I have a somewhat unique perspective on this deal.

1 - I used to work at Stumptown.
2 - I used to be a General Partner at a Corporate Venture Fund.
3 - I'm a serial entrepreneur who has started multiple (externally funded) companies (and sold two of them to other companies).

A few caveats first (just to be clear)...

A) 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.

B) 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 linked to).


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 other companies in the space, and for us as consumers of high end coffees, this is great news.

Second - that being said, there is one group of people out there who should be very (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. Combining Stumptown's brand, relationships and expertise with a whole stack of capital... yeah, if I were running a competitor I'd be nervous.


In reading through these posts there are also a few things that I feel I should mention - because some of the speculation doesn't make any sense to me.

1 - the idea that Duane is going to "cash out" and leave in a year 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 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 do something else (and that includes not working). As a result, we an absolutely assume that his motivation was something other than "cashing out" -- which fundamentally changes the structure and tenor of the deal.

2 - everything I hear was that Stumptown was doing better financially than it ever had before. In other words, financial hardship (another common motivator for capitalization like this) was not the driver.

3 - given this, I have to assume that the motivation was (pure and simple) 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.

4 - 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.

5 - 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.


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 that success was one of the reasons why 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. 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.
The idea that 90% of these "stories" are based on a single source who happens to run a competitor who (from what I hear) is losing market share in NYC to Stumptown -- without corroboration on any of the main points and without any non circumstantial support is freaking appalling to me.
Oh... and the fact that Esquire published that original story is the worst of all. Unacceptable.

Good interview with Duane Sorenson in Entrepreneur today. His expansion list includes Los Angeles, Chicago, San Francisco and ... Europe. Interestingly, the interview was held in L.A. http://www.entrepreneur.com/article/219838

malachi wrote:Second - that being said, there is one group of people out there who should be very (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. Combining Stumptown's brand, relationships and expertise with a whole stack of capital... yeah, if I were running a competitor I'd be nervous.

This seems like a great point. To acquire the quantities needed for the kind of expansion being talked about would seem to demand building exclusive arrangements with the mid and larger quality producers. This will be attractive to such producers to simplify things. But at the same time it will lead to dependents on one buyer relationship for the good and bad in the future. In the past it seemed that the larger roasters still had to cooperate with other roasters to bring in many lots that seemed like a good thing at least for us consumers. This may be a game changer in this regard.
The other thing that troubles me is the choice of approach to Duane's wanting the accessibility to great coffee around the world. He can think of actually doing this himself under one label or create the best model for a much broader set of players to do so. including cooperation. Personally, I've always preferred the second concept. It would seem that some added personal/co. financial gains could come from this also. The same as I'd like to see a broader base of active members in the SCAA and RG lifting more boats.
these are just gut feelings and not professional opinions

Chris, thanks for your insight on this deal. I appreciate the post.

malachi wrote:A few caveats first (just to be clear)...

A) 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.

I was wondering if you were involved at all myself a few days ago before you posted this..

malachi wrote:Oh... also... I used to write for the NYTimes.
I believe strongly in journalistic ethics.
The idea that 90% of these "stories" are based on a single source who happens to run a competitor who (from what I hear) is losing market share in NYC to Stumptown -- without corroboration on any of the main points and without any non circumstantial support is freaking appalling to me.
Oh... and the fact that Esquire published that original story is the worst of all. Unacceptable.

Welcome to the new world of media where there is little distinction between a blog post and a news article.

malachi wrote: Oh... and the fact that Esquire published that original story is the worst of all. Unacceptable.

Wasn't the thing that Esquire published originally just an opinion column? I also find it unacceptable that it wasn't accompanied by clearer disclosure, and that other news outlets picked it up as "news," but how far beyond the pale was it, for a crappy online opinion column?

Conflict of interest was clear.

malachi wrote:Conflict of interest was clear.

Sure. But I didn't think the disclosure Esquire printed:

Industry Source 'T.D.' wrote:Todd Carmichael is the co-founder of La Colombe Torrefaction and the first American to cross Antarctica to the South Pole alone on foot.

was clear at all, and I thought the later stories based on the same source were much less clear. Even for a crappy online opinion column, I'd have expected Esquire to disclose that conflict of interest more explicitly. But I was never a journalist; maybe I'm expecting too much.

Exactly.

You don't publish a piece from someone who will financially benefit from the piece being published and certainly don't do so without disclosing that fact.

This is getting off-topic but I work for one of the TV networks (in IT) and I'm getting more and more depressed about the state of our reportage in Los Angeles along with that of our competitors', mostly with regards to sensationalism. It seems at the local level TV stations are getting desperate and they're resorting to sensationalism more and more.

Although there was a conflict of interest, Carmichael's description of what STG told him is hardly implausible. I think this is a distinction worth noting at this point . . .

A few questions that came to mind:

If Carmichael's comments are fabricated why hasn't Stumptown set the record straight about the deal not being a 90 / 10 split? Could there potentially be a clause in the contract that prevents disclosure to the public of any of the deal's details?

Did Panos have any incentive to lie to Carmichael about a 90 / 10 split?

Why would STG invest in a minority share in Stumptown? That really wouldn't fit their MO.

Could Panos plausibly be listed as president, secretary, treasurer and director of Stumptown if STG had a minority stake in Stumptown?

Although there's a clear conflict of interest for Carmichael there's no actual evidence he acted duplicitously. In contrast we now know that mgmt at Stumptown was not honest about what had happened (although I'm sure that some will argue that they had no obligation to be). A 90 / 10 deal is hugely damaging to their reputation and could induce panic amongst employees and potentially hurt sales (moreso in pdx than Seattle or NY). Thus, Stumptown had a strong motive to not be forthcoming about a 90 / 10 deal and their bungled response to internet speculation seems to back up Carmichael's account.

Even if there has not been a total buy out of Stumptown I don't think that this is a step forward for the specialty coffee trade. The third wave may end being coffee's golden age, a time when roasters like Stumptown and Intelligentsia created models for roasters small and large alike to thrive. Potential consolidation of specialty roasters and advanced buying capacity for Stumptown means that fewer roasters will have access to great beans. That means fewer perspectives / unique skill sets being brought to roasting and brewing which seems like a loss for farmers, customers and those who work in the coffee trade.