CHAPTER 5
Naysayers Never Built a Great Enterprise

We judge ourselves by what
we feel capable of doing,
while others judge us by
what we have already done.

—HENRY WADSWORTH LONGFELLOW,

Kavanagh, 1849

It’s a classic American tale, every entrepreneur’s dream: to start with a great idea, attract some investors, and build a business that is profitable and sustainable. Trouble is, you usually have to start as the underdog.

If you want to know how underdogs feel, try to raise money for a new enterprise. People will shut you out. They’ll regard you with suspicion. They’ll undermine your self-confidence. They’ll offer you every reason imaginable why your idea simply won’t work.

Being an underdog has a flip side, though, for facing such adversity can be invigorating. In my case, part of me relished the fact that so many people said my plan couldn’t be done. No matter how many times people put me down, I believed strongly that I could pull it off. I was so confident of winning that I enjoyed being in a position where people’s expectations were so low that I knew I could beat them.

Nobody ever accomplished anything by believing the naysayers. And few have done so by sticking to proven ideas in proven fields.

It’s those who follow the road less traveled who create new industries, invent new products, build long-lasting enterprises, and inspire those around them to push their abilities to the highest levels of achievement.

If you stop being the scrappy underdog, fighting against the odds, you risk the worst fate of all: mediocrity.

“NO” IN ITALIAN DOESN’T SOUND AS BAD

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.

SOMETIMES SINCERITY SELLS

BETTER THAN BUSINESS PLANS

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.

HOW THE WORLD LOOKS TO AN UNDERDOG

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.

Many of the investors I approached told me bluntly that they thought I was selling a crazy idea.

“Il Giornale? You can’t pronounce the name.”

“How could you leave Starbucks? What a stupid move.”

“Why on earth do you think this is going to work? Americans are never going to spend a dollar and a half for coffee!”

“You’re out of your mind. This is insane. You should just go get a job.”

In the course of the year I spent trying to raise money, I spoke to 242 people, and 217 of them said “no.” Try to imagine how disheartening it can be to hear that many times why your idea is not worth investing in. Some would listen to my hour-long presentation and not call me back. I’d phone them but they wouldn’t take my call. When I finally got through, they would tell me why they weren’t interested. It was a very humbling time.

The hardest part was maintaining an upbeat attitude. You don’t want to pay a visit to a prospective investor and not display the full measure of passion and enthusiasm about what you’re proposing to do. You can’t be dejected when you meet with a landlord to begin negotiations about leasing a location. But if you’ve had three or four fruitless meetings that week, how do you whip yourself up? You really have to be a chameleon. Here you are in front of somebody else. You’re depressed as hell, but you have to sound as fresh and confident as you were at your first meeting.

Still, I never once believed, not ever, that my plan wasn’t going to work. I was truly convinced that the essence of the Italian espresso experience—the sense of community and artistry and the daily relationship with customers—was the key to getting Americans to learn to appreciate great coffee.

There’s a fine line between self-doubt and self-confidence, and it’s even possible to feel both emotions simultaneously. Back then, and often enough today, I could be overwhelmed with insecurities, and at the same time have an abundance of self-assurance and faith.

Frankly, when I started, I don’t think I was all that good at raising money, because it took me so long to meet my goals. With practice, though, I got better at making my presentation and at anticipating objections and concerns.

In the meantime, I was eating up my seed capital. In April, when we opened the first Il Giornale store, it was exciting to watch as Seattlites discovered the pleasures of handcrafted espresso drinks on their way to work. From the first day, sales exceeded our expectations, and the atmosphere was just as we had envisioned it. But it would be a long time before we could expect any profits, and in the meantime I had to pay rent and hire people, spending funds I didn’t yet have.

As each month passed, we worried about how we were going to continue in business because the money wasn’t coming in as I had planned. At times we weren’t sure we could meet payroll or pay the rent. Dave Olsen and I would sit together and ask each other: “Who do you want to pay this week?” In fact, we never did miss a payroll, but we came frighteningly close.

For some reason, the people around me never doubted that I was going to get them through it, that I would figure out some way to work things out. Somehow, their confidence strengthened my resolve. The odds against our pulling it off were so slim. Investors had to have a pretty strong stomach to bet on our success.

I continued to get commitments, but I couldn’t use any of the money until I reached what’s called an “impound number.” The impound number is the minimum amount of money an entrepreneur must raise to gain access to the original cash commitments. In my case, I couldn’t use any of the money I raised until I had guaranteed investments totalling $900,000.

A key turning point for Il Giornale came in June, when, to my relief, I was finally able to meet my impound number. An investor named Harold Gorlick gave us more than $200,000, the biggest single check I’d ever received. I stared at it for a long time, wondering what magic mixture of timing and inclination it takes to make any given investor believe. Gorlick was a client of Arnie Prentice’s. He was an unusual guy, a self-made man who had made his fortune in the heating and plumbing businesses. He was rough around the edges, but I became very fond of him.

A few years later, Harold introduced me to his nephew, a rising jazz saxophonist known as Kenny G. We were two young men, each aspiring to make a mark in different fields, and our friendship grew as we faced similar kinds of challenges. Kenny eventually invested in the business, too, and even played at employee events and performed benefit concerts at our plant and market openings. His music became a part of the culture of the company.

With the impound number, I was able to collect on earlier commitments, easing our immediate financial crisis. But the goal of $1.25 million still seemed far off. There were not many doors left to knock on.

YES, YOU CAN REINVENT A COMMODITY

The tension grew as the summer progressed. The biggest barrier I continued to face was the apparent improbability of my own idea at a time when investors had so many other, more attractive industries in which to put their money.

