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Good morning and happy Tuesday. Welcome to all those joining us for the first time this week. If you're reading this and aren’t subscribed yet, you can join the crowd of intelligent, curious investors below. 

With a handful of you already reaching out to me about digging into this offering, I’m excited to share with you this week a deep dive on Cheers. In less than 14 days, Cheers has raised nearly $1.5 million from over 1,000 investors. Considering the company is profitable and generated over $10 million in 2020 revenue, it’s actually somewhat surprising that it hasn’t had even more success in its fundraise. Despite its stellar growth and strong underlying financials, prospective investors seem to be hung up on two things: its controversial claims that its products cure hangover symptoms by up to 50%, and its $49.5 million valuation.

Even if you’ve already made up your mind on Cheers and whether or not its products actually work, you’re going to want to read this. I’ll be the first to say that I am naturally skeptical of a company stating they can cure hangovers. But after living, breathing, sleeping Cheers this past week, I can tell you that at least studying the evidence is worth your time. If you don’t have a clue about the science behind hangovers or the supplements that Cheer uses, that’s okay. I broke this down so that you can finish reading it with a comprehensive understanding of everything you’d need to know if you’re considering an investment in Cheers.


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Deep dive - Cheers
The hangover
As most adults have experienced firsthand, hangovers are a painful price to be paid for overindulging in alcohol. The worst hangovers might even leave you momentarily telling yourself that you’ll never drink so much again. But more often than not, you’ll find yourself once again battling the aftermath of a long night of drinking at some point down the road.
  • Using medically backed research, Cheers has created a better way to drink alcohol and recover from hangovers. With its hangover remedy and alcohol-related supplements, Cheers is focused on bringing people together by promoting fun, responsible, and health-conscious alcohol consumption. After helping more than 300,000 individuals recover from dreaded hangover symptoms, Cheers is turning to the crowd for $5 million as it looks to capitalize on its successes and begin a new chapter.

Dehydration – what you’ve probably been told leads to hangovers
Alochol’s diuretic, or dehydrating, effect causes your body to remove fluids at a much quicker rate than other liquids do. In other words, it makes you pee more often, which leads to dehydration during and after drinking. Dehydration then leads to headaches, dizziness, and some of the other symptoms associated with hangovers.
  • When alcohol is consumed, the body processes the enzymes in the liver and converts it into acetaldehyde. This becomes toxic in large quantities, so the liver removes it from the body. During this whole process, water is flushed out of the body much faster than the alcohol is processed, which leads to dehydration.
In order to fight alcohol’s dehydrating effect, you’re often told to drink water, eat food, drink Gatorade or Pedialyte (both are high in electrolytes), take ibuprofen, or just sleep it off. 

What science says about hangovers
In reality, dehydration isn’t the root cause of symptoms associated with hangovers. Sure, dehydration contributes to how you feel when you have a hangover. But there’s more to hangovers than that. The truth is that varying scientists and medical experts have placed their conviction in more than one theory.
  • What’s laid out below is the most plausible and widely agreed-upon explanation, but uncertainty still exists.
While consuming alcohol, the body’s neurotransmitters go a little crazy. In the context of drinking, the two important neurotransmitters to know about are Glutamate and GABA. Glutamate turns on the brain while GABA turns it off. When functioning properly, every time Glutamate is released, GABA is released, too. As described below by Dr. David Nutt, a leading global authority on alcohol abuse, these two neurotransmitters don’t work like they should when alcohol is consumed.
  • Alcohol stimulates GABA, which initially makes you feel relaxed. As you consume more alcohol, it can switch off important parts of the brain, such as those affecting judgment and consciousness. At the same time, alcohol blocks the body’s Glutamate receptors, which leads to alcohol-related memory loss as your alcohol level rises.
  • As a result of Glutamate rebound – or the body’s attempt to compensate for the Glutamate activity suppressed by alcohol, Glutamate production is increased, resulting in sensitivity to light and sound. In addition, headaches also likely result at least in part from Glutamate rebound.
To better understand the rebound effect, consider alcohol’s impact on sleep as an example. Whether you’ve heard it or experienced it yourself, alcohol is often associated with a faster, deeper sleep. As a depressant, it slows down brain functioning and neural activity by enhancing the effects of the GABA neurotransmitter. Despite falling asleep faster, those who consume more alcohol wake more frequently and experience lighter sleep during the second half of the night. This pattern has come to be known as the "rebound effect".
  • After the alcohol has been metabolized and eliminated, sleep variables reverse themselves, exceeding what those values would have even been at baseline. In other words, the body initially adjusts for the effect of alcohol in order to maintain sleep during the first half of the night. During the second half of the night, even after the elimination of alcohol, the body ultimately overcompensates, which results in sleep disruption. This overcompensation is a product of the rebound effect.
Alcohol is poison to the body and it causes a series of responses that will lead to hangover symptoms if consumed faster than it can be broken down. Just as the dehydrating effect of alcohol isn’t fully to blame for hangover symptoms, neither is the activity of these two neurotransmitters. Though not entirely at fault, the imbalance of Glutamate and GABA does appear to play a leading role in how the body responds to alcohol overconsumption (at least according to the most recent medical findings). This is what Cheers has focused its attention on.

