Pour Your Heart Into It (10 page)

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Jerry Baldwin surprised me. When I was drawing up the documents to form my new company and planning how to approach investors to raise money for it, he called me into his office and offered to invest $150,000 of Starbucks money into my coffee-bar enterprise.

“This isn’t a business we want to go into ourselves,” he explained, “but we’ll support you.”

With those words, ironically, Starbucks became my first investor, committing a huge sum of money for a company so deeply in debt. Jerry also agreed to serve as a director, and Gordon promised to be a part-time consultant for six months. That stamp of approval eased my transition enormously.

Perhaps Jerry hoped to prevent me from becoming a competitor or perhaps he wanted to ensure that I would use Starbucks coffee, although it would have been my first choice anyway. It was clear to me, though, that Jerry also simply wanted to be supportive, and I was grateful.

Gordon was as pumped up about the venture as I was, and he put his creative mind to work, helping refine my idea. “This is not about the ordinary,” Gordon told me. “You need to elevate the expectation of the customers. Everything about the new store—the name, the setting, the presentation, the care taken to create the coffee—everything should lead the customer to expect something better.”

It was Gordon who proposed that I should call the company Il Giornale. While best known as the name of the largest newspaper in Italy,
giornale
also has the more basic meaning of
daily.
You’ve got your daily paper, your daily pastry, your daily cup of coffee. If we served great coffee with Italian elegance and style, we hoped people would come back daily.

With Jerry and Gordon’s support, I thought, naively, I could attract all the investment funds I needed within six months.

There’s nothing sweeter to a freshly minted entrepreneur than the taste of success after raising that initial dollar of investment. But when the first “no” comes, it’s like a slap in the face. I had to experience that in, of all places, Italy.

In December, just as I left Starbucks, Gordon and I set off on an adventure, flying to Italy to research coffee bars. Over the previous three years, I had grown fond of him and enjoyed his eclecticism. I expected to come back with $1 million in investment financing.

Our big prospect was Faema, a producer of espresso machines in Milan. I had pitched my idea by phone to them, and they had sounded very interested. On our first full day in Milan, I made my initial presentation, and I was proud of it. I explained to them how we would re-create the Italian espresso bar experience in the United States, eventually expanding to fifty stores. I spoke as eloquently as I could about the potential scope of the opportunity and stressed the appeal of Italian-style coffee, which was little known in America. For a company that sold commercial espresso machines, I figured, the venture would appear an obvious winner.

But after a surprisingly short discussion, they turned us down. Americans, they insisted, could never enjoy espresso the way Italians do.

Although I realized I had probably been too optimistic about the prospects of a major foreign corporation’s taking a financial stake in a small and untested American company, I couldn’t help feeling deflated. Faema’s rejection meant that I would have to go door-to-door to individual investors to raise the $1.7 million I needed. I knew how hard that would be.

But as always, Italy made it impossible to be unhappy for long. Gordon and I visited nearly 500 espresso bars in Milan and Verona. We took notes, snapped photographs, and videotaped baristas in action. We observed local habits, menus, decor, espresso-making techniques. We drank a lot of coffee, tasted a lot of Italian wine, and ate some fantastic meals. We sat at outdoor cafés in that intense Italian light and sketched out different design schemes, figuring out how we could replicate an authentic, Italian-style coffee bar.

By the time we got back to Seattle, we were as high on the idea as when we had left, and I was renewed in my determination to raise as much money as it took to get Il Giornale under way.

I had no funds of my own to invest, and I knew nothing of venture capital. It didn’t seem right to approach friends or family for money. If the idea was sound, I reasoned, experienced investors would want a piece of it. If it was unworkable, they would let me know.

They let me know, and then some.

I didn’t realize, until much later, the long-term implications of raising equity. Unlike knowledge-based companies like Microsoft, retail businesses are highly capital intensive; when they expand rapidly with company-owned stores, they require repeated injections of funds for such expenses as build-out costs, inventory, and rents. Each time more money is raised, the founder’s stake diminishes. I could never have retained 50 percent ownership, as some software company executives did. I wish, today, that I could have kept a larger stake in the company. But at the time, it seemed I had no choice. And if I had, Starbucks could not have grown large as rapidly and smoothly as it did.

After my return from Italy, my friend Scott Greenburg and I sat down at my kitchen table and drafted a new private placement plan for Il Giornale. We were both young and fascinated by the possibilities, and we complemented each other well: I had the vision, and he knew what information and projections were needed to attract private investors and how to outline the opportunities and risks.

Since we were introducing something new to Seattle, I figured I had to open at least one store, to show people the practical operations and artistic appeal of an Italian-style coffee bar. To do so, however, I needed to raise an initial $400,000 in seed capital. After that, I calculated, I would need another $1.25 million to launch at least eight espresso bars and prove the idea would work on an extended scale both in and outside Seattle. From its inception, Il Giornale was intended to be a major enterprise, not just a single store.

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Il Giornale’s first outside investor was Ron Margolis—in some respects, the unlikeliest investor you could imagine. Ron was a physician who had put some of his savings into the stock market and the rest into small, risky start-ups, mostly businesses begun by people he got to know and trust.

When I approached him for money, Ron and I were total strangers. Sheri knew his wife, Carol, through professional contacts. One fall day, the three of them were walking their dogs through the fallen leaves in a Seattle park. Carol had an infant, Sheri was pregnant, and Ron was an obstetrician, so most of the talk revolved around babies. But when Sheri mentioned that I was looking to start my own company, Ron told her: “If Howard ever starts a business, I’m sure he’ll succeed, so I want to know about it.” Not long afterwards, Sheri arranged for me to meet with them. Carol invited us over.

