Stumptown Steps Up

I wrote a post about the investment that Stumptown recently raised back a week or so ago.

No... that's not the honest truth.

I wrote a post a week or so ago about how the response to the Stumptown news from within the coffee community illustrated perfectly many of the reasons that I no longer worked in coffee - and which in general took the coffee profession to task for its lack of professionalism and seriousness in business.

But that's another whole topic -- cause I decided it was the wrong thing and the wrong point.
So I decided to wait - and to see what shook out from all this.

So now I have an idea of what people are saying, have said (and probably are going to say). I think I see how this has played out. And I'm going to share my thoughts.

I have a somewhat unique perspective on this deal.
  1. I used to work at Stumptown.
  2. I used to work at a Corporate Venture Fund.
  3. I'm a serial entrepreneur who has started multiple (externally funded) companies (two of which were sold to other companies).
So, I think I have a perspective that might be worth hearing.

Now, first, I need to put a few caveats first (just to be clear)...

  1. I am not writing this based on any sort of "insider information" on the deal. My relationship with TSG is purely second hand, and while I'm still a friend of many folks at Stumptown (including Duane) and a fan of the company and its coffee I'm neither involved with the company nor involved in the deal in any way. In fact, my guess is Duane and the Stumptown family are going to probably wish I'd not said anything.
  2. This is purely my opinion based on the points listed above under Perspective. In other words - I'm writing this as pure speculation (like everything else written in this thread -- and for that matter in the various press pieces covering this deal to date).

For me, there are two key things about this deal.

First - this is a huge validation for the high-end sector of the speciality coffee market. The fact that a fund like TSG is making a bet on Stumptown at this time says that they see significant potential for growth in the whole sector. This sector has long been ignored not just in the investment world (of course) but in the larger coffee world as well (the "less than 2% of the market" comment has been made a million times). For the other companies that have also been building the space, and for consumers of high-end coffees, this is great news. Sadly - as far as I know this has not be covered in the press. Given that it should be the main story, that makes me both sad and frustrated.

Second - that being said, there is one group of people out there who should be very nervous about this deal. And no... it's not Stumptown customers or Stumptown employees. It's competitors of Stumptown. In looking at the stated and rumored goals (open more retail locations in NYC, open business in Chicago, open business in SF) you can model this out to mean that (if successful) Stumptown will be at least doubling the volume of green coffee they are buying within 24 months. Where is that coffee going to come from? From other high-end roasters. And who will they be selling the roasted coffee to? That's right - customers of other roasters. And who will be working in these new roasteries and new retail locations? Yeah... you get the idea. Combining Stumptown's brand, relationships and expertise with a whole big stack of new capital... yeah, if I were running a competitor I'd be nervous.

Now... after talking to folks and reading all the crazy shit that's been out there - there are a couple things that I feel like I need to comment on. Again... these are just my opinions. But... well... I think I'm probably more right than most people.

  • the idea that Duane is going to "cash out" and leave in a year or two is something that only someone who doesn't know him could ever come up with. The man has no hobbies. His entire life is coffee and Stumptown. He truly loves what he does - and he loves Stumptown. In the time I worked at Stumptown he never took a vacation longer than a 3 day weekend that I can remember. There is absolutely no way that he would (or perhaps could) do something else (and that includes not working). As a result, I feel like we can absolutely assume that his motivation was something other than "cashing out" -- which fundamentally changes the structure and tenor of the deal (given that it changes the motivation).
  • everything I hear says that Stumptown was doing better financially than it ever had before. In other words, financial hardship (another common motivator for capitalization deals like this) was not the driver.
  • given this, I have to assume that the motivation was in fact capitalization for growth and opportunity. This makes sense to me. Duane used to always say he wanted to bring great coffee to everyone in the world who loved things that taste good.
  • now, while it's entirely possible that TSG was talking to other roasters in order to pursue a roll-up strategy, it's perhaps more likely that this was simply a pricing and competition exercise for TSG. I know it sounds sleazy but many serious investors do it. I've done it. Yeah... it causes bad feelings if the companies that are not the investment target take things personally and feel like they were either used or jilted in the process. That's life. That's business.
  • as noted at the start, my relationship with TSG is purely second hand (I have friends who know them, who are at companies that have worked with them or co-invested, etc). That said, once I heard about the deal I asked around and came back with 100% positive responses. And - just to be clear - in the PE world that is not common. In fact, an associate I know at one of the most highly regarded early stage VC funds said that TSG was his dream gig. And the reputation that Alex Panos had amongst these folks was equally impressive.
  • so... Very good investment firm puts money into thriving growing private company because that company wants to grow rapidly in an expanding new market. Pretty damn common, yeah? And I think we can at this point say that the usual rules, metrics and models of a deal like that probably also apply to this particular deal, okay?

To be frank, I'm kind of shocked that Stumptown was able to scale as it did without investment. As far as I know, they were the largest high-end speciality coffee company that didn't have outside investment. I'm guessing that this exact success was one of the main reasons TSG was so attracted to them.

Of course, the deal is also a validation of Stumptown. And that is an important point. No good investors are going to put money into a company based on its success and then destroy what has made it successful.

The vast majority of people have no idea what Private Equity or Venture Capital are, how they work, what the goals are, what the motivations are, or what the people working in those fields are like. They are sharing opinion based on a combination of ignorance and misinformation. To compound matters... they tend to have an automatic and innate distrust or dislike of these investors and take the results of ignorance and misinformation and filter through this distrust / dislike. Investors like this are professionals. They're not stupid.

Given all that I have walked you through above, I think we can assume that the thinking behind this deal is simple.
    Stumptown has kicked ass to date
    It has done so with no external capitalization (straight bootstrapping)
    The entire market sector is primed to grow over the next 5-7 years
    Stumptown is best positioned to take advantage of that
    Let's accelerate Stumptown's growth to take advantage of these circumstances.
    This will result in Stumptown being the dominant player in a newly expanded market sector at the end of this time period.
    To do this, let's use external capital (investment) in order to massively expand Stumptown's geographic footprint.

At least... that's my perspective and (unfounded and speculative) opinion.

Oh... also... I used to write for the NYTimes.
I believe strongly in journalistic ethics.
Suffice it to say that there are people who have been involved in the coverage of this "story" who should not only be ashamed but should not ever be considered in any way "journalists" of any sort.