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The Balcones Controversy

September 11th, 2014

Author - Dave BroomThe extraordinary reports coming out of the Balcones distillery in Waco, Texas may yet be seen as the first of many such scenarios as venture capitalists set their sights on the craft distilling industry. The distillery founder, Chip Tate, has refused to attend board meetings with the venture capital group that owns a majority stake in the company; the VC group has, in turn, accused him of what amount to terroristic threats. Whiskey-lovers are up in arms, fearing the outcome for this iconic craft distillery; the Twitter hashtag #nochipnobalcones is spreading.

Here’s what’s happened. The distillery was established — indeed, was literally built — by president and head distiller Chip Tate in 2008 and has subsequently become one of the flagships of the U.S. craft scene internationally. With demand for the Balcones range rising, Tate needed to increase capacity and in, 2013, he and second round investor Michael Rockafellow accepted a substantial offer from a group headed by Greg Allen, along with a number of smaller investors, which bought out Stephen Germer (Balcones’ initial investor), giving them a majority stake in the company.

Allen’s background is with his family’s food processing business. Prior to that he worked in Goldman Sachs’ mergers and acquisitions department and as an attorney specializing in venture capital financing and emerging growth companies.

Chip Tate

Chip Tate

It appears that a combination of differing philosophies as to future strategy, a clash of personalities, and concerns over the rising costs of the distillery expansion has resulted in a deterioration in relations between Tate and the new board, with them moving to significantly reduce his role within the company he founded. As a result of this, Tate refused to attend board meetings.

On August 22nd, the boardroom battle ended up in court, where judge Gary Coley granted a temporary restraining order enforcing a 90-day suspension on Tate. According to the board, his “unconscionable and reprehensible” behavior could delay the $10 million distillery expansion project. They also alleged that Tate had threatened the life of chairman Greg Allen and suggested he would rather see the distillery burn than have it wrested from his control, claims which most commentators feel were made in the heat of the moment and are hardly credible.

While Allen has made some documentation available to the court, the restraining order has gagged Tate, preventing his side of the story to be heard. (For the record, we have not attempted to speak to him, nor have we received any communication from him.) A hearing in the case is set for Sept. 18.

It leaves a number of questions. The extreme reaction of the board to the apparent rise in costs of the new facility (inevitable in any distillery build) has raised questions as to the financial stability of Allen’s investment group, and makes some analysts wonder whether the Allen-led consortium was investing in Balcones with the intention of selling it at a profit soon after the expanded plant was in production.

If so, this will not be the last time we will see this happen. Investors unfamiliar with the long-term nature of the whisky business are liable to only see potential profit, with no great understanding of the deep pockets required to invest in plant, warehousing, and inventory. What further complicates matters where craft distilleries are concerned is that they are not just buying into a brand, but a highly personalized vision. Without Chip Tate, is there — can there be — a Balcones?

Photo: darkrye.com

27 Responses to “The Balcones Controversy”

  1. John Hansell says:

    I wanted to add that the main reason for this post was to say that, with all the craft distillers popping up and the capital investment required, you can count on seeing more of this kind of situation in the coming years. We don’t plan on posting about every distillery feud that surfaces in the news, nor were we particularly focusing on (or picking on) Balcones.

  2. Adam says:

    It’s a terrible situation.

    The high-tech industry, which is also very personality-driven, has done a good job of avoiding problems like these by structuring investment rounds such that the founder maintains full or majority control over the board, even as they give up equity. Heck, Jim Koch did that too: I understand that he still controls 100% of the voting shares of Boston Beer, even though it’s a publicly traded company.

    I don’t know if small craft distillers have the kind of clout to demand that kind of control, but I feel like it’s a necessity to avoid situations like this. It’s an industry segment that’s growing very quickly, and investors want in on it… so maybe that gives these distillers a little leverage so they can keep running the show their own way.

    • Michael Soo says:

      The main difference with the Jim Koch:Chip Tate analogy is that JK has a JD and MBA from Harvard and was a consultant at Boston Consulting Group so he had a very firm grip on the business end of the craft brewing. He has been the most successful at selling beer of any of his peers and there’s a reason, he’s worth a billion dollars–it’s not because he’s the best brewer but because he’s the best businessman in the industry.