One of the groups I approached was called Capital Resource Corp., a small business investment corporation, in which fifteen to twenty partners pooled their money to back promising start-ups. By now, the success of the first store was visible and my pitch had grown more ambitious. Il Giornale Coffee Company, I figured, would open and run as many as 50 Italian-style espresso bars, starting in Seattle but eventually spreading to other cities.

The member who did due diligence, Jack Rodgers, recommended a sizable investment, but the group declined. According to their charter, they were committed to investing in high-technology start-ups. There’s nothing high-tech about coffee.

Conventional business wisdom tells you that the most attractive business start-ups have a proprietary idea or technology—something to offer that no one else has. Notable examples are Apple’s computers, Intel’s chips, and Microsoft’s operating system. If you hold a patent to your product, so much the better. It’s less risky if you can erect some barrier to entry, to prevent a dozen competitors from popping up and grabbing your market away from you before you can establish yourself. And the most promising ideas are those in the industries of the future, such as biotechnology, software, or telecommunications.

Il Giornale didn’t fit any of these paradigms—nor does Starbucks today. We had no lock on the world’s supply of fine coffee, no patent on the dark roast, no claim to the words caffè latte apart from the fact that we popularized the drink in America. You could start up a neighborhood espresso bar and compete against us tomorrow, if you haven’t done so already.

I heard all the arguments about why coffee could never be a growth industry. It was the second most widely traded commodity in the world, after oil. Consumption of coffee had been falling in America since the mid-1960s, as soft drinks surpassed it as the country’s favorite beverage. Coffee shops have been around since time immemorial.

I explained, again and again, the rising interest in specialty coffee. In cities like Seattle and San Francisco, a growing niche of people had learned to drink high-quality coffee at home and at restaurants. But they had little or no opportunity to experience good coffee in the workplace. And while in more and more cities, small neighborhood places were starting to sell quality whole-bean coffee, espresso was available mostly in restaurants as an after-dinner drink. Although a few espresso bars did exist, no one offered high-quality, quick-service espresso to go in urban areas.

What we proposed to do at Il Giornale, I told them, was to reinvent a commodity. We would take something old and tired and common—coffee—and weave a sense of romance and community around it. We would rediscover the mystique and charm that had swirled around coffee throughout the centuries. We would enchant customers with an atmosphere of sophistication and style and knowledge.

Nike is the only other company I know of that did something comparable. Sneakers were certainly a commodity—cheap and standard and practical and generally not very good. Nike’s strategy was first to design world-class running shoes and then to create an atmosphere of top-flight athletic performance and witty irreverence around them. That spirit caught on so widely that it inspired myriads of nonathletes to lace up Nike shoes as well. Back in the 1970s, good sneakers cost $20 a pair. Who would have thought anyone would pay $140 for a pair of basketball shoes?

How, then, should you evaluate a good investment opportunity? How do you identify a good entrepreneurial idea? What were people missing when they turned down the chance to invest in Il Giornale?

The answer’s not easy, but it has a lot to do with instinct. The best ideas are those that create a new mind-set or sense a need before others do, and it takes an astute investor to recognize an idea that not only is ahead of its time but also has long-term prospects. Back in 1985, although Capital Resource Corp. turned me down, Jack Rodgers and several other individuals who were part of that group invested in Il Giornale on their own. They didn’t let conventional business wisdom stop them. I’ve often wondered if their high-tech investments paid off as well.

BREAKTHROUGHS AREN’T CHEAP

By August, I felt as if I were in the twelfth inning. The store had been open four months, and business was good. But I still had raised only half as much as I needed. I had already signed a lease for a second store, and I didn’t know how I would pay for it. I had to score the winning run soon.

There was one big powerhouse I hadn’t tapped. Three of Seattle’s most prominent business leaders had not yet heard my pitch. This was the triumvirate of Jack Benaroya, Herman Sarkowsky, and Sam Stroum. Locally, they were titans who had developed some of the tallest buildings, most successful residential complexes, and sturdiest businesses in Seattle. Active in the Jewish community, and generous philanthropists, the three were friends and sometimes invested together.

Herman’s son, Steve, is about my age. One day he brought his father into the Il Giornale store and introduced me, and Herman agreed to let me make a presentation to the three of them. It was my last chance. If these three big investors turned me down, I didn’t know who else to go to in Seattle. It had to work.

By now, I had made my pitch almost a hundred times, but I practiced it again and again before that crucial meeting. I didn’t want to step on stage until I was absolutely prepared. Even if they invested only a little, their commitment would be an invaluable endorsement, and I could count on others in the higher-echelon business community to follow their lead.

The meeting was to take place on the top floor of one of Seattle’s tallest office buildings. I had to walk around the block three times to calm myself. My presentation went well, and they appeared ready to invest a lot of money. But the group made some stiff demands. They wanted a lower price, and options, and board seats. It took two weeks to work out the details. Then they decided, as a group, to invest $750,000. That took me over the top. I had made it.

I ended up raising $1.65 million from about thirty investors, including the seed capital. The biggest chunk came from the Big Three. Along with Arnie Prentice, Harold Gorlick, and Jack Rodgers, Steve Sarkowsky became a director and strongly supported me during some tense and difficult times later. If you ask any of those investors today why they took the risk, almost all of them will tell you that they invested in me, not in my idea. They believed because I believed, and they prospered because they trusted someone in whom nobody else had confidence.

Il Giornale has faded into history, remembered by only a few of its old customers. But those initial investors ended up earning a one hundred-to-one return on their investment. How that happened involved some strange twists of fate.