The Balcones ControversySeptember 11th, 2014
The 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.
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?