Cheers' solution
During his time at Princeton University, founder and CEO, Brooks Powell, found himself at the right place at the right time as he came across the recent discovery of the alcohol-related properties of Dihydromyricetin (DHM). In studies, DHM was shown to bind to the GABA receptor, reducing GABA rebound. While medical researchers were intrigued by its potential to be used in an alcohol use disorder setting, Powell had other ideas.
  • DHM is a flavonoid extracted from a Japanese raisin tree. As described by Powell, it’s a natural extract – like caffeine is to coffee. It’s been used as a hangover cure throughout Japan, China, and Korea for centuries.
  • In 2012, scientists discovered a breakthrough with DHM. After performing studies that involved getting rats drunk, researchers found that rats showed significantly reduced signs of hangovers when given DHM.
In 2013, Powell came across this study in the Journal of Neuroscience. Working with neuroscience professors, Powell conducted a human study testing DHM’s efficacy on alcohol’s negative effects. Across 8 typical hangover symptoms, the study found that users felt an average of 50% better the next day
  • Cheers released its hero product, Restore, in 2017. With 1,200mg of DHM in each capsule, Cheers Restore is marketed as reducing hangxiety, brain fog, and the “bleh” feeling that many experience the day after drinking. Its claim to fame – “feel at least 50% better the next day or your money back”. In addition to its restore product, Cheers has also created Protect, a daily liver supplement, and Hydrate, an oral rehydration supplement.

The $5 million question – does DHM really work?
Remember when I mentioned acetaldehyde above? That’s important. In order for the body to metabolize alcohol and remove it from the system, it must first be converted it into something that can be more easily broken down. As alcohol is consumed, the body converts it to acetaldehyde before again converting it to acetate.
  • The body is capable of detoxifying about one drink per hour (hence the standard one drink per hour rule). If alcohol is consumed faster than it can be metabolized, the body is left with a buildup of acetaldehyde, which leads to the not-so-enjoyable rebound effect and accompanying symptoms.
Here’s where DHM comes into focus. According to the Cheers team, DHM has been shown to speed up the body’s metabolizing of alcohol, protect against alcohol-induced liver damage, and target short-term alcohol withdrawal. Though research on DHM is still fairly limited due to its alcohol-related use being a relatively new discovery, the information that is available suggests that DHM can in fact help: A search for DHM and its interaction with alcohol will return numerous studies that support the claims made by Cheers and Cheers’ competitors. It’s much easier to find studies supporting DHM’s positive effects than it is to find ones that oppose it. Still, uncertainty remains about its effectiveness.