      The problem with any company that is looking to expand by taking on outside investors is that usually you have to give up control when you take someone’s money. I would not invest substantially in a (high-risk) small company without receiving equity and/or control in return. Unless the company has a long track record of making good decisions and money, then this is pretty unavoidable. I just hope new distilleries and breweries learn this lesson as they grow and don’t try to expand too quickly. In beer world, it seems like most brewers have grown the right way

  3. Derrie Deare says:

    Investors want ROR(rate of/on return). The do not have passion for a particular craft or industry,however, they are only driven by ROR.
    The classical situation in this case is a passionate founder, creator of whisky and lover of malts vs the “rate of returners”!. He may not be as concerned with the mundane protocol of Wall Street or any other street , because his objective and “life driving force” is the production of great whisky! I have suggestions for him, but refuse to do so in a public forum.
    I wish Chip well and hope it all works out in the end, because he makes some “damn good whisky”!!!

  4. Clay Risen says:

    I agree that this isn’t the last investor-founder kerfuffle we’ll see, if only because such deals are already in place, waiting to go off like a landmine. But I also hope, and expect, that the Balcones story will serve as a warning for any distillers interested in bringing in outside money. As some of noted, it’s arguable that Chip made a big mistake in giving these guys a controlling interest in the company; details will emerge, but that seems like a strong takeaway, especially if, as Dave notes, the investors aren’t well-versed in craft distilling.

    • Lew Bryson says:

      It’s an old saying, but a true one; I first heard it from Julian Van Winkle, probably 15 years ago.
      “Know how to make a small fortune in the whiskey business? Start with a large one.”
      You really need to do your due diligence. Not every business is the same, but most investments are: the more you know about the business before you invest, the better.

  5. As far as “commentators” are concerned the one who counts the most is the Judge in this matter. The restraining was neither simple nor run of the mill. The local judge is well aware of Tate’s home town hero status, and you can be sure his restraining order was as fair and unabiased as possible. No restraining of the stunning breadth, and such great and complete detail – which literally shut Tate down almost completely – is granted without reasonable cause based on the presentation of adequate and persuative evidence. The request must be seen as reasonble and more provable than not.

    Such a powerful order – without such evidentiary cause – will not be granted. Further, a reading of the company’s filing and the order allege extreme and repeated negative and damaging actions by Tate that go far beyond the highlights presented here. An actual reading is shocking. It should go without saying that such allegations and claims will certainly be challenged; thus you can be sure that the company is fully prepared to defend each and every allegation successfully.

    Since the company better than anyone realizes the damage from this process, you can be sure this path would not have been entered unless the damage from not acting would have been even more severe. Clearly the company felt forced into this postion, particularly at this early stage.

    Tate did not agree to this deal blindfolded. If he failed to define and guarantee his role and responsibilities from the get go, he has no one but himself to blame. From the beginning I felt his need to expand was premature and ill considered, particulary when his novelty and experimental few products had yet to understood. This young experimenter had incredibly good early fortune, but perhaps too soon and too fast before the niche, the market and the process were fully understood. His claim of being the next Balvenie or Macallan – really? Scaling any small business, particularly one not fully realized, and particularly so dramatically was extremely risky at best. Combine that with micro-management and the need for near total control, and well…

  6. Tadas A says:

    Capn Jimbo – are you the lawyer for the Greg Allen? 😉 Are you an involved party? A lot of accusations, plenty of fancy words and anger, but nothing proving your point or any facts.

  7. danz says:

    Capn Jimbo has been trolling this comment, and variations on it, on every forum he can find, in an apparent attempt to drive traffic to his blog/forum. His descriptions of the legal system and significance of the proceedings are not accurate. Don’t take the bait.

    • Jim W. says:

      Agreed. Pretty much everywhere Capt. Jimbo shows up, he trolls, flogs his blog, and dribbles misinformation.

      The less said about him beyond that, the better.