At this early stage, I was still too excited about my idea to be nervous. I brought along the business plan Scott and I had spent hours writing. We had prepared the standard financial projections: how much money I needed to raise, how long it would take to open the first store, how long before we’d be profitable, how investors would get a return on their capital. I had even had an architect’s blueprint drawn up for my first store.

Ron never gave me a chance to show them off.

When we got to the Margolises’ home, we sat down at their dining table. “Tell me about this new business you’re starting up,” said Ron, after some small talk.

I jumped in eagerly. I told him about the inspiration I had had during my trip to Italy, about how a quick stop at an espresso bar is a daily routine for Italians. I described the flair and artistry the barista brought to the preparation of every espresso drink. I discussed my idea for displaying newspapers on racks for customers to read, in keeping with the name
Il Giornale.
If the espresso culture could thrive in Italy, I argued, it could in Seattle, too—and anywhere else, for that matter.

The more I talked, the more enthusiastic I grew, until suddenly, Ron interrupted me. “How much do you need?” he said.

“I’m looking for seed capital now,” I replied, as I started unraveling my papers. “Let me show you the financial projections.”

“Don’t do that,” he said, waving the documents away. “I wouldn’t understand them. How much do you need? Will $100,000 be enough?” Ron pulled out his checkbook and pen and wrote the check on the spot.

I wish all my fund-raising had been so easy.

Ron doesn’t invest based on financial projections but looks instead for honesty and sincerity and passion. He looks, in short, for someone he can trust. It was a risky move he made that day. It was four years before the company started to make any money. Ron and Carol had no assurance they’d get their investment back at all, let alone any return on it. But once the company went public, and the profits and stock price started climbing, they were rewarded: The shares they bought for $100,000 grew to be worth more than $10 million.

Passion alone is no guarantee of remarkable returns. Ron himself will tell you that many of his other investments, made based on the same instincts, didn’t pay back so handsomely. Some entrepreneurs fail because their idea ultimately isn’t sound. Others remain shortsighted and unwilling to give up control. Some refuse to bring in more money. Any number of different factors can knock a company off its course in the period between its founder’s initial enthusiasm and the eventual returns. But passion is, and will always be, a necessary ingredient. Even the world’s best business plan won’t produce any return if it is not backed with passion and integrity.

The irony of Ron’s vote of confidence in Il Giornale is that he is not even a coffee drinker. He invested in me, not in my idea. He’s a doctor, not a businessman. But his advice is worth remembering:

“It appears to me that people who succeed have an incredible drive to do something,” observes Ron. “They spend the energy to take the gamble. In this world, relatively few people are willing to take a large gamble.”

If you find someone who is, listen carefully; you may end up helping achieve a dream of amazing proportions.

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By the time my son was born, in January, I had raised the entire amount of seed money, $400,000, at 92 cents a share. (Because of two stock splits since, that’s the equivalent of 23 cents a share today.) The bulk was provided by Starbucks and Ron Margolis; the rest came from Arnie Prentice and his clients.

Arnie Prentice, co-chairman of a financial services firm who knew both Starbucks and Italian espresso, was one of the first to believe strongly in what I was trying to accomplish. He organized breakfasts and lunches for me to present my idea to his clients, putting his reputation on the line to validate mine. He joined the board of Il Giornale and still sits on the Starbucks board today.

The seed capital enabled me to secure a lease and start building the first Il Giornale store, in a new office building that became the highest skyscraper in Seattle, Columbia Center. It was at this point that Dave Olsen joined me (I’ll talk more about him in the next chapter). The two of us began working together to get the store running by April 1986.

But the bulk of my energy and time still went toward raising the next $1.25 million. We rented a tiny office on First Avenue, and I started pounding the pavement. I spent every minute of my day asking for money, racing from one meeting to another and trying to keep my pitch sounding fresh. I was on the phone constantly, before and after the first store opened, approaching every potential investor I could find.

I wasn’t just an underdog during that year; I was an
under-
underdog. It was the roughest period of my life. I felt as if I were being kicked and beaten every time I scratched on another door.

At the time, I was thirty-two years old and had been in Seattle for only three years. I had experience in sales and marketing, but had never run my own company. I hadn’t had any exposure to the moneyed elite of Seattle.

I knew nothing about raising money, and I was so naive I would talk to anybody. There’s a legal definition for an “accredited investor,” someone who has a net worth large enough to assume the risk of investing in a small start-up. Whenever I could find anyone who fit this description, I would approach him or her. I suspect that half the time I was talking to people who couldn’t have invested if they wanted to. I had to lower the price three times.

I was often turned away with a great deal of arrogance. When I was in high school, I worked one summer as a waiter in a bungalow colony at a restaurant in the Catskill Mountains. I remember how terribly rude some of the guests were to me. They would be brusque and demanding, and I’d run around and do my best to please them, and when they departed, they would leave only a meager tip. As a poor kid from Brooklyn, I figured this is what the rich were like. I remember saying to myself:
If I’m ever wealthy enough to vacation in a place like this, I’m always going to be a big tipper. I’m always going to be generous.

I had some of the same feelings during that year when I was raising capital, and I swore to myself that if I was ever in a position of being successful and approached by entrepreneurs asking me to invest, even if I thought they had the worst concocted concept, I would always be respectful of the entrepreneurial spirit.