What skeptics say
Because scientists and medical professionals still can’t definitively agree what it is that leads to each hangover symptom, it’s hard to say with absolute certainty that DHM reduces or eliminates hangovers.
  • The truth is that DHM does show promising results. According to many studies, DHM helps the body break down acetaldehyde and metabolize alcohol faster, suggesting a lessened rebound effect. Even if it can’t be said with 100% confidence, this appears to play a major role in the onset of symptoms. However, until there is evidence that unequivocally proves what leads to hangovers, skeptics argue it’s difficult to state that DHM can reduce or eliminate hangover symptoms.
Skeptics have also found fault with the type of testing, and number of tests, that DHM has undergone. While drugs require FDA testing on humans, supplements play by different rules. Because supplements aren’t considered drugs, they aren’t required to comply with the same strict safety and effectiveness requirements that drugs are. As such, dietary supplements are considered safe until proven unsafe.
  • This isn’t to say that DHM is unsafe. It is to say, however, that DHM has undergone very little testing relative to what’s required of a drug.
Furthermore, when you dig in on the topic, most blog posts and online reviews backing DHM are referencing the same handful of studies. A majority of these studies, by the way, have been conducted with the use of lab rats rather than humans. Again, this doesn’t mean that DHM doesn’t work. It has, after all, been proven effective in these studies more often than it hasn’t. But critics definitely don’t love that most of the evidence has been yielded from somewhat limited research on rats rather than humans.
  • The concern skeptics have with this is that rats are not the same as humans. Yes, they’re close in a lab testing setting, but humans are more difficult to study due to many different variables that can’t be replicated with rats. Important for this context, rats can’t tell the researcher if they feel 50% better after taking a DHM supplement. All that can be determined is how DHM influences the rat’s rebound effect, ability to metabolize alcohol, etc. But again, this may not actually be as influential on hangover symptoms as researchers currently believe.
So what do consumers say about it? 
The importance of Cheers’ claims being supported by evidence-based research cannot be overstated. That much can be said with absolute certainty. Whether you, or even I, believe there’s a sufficient amount of evidence to satisfy their claims, however, is a whole lot less important than what its customers believe. So what do customers have to say about it?
  • It’s a hit. To see for yourself, check out Cheers’ product reviews on Amazon here, here, or here. There’s a lot of awesome responses with detailed feedback about how exactly happy customers have noticed a difference after using Cheers. I strongly recommend you check them out. There‘s also some less than impressive reviews, albeit much fewer than the positive ones, that voice the complaints of unsatisfied customers.
Interestingly, customer reviews are pretty polarizing. Customers either think the products work as advertised, or they don’t think they work at all. There’s very little middle ground. With over 70% of customers sharing 5-star reviews on Amazon, the overwhelming majority suggest that Cheers products do in fact work.
  • On its website, the reviews are even more one-sided. To read what customers purchasing directly from Cheers are saying, you can read the reviews for its three products here, here, and here.
Putting aside whether or not DHM is a legitimate hangover cure, I must admit I was shocked to see how strong the reviews are for Cheers’ products. Let’s face it, claiming you’ve found a treatment for hangovers doesn’t mean a lot these days. In fact, after hearing dozens of wives’ tales, secret family recipes, and one-off oddities that have been claimed to cure hangovers, I’m somewhat inclined to immediately believe that it doesn’t work when I hear about a newfound treatment. While I can’t say with absolute certainty, I’d bet that a majority of you share the same opinion.
  • If the reviews weren’t enough to sell you on how customers feel about the product, consider this: In 2020, only 1.6% of sales were refunded to unsatisfied customers.
More than a hangover pill
Building on its early success, Cheers has set its eyes on the massive $250 billion alcohol sales market in the U.S. It doesn’t want to be known just as a hangover cure company. It wants to be known as an alcohol health and wellness brand.
  • As consumers have grown increasingly health-conscious, Cheers is looking to capitalize on this transition with its latest product, Cheers Restore beverage. Catering to those that want to drink alcohol while prioritizing their health, Cheers believes it’s pioneering an entirely new category with this patent-pending solution.
Alcohol drinkers growing increasingly health-conscious hasn’t happened overnight. It started years ago when brands flooded the space with low carb, low-calorie beers that still packed the same great taste. Then seltzers emerged. For the health-conscious consumer, seltzers took it to a whole new level. Offering a healthier way to consume alcohol in a brand-new format, the seltzer obsession felt almost instantaneous. With the Restore beverage, Cheers is looking to do what seltzers did to the U.S. alcohol market just a few years ago.
  • As put by Cheers, consumers want to be able to consume alcohol and still wake up ready to take on life’s responsibilities the following day. Though seltzers may be a healthier option than beer, drinking a seltzer is going to result in the same unpleasant hangover symptoms as beer.
What’s different about the beverage?
Powered by a permeabilizer technology that Cheers coinvented with Princeton University, the Restore beverage has been found to increase DHM’s bioavailability by up to 19x. In other words, the positive effects of DHM are much more likely to be felt by someone drinking the Restore beverage vs. taking the Restore capsule.
  • Bioavailability can be thought of as the proportion of DHM that is actually able to have an active effect after entering the body. DHM suffers from poor bioavailability. The vast majority of even purified DHM that’s consumed does not make it to the bloodstream. Instead, it’s excreted unused. Even with large amounts of DHM, the total DHM absorption per dose is low. So, Cheers claiming it has increased DHM’s bioavailability in this new product by up to 19x is extremely significant.
  • With its Restore capsules, Cheers estimates that 5% of the DHM, or 60mg, is absorbed by the body.
Currently available only online, Cheers is looking to move its new Restore beverage into retail across the country. Cheers wants the Restore beverage to be sold everywhere that alcohol is sold. This includes grocery stores, liquor stores, bars, etc.
  • The Restore beverage will closely resemble what customers are used to drinking with seltzers. Offered in a lemon sherbert flavor, the Restore beverage is made with zero sugar and is lightly carbonated.
Customers will initially be able to purchase four packs of the beverage for $14.99.