      • That’s funny. Forgive me for linking my website, as have many others. If you have a disagreement it’s with the Court and an unbiased judge who made a stunning order based on certainly adequate and reasonable evidence. Or with the many others who like me also made the point that this talented young distiller gave away control to his own detriment.

        My own view: where there’s smoke, there’s Chip Balcones and his Brimstone, lol…

        • Jim W. says:

          Just to poke one glaring hole in your pompous pontificating, and without taking a side in the Balcones thing, just because a judge does something does not make said action sacrosanct. Judges are biased, judges make mistakes, and judges are corrupt. It’s why we have this thing called “an appeals process.”

          In Logic 101, what you have done would be called a fallacious appeal to authority.

  8. Josh Feldman says:

    On the contrary to what Capn Jimbo has said, all we’ve been able to see so far is the court documents presented by the Balcones Board. The accusation of threats is a matter of unsubstantiated hearsay, and a very effective line in character assassination, by the way. The timing of the restraining order exactly coincides with at attempt to restructure the ownership of the company by taking on another major investor – an entity called ICC. This fact implies that it’s possible that the entire episode is financially motivated and has more to do with Chip’s voting block than his actions. Allegations from a financially interested party are not unbiased and I’d caution everyone from the kneejerk belief that Chip Tate threatened anyone, just because the people who are attempting to take his business from him say so.

    If you’re interested in reading the court documents yourself, Whisky-File blog put them on line here:

    http://whisky-file.com/2014/09/10/heres-the-balcones-lawsuit-court-documents/

    • Derek J. says:

      A little research shows that ICC is not an investment group, they are an engineering firm that specializes in beverage making facilities including breweries and distilleries. Likely, especially with the way things are worded in various documents, alludes that Balcones has hired ICC to help facilitate the design of the new distillery. More on them: http://www.iccinc.net/

  9. James Rodewald says:

    The first chapter in my just-published book, “American Spirit: An Exploration of the Craft Distilling Revolution,” is largely a discussion with Chip Tate about the need for investors and the difficulty of finding the right kind of investors. In light of what has happened, it might add a bit of Tate’s thinking (if not his side in the dispute) to the conversation.

  10. Roque says:

    The allegations in the court filings are no more and no less than allegations. It’s easy to speculate when we can’t hear Chip Tate’s side, which I’m as eager as everyone else to hear.

    Thanks Derek, for digging that up about ICC. It’s possible that’s the group referred to in the documents. It’s clearly stated in the filing, however, that Balcones was raising capital from outside sources in a deal that was to be finalized this week. What’s not clear is who the investors were or how that relates to the conflict with Tate.

  11. MadMex says:

    Evil Capitalist — Power to the People

  12. MadMex says:

    Burn it down. Burn it down. Burn it down.

  13. There is a lot of speculation here, in Dave’s original post as well as the comments. Speculation is inevitable for the also stated reason that this may be the first of many similar clashes between the creative and business sides in a successful mirco-distillery. Just try to separate the facts from the speculation as you read about the kerfluffle at Balcones.

    The thing is, although the micro-distillery business is new, there is nothing really new here. In my advertising career we had a saying, “the problem with owning an advertising agency is that all of your inventory goes down in the elevator every day.” If your business depends on creative people, you have to keep the creative people happy or you don’t have a business.

    And always beware the hubris on both sides.

    The other side of this, of course, is two-fold (1) many business types think creatives are interchangeable. If one breaks, you just plug in another one, and (2) many business types have such huge egos they think they are the reason for the company’s success, not the creatives.

    The nice thing about a market economy is that when people make bonehead decisions they lose all their money and go away.

    • two-bit cowboy says:

      There’s true wisdom in these words. Nothing jaded or accusatory, just pure, logical observation. Small-town Main Streets across the land see the “… business types … [with] huge egos …” come and go every year. And to most I offer a good riddance.

  14. This is the old saying, “Be careful with whom you get in bed with.” As we are all whisky lovers here, at the end of the day it’s still a business. If you have investors who have a majority say in the business, unfortunately, they may go a different direction that what you intended. Chip’s a good guy and I hope this goes away quietly.

