture of the wine they are drinking and receive a treasure trove of information. They can see an interactive map of the wine’s origins, the history of the producer, what foods it pairs well with, the price points, the fruitiness and more.

“You have to be able to look at multiple dimensions and pull in all that data, both structured and unstructured, to allow people to go from one aspect to another,” Schlenker said.

Delectable also features content from 1,500 industry experts, including sommeliers, winemakers and bloggers. Users can follow these experts to see what they are drinking and add those wines to their wish list. They can also see what their friends are drinking and even get personalized recommendations based on the wines they’ve enjoyed in the past.

Unlike other online wine startups like Wine.com, which is strictly a retail operation, Delectable does not sell the wine. Instead it partners with wholesalers and vineyards and receives an affiliate fee for connecting them with consumers and facilitating the sale.

Another wine startup leveraging big data is Vivino, which raised $11.3 million led by Balderton Capital. Vivino, like Delectable, lets users take photos of wine labels, and then matches the image against its database of 1.3 million wines. The app instantly returns information about the wine—where it is from, grapes, varietal, vintage, etc. It can even tell a user where they can buy the wine locally. Vivino also has a premium app for $4.99 to help users keep track of their favorite vintages and create a customized wine cellar.

Roberto Bonanzinga, the Balderton partner who led the Vivino deal, said it was the incredible fragmentation of information and complexity of data in the wine industry that intrigued him most.

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Source: Photo courtesy of UpRoot Wines

Jay Levy

Wine is one of the most challenging products to sell online because of the strict state-by-state regulations and tax laws around alcohol.

Jay Levy

Co-founder

UpRoot Wines

“For the first time there is the possibility to make sense of it all,” he said. “Traditionally, the Internet approached wine from strictly an ecommerce point of view. But really the right starting point is data because wine is something that most people don’t know too much about. You need to take advantage of the Internet to help you discover what wine is right for you. That’s the revolution happening now, the revolution of the dataset.”

The actual online selling of wine online is also going through its own transformation. In the past, it was hard to get consumers to buy wine over the Internet when they could get it cheaper and quicker from their local supermarket.

Jay Levy, a managing partner at venture firm Zelkova Ventures, who co-founded and seed-funded a new winery called UpRoot Wines, said wine is one of the most challenging products to sell online because of the strict state-by-state regulations and tax laws around alcohol. His small winery has to file more than 100 reports each year to sell directly to consumers.

“There are also major shipping costs because wine is heavy, fragile and goes bad,” he said. “Besides being explosive, I don’t think there’s anything worse you can add to that list.”

But several new venture-backed companies are discovering innovative ways to overcome those traditional barriers. Club W, backed by $3.1 million from CrossCut Ventures, is taking a Netflix-inspired approach to online wine selling. Club W offers an expertly-curated wine experience starting at $39 per month for three bottles, delivery included.

The process starts with a simple online palate test comprised of questions like, “How do you prefer your coffee?” and “Do you find truffles intoxicating or toxic?” The results help the company’s in-house wine experts find the bottles that are best for its members. And by connecting the consumers directly to the winemaker and eschewing middlemen, Club W said it produces cost savings of up to 30% for its wine lovers.

“When you go to Trader Joe’s and try to buy a wine, there are so many names on the shelf,” said CrossCut’s Goldenberg. “You either gravitate to a known brand or try something blind. So getting a wine that is hand-picked for you and comes with tasting nodes and pairings and is shipped directly to your home, all for the same price point, that just makes so much sense.”

It’s only a matter of time before wine becomes a multi-billion dollar ecommerce category, he said.

 “It’s not yet there today, but this is such an underpenetrated market with a huge opportunity for disruption if you can solve the considerable challenges,” he said. “If people can buy shoes online, there’s no reason they can’t buy wine.”

Another new company is Invino, which is bringing the private sale model, a la Gilt Groupe, to wine. Funded to the tune of $3 million by Delectable-backer DN Capital, Invino offers its members time-limited access to quality wines at discount prices. The company’s founders are rooted in the California wine industry and have close relationships with many top wineries. Each daily or weekly offering comes with detailed descriptions of why Invino likes a particular wine, the foods it pairs well with, the history of the wine, and also why it was able to get a good price for its members.

To offer an even better experience, Invino has partnered with eBay for same day or next-day delivery in certain geographic markets. This emphasis on speed and customer service is more critical than ever for wine startups now that Amazon recently entered the market with its Amazon Wine venture, offering more than 1,000 domestic wine brands.

“Historically, you buy wine online and it takes three weeks to get it,” Levy said. “That’s not going to cut it anymore. People expect a Zappos-like experience for all their online purchases, and that’s what we have to give them.”

Wine, by its very nature, gets better with age. Time will soon tell if this new crop of wine startups ripens into beautiful fruit or withers on the vine.