The opportunity to take control of a massively underserved market
Reaching $250 billion in 2019 sales, there’s no denying how large this opportunity could be if Cheers can grab the attention of just a small fraction of the U.S. alcohol market. In South Korea where liver supplements and hangover cures have reportedly already become popular, the alcohol-related health supplement market is 3.6% of the country’s annual alcohol sales.

In 2018, over 65% of U.S. citizens consumed alcohol. According to a Delphi Health study, over 75% (~120 million) of American workers have shown up to work hungover. In the same study, it was found that hangovers cost U.S. employers nearly $42 billion in wasted salary each year. In 2010, a CDC report found that excessive alcohol consumption cost the U.S. nearly $250 billion.
  • Despite all of this, there remains no widely implementable solution to address this growing problem.
Cheers, however, isn’t the only company to recognize this massive opportunity, and it certainly isn’t the only to use DHM as its core supplement. As put by Cheers, “countless cheap knockoffs have flooded the market, potentially cutting corners to reduce COGS and compete on price. These are often products with reduced efficacy, formulas and ingredient amounts hidden behind proprietary blends, an emphasis on form over function, messaging that promotes binge drinking, or a combination thereof”.
  • Where Cheers believes it excels in comparison to competitors is in pricing, effectiveness, branding, and mission.
Because most competitors are also using DHM, it’s difficult to make many distinguishments between who offers the most effective product. However, at 1,200mg per dose (Restore), Cheers claims it offers the highest amount of DHM available. Competing products range from ~300-1,000mg of DHM per dose. And at $2.92 per dose, the Restore capsules are notably less expensive than $4, $5, and even $6 competitors.
  • Importantly, Cheers feels that it has the branding and marketing strategy that will enable it to maintain a category-leading position. Combining this with its unmatched Restore beverage, Cheers hopes to lead the alcohol wellness market toward a future where everyone consuming alcohol is also consuming an alcohol recovery aid.
Business highlights and fundraising initiatives
Since its launch in 2017, Cheers has generated over $25 million in total revenue and sold more than 13 million doses to 300,000+ customers exclusively through its online channels. With its first profitable year, Cheers generated $1.7 million in 2020 profit.
  • In 2020, 55% of the company’s revenue came from repeat customers. In recent years, a majority of it came from its increasing base of loyal customers.

In February 2018, Brooks Powell brought Cheers to Shark Tank. After the pitch was reportedly “hijacked” by Mark Cuban, Powell was unsuccessful in securing an investment from the sharks. While Cheers walked away without an investment, its airing on Shark Tank brought national attention that likely proved more valuable than any investment it could have received.
  • Shortly after being denied by the Sharks, Cheers raised a $2.1 million Seed round from venture capital investors including NextView Ventures, Founder Collective, and Fitz Gate Ventures.
Focused on cash efficiency to maximize its R&D spending and best set itself up for long-term success, Cheers has been diligent in optimizing its business operations. Among other things, this includes:
  • Maintaining a lean team and minimizing overhead.
  • Nurturing its existing customer base to drive loyalty, repeat business, and word-of-mouth referrals.
  • Increasing average order values through expanding its product line and offering more customer-friendly bundling options.
  • Expanding control over its supply chain to increase efficiency and reduce costs.

With the help of this Reg CF round, Cheers is focused on expanding into an omnichannel model through retail and on-premise expansion. Bringing in an entirely new audience of loyal customers and investors, Cheers is looking to use this round of funding to take the business to new heights. Initiatives include:
  • Expanding into retail and strengthening its DTC customer acquisition efforts.
  • Offering customers additional products with increased DHM bioavailability through the integration of its recently discovered, patent-pending technology.
  • Creating educational content around alcohol and liver health.