  15. Steve Huff says:

    I think Balcones is special product in a sea of innovation. If his investor group wants to ruin that, I thin Chip should go on offense, both in terms of litigation and in terms of buying those commies out. I would be willing to speak to him confidentally and at no charge. I also have an Austin based brother that owns a VC firm. It could not hurt to call or email. I think the corporates are boxing him in and making him look derelict. Chip should not allow this to happen or he risks all his great work going to the investors.

  16. Dave Schmier says:

    In the grand scheme of things this is a business dispute. In the spirits business, the cult of personality is often used to build brands, some cases warranted, some not, but that is a story for another day. Much like the speculation surrounding the allegations being presented by both sides, that’s a story that will be fully told (or hopefully not told as both sides come to a mutually beneficial agreement)
    The story here is the next phase of the growing micro distilling and small spirits movement. I believe this is a touchstone moment where all the fans (and some of the producers) come to the realization that this is a real business, and a tough one at that.
    Many of the players involved (most certainly including Chip) in the small spirits world are passionate about their craft and bringing great products they bring to market.
    Being small gives the passionate entrepreneur the ability to follow his or her whims and create special and unique products. Sometimes these products delight a small audience, but in several notable instances, these passionate entrepreneurs have developed in an extreme short amount of time, a worldwide following and outsize demand for their product.
    That leads to tough decisions for the entrepreneur – Stay small, grow organically or take on investors and realize a bigger dream.
    Distilling equipment and laying down whiskey is hugely capital intensive with few standard financing avenues available. Surprising as it may be, investors do not see positive press and awards as collateral for your business, they want equity and control. The entrepreneur must make a choice, nothing is free, and as smiles, handshakes and flattery over previous accomplishments are exchanged, the investor is interested in making money and less about your belief of what kind of yeast creates a better tasting whiskey.
    Beer (see
    Steve Hindy’s (Brooklyn Beer) book on the Craft Beer Revolution,)went though the same issues in the late 90’s as spirits are dealing with now-.Venture money and established companies wanting a piece of the action, lots of new players, debates about what is craft, etc. it’s part of the growth. Playtime is over. (though we can all continue to have fun)

    I do hope both Chip and his investors figure this out productively. I wish them both well. Chip has accomplished a lot in a short period of time and earned respect with many in the industry. The investors have taken a big chance in our industry, that needs to be respected as well. Be great if Chip finds a path back to Balcones (agreement, new investors, court, etc) but if Balcones thrives without Chip, it will be both a great testament to Chip’s innovation and talent and vision as well as a signal to other investors that their resources can be safely invested in the spirits business.

  17. Far be it from me to say I told you so, but…

    Chip Tate of Balcones Whiskey has now been found in contempt of Court and for good cause. As should be abundantly obvious to all except for his small crew of denialists/sycophants (see above), his past and present actions seem entirely consistent and self-destructive. His fate was largely self-determined and he now appears to be paying the price. His best move – long past I’m afraid – would been have to face the fact that he chose to give up control and to – however reluctantly – cooperate with the company, proceed with the expansion and preserve what was a good reputation. And move forward.

    To the contrary thumbing your nose at the Court yet – by failing to abide by the TRO, flouting the court order, delaying court appearances, destroying data and continuing to communicate with the media, including Chuck Cowdery (yes, I pointed that out too) – was predictably not well received by the Court, as should now be abundantly obvious. A wise man knows when to hold em, and when to fold them.

    His contempt is detailed here:
    http://www.wacotrib.com/news/business/judge-rules-balcones-distilling-founder-in-contempt-of-court/article_5ff51a06-a2ce-5bfa-be91-6075e5eb6da8.html

    At this writing a hearing to determine Tate’s punishment for being found in contempt was to be held two days ago. Also to be determined will be whether the TRO will now become a temporary injunction, no doubt with new restrictions. I take no joy in Tate’s fate, but there’s comes a point when we all must step back, observe and accept his actions for what they are, and trust that justice is being done.

    Time to fold em Chip…

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