In addition to expanding its retail presence, Cheers is planning to launch an entirely new brand of sugar-free hydration products called Lightspeed. In 1992, NASA developed a sugar-free hydration beverage designed to keep astronauts hydrated during long missions. Utilizing the learnings of its expired patent, Cheers developed Lightspeed.
  • The zero-sugar hydration brand is designed to be a healthy alternative to the sugar-filled formulas currently flooding the market.
As put by Cheers, an investment in the company is more than investment in what Cheers has created thus far. It’s a bet on the team’s ability to continue innovating novel products and brands that aren’t even on the map yet. At a pre-money valuation of $49.5 million, individuals can invest in the company’s common stock, which is priced at $39.11 per share, for as little as $117.
  • The current Reg CF round opened on May 20, 2021, and is scheduled to close on November 15, 2021. As of May 31, 2021, the company has raised over 20% of its $5 million goal.
Valuation
Given Cheers’ valuation and the concern that many investors seem to have with it, I want to use this section to dissect it in more detail with you. At a $49.5 million pre-money valuation, Cheers is notably more expensive than many other companies raising a round from the crowd. That said, it also has quite a bit more traction than most other startups raising a Reg CF round. Addressing its valuation, Cheers broke it down as follows:
  • In February 2021, alcohol beverage companies together yielded an average EV/EBIT multiple of 22.2x. For non-alcoholic beverage companies, it was 25.2x. And for household products companies, it was 22.3x. EV/Sales multiples were 5.3x, 5.1x, and 4.1x for each of those industries, respectively.
With a $1.7 million 2020 EBIT and a $49.5 pre-money valuation, you can think of Cheers’ EV/EBIT ratio as 29.1x. With revenue of $10.4 million in 2020, it has an EV/Sales multiple of 4.75x.  
  • For those of you unfamiliar with these acronyms and ratios, they’re not as complicated as they may seem. EV (enterprise value) can be thought of as the company’s total value. EBIT (earnings before interest and taxes) can be thought of as operating income. The EV/EBIT ratio is a common way to compare companies and analyze how much investors are paying for the company. For high-growth companies, the ratio is higher.
Without overly complicating these earnings multiples and getting too into the weeds here, Cheers is actually pretty fairly priced. I could even make a strong argument that it could justify an even higher valuation. The ratios for Cheers that are used above include 2020 EBIT and sales information. Using up-to-date 2021 info, I would have to expect that it’s now even more in line with industry averages.
  • Additionally, startups by their very nature present the opportunity for exponentially more growth than publicly traded companies do. As such, they are typically priced at substantially higher multiples. This being the case, it’s again worthwhile to note that even with the potential for growth that it presents, Cheers is fairly in line with its publicly traded peers.
For the purpose of keeping this as simple and understandable as possible, I won’t go any further here. But if you have any questions about this or want to go even deeper, do not hesitate to shoot me an email at drew@thecrwd.com.

Final thoughts
I don’t typically include this section in my research, but it felt appropriate for Cheers. I, just as much as anyone, want to see DHM proven to be effective in treating hangovers and helping the body better metabolize alcohol. But even Cheers acknowledges, “there isn’t a clear, approachable mass understanding of the science behind hangovers, how alcohol impacts your liver, and how you can improve your habits to stay healthy”. As long as this remains true, I find it difficult for Cheers, or any other company, to definitively say that their product will reduce hangover symptoms.
  • This isn’t to say that I don’t think DHM works. Based on what’s been laid out above, DHM does in fact appear to be effective in lessening the symptoms of hangovers. I believe, however, there is still a chance, albeit a small one, that DHM is proven to be unrelated to hangover conditions. Until the medical community can confidently agree to the cause of various hangover symptoms, and until more research surrounding DHM’s effectiveness is produced, there will always remain a chance that DHM is causing nothing more than a placebo effect.
All this being said, from the viewpoint of analyzing Cheers as an investment opportunity, what arguably matters more than this is what customers think. Yes, a very small fraction of Cheers’ customers indicated they couldn’t tell a difference, but the overwhelming majority felt meaningful differences.
  • Something else important to consider here is that not all hangovers are equal. Acknowledged by Cheers, hangovers affect people in different ways, and some people may not experience the beneficial impact of DHM. In addition to the number of drinks and types of alcohol consumed; age, weight, overall health, and genetic composition can all affect the length and severity of a hangover.
I will leave you with this. At the end of the day, investors are not just betting on Cheers’ ability to lead this alcohol health and wellness category. This is also somewhat of a bet on DHM as a legitimate hangover cure. I expect that as Cheers rolls out its Restore beverage to retailers nationwide it will face increasing scrutiny, which will likely lead to more attention from the medical community. As such, I wouldn’t be surprised to see more studies in the not-so-distant future that will expand on the research behind DHM that’s currently available.
  • If further research supports the current findings and validates DHM as a hangover remedy, there may be no ceiling for how high Cheers can go. If additional studies don’t indicate what is currently believed of DHM, well, it won’t be good for Cheers. I could be very wrong about this, but from my unprofessional, unbiased perspective, this is what an investment in Cheers hinges on.
Want me to take a deep dive look into a particular offering, ask any questions, or just reach out and introduce yourself? Shoot me an email at drew@thecrwd.com. Otherwise, I'll see you next week.
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