Takeaways From The Balcones Controversy

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By Richard Thomas

Balcones line

(Credit: Balcones)

When people refer to Chip Tate and Balcones Distillery as “trailblazers,” they aren’t exaggerating. After several years spent in the brewing industry and a Summer 2008 apprenticeship under Jim McEwan of Bruichladdich, Tate set about building a distillery with his compatriots from scratch. In a spirit reminiscent of the early days of the craft brewing boom, they scraped together the copper and stainless steel to make much of their own equipment by hand. Balcones might not have been first modern craft distillery, but it remains the only distillery literally created by its own distillers.

Balcones went on to garner plenty of attention and garlands for its maverick spirit and innovative whiskeys, rapidly growing from start-up to pillar of the craft whiskey movement, which is why the current Balcones controversy reminds me so much of the early days of Steve Jobs. Like Jobs, Tate’s vision rapidly built a cutting-edge company and attracted fans that were devoted to both him and his products in equal measure. Also like Jobs, Tate has landed in a bitter dispute with his second round of investors, and he looks set to meet the same fate as Jobs: expulsion from the company he founded.

The thing is that if you’ve read anything about Steve Jobs, you know he had almost as many detractors as supporters. The full facts of the clash between Tate and his board remain unknown at this time, and for that reason assessing the right and wrong of the dispute is impossible. That said, there are some reasonable takeways to be made from the controversy and the response to it:

Tate Signed A Bad Deal. I can’t speak to what exactly Tate’s ambitions were in seeking his second round of investment, but what is known is that it lead him to sign away control of his company. I’m sure even Tate would now agree that was a mistake. As a matter of sound strategy, if he couldn’t raise enough money to meet his expansion ambitions without giving away control, he should have either scaled back or postponed those ambitions instead.

The Pundits Are Getting It Wrong. In the wake of the controversy, many whiskey pundits are joining a bandwagon playing the tune “We’ll see this thing happen over and over again.” Depending on what they mean by that, they might be making a bad call.

Perhaps that is just a vague and off the cuff declaration meaning the burgeoning craft whiskey sector is new, very fluid, and we’ll see a lot of changes before the boom has run its course. In that case, I completely agree.

Yet if the statement is meant to be taken literally, meaning the future will reveal many more bad deals that allow company founders to be pushed out of their own companies, it points to a profound ignorance of who the people in the craft whiskey movement are.

A TV producer recently asked me for help in finding craft distilleries with a “blue collar flavor,” and, as I had to explain, there are surprisingly few of them. Balcones’s start resembles that of an early craft brewery more than any other micro-distillery I can think of, and compared to that model most micro-distilleries are reasonably well-financed and decidedly white collar. These are outfits started by lawyers, successful businessmen,  ex-corporate sales and marketing people, and former Wall Street guys.

It’s hard to see business- and legal-savvy people like that being finagled out of their own company. At the very least, such people will be clear on their role in the company. Sure ugly ousters will happen again, as they happen in every industry, but such cases will hardly be the norm.

Balcones Is Tate And Tate Is Balcones, But Does That Matter? Despite its popularity, Balcones is still a small company and its main consumers are found among whiskey aficionados and geeks, exactly the same group of people who will pay close attention to ongoing controversy. If most of Balcones’s consumers didn’t know who Chip Tate was before the dispute between Tate and his board became public knowledge, they certainly do now. By all appearances, most of that consumer base has sided with Tate.

That said, this mess might turn out to be a mutual suicide pact rather than merely a public relations disaster for the Balcones board. Many observers are assuming that because Tate is the talent and the customers are behind him, Balcones is doomed without him. As history demonstrates (the aforementioned case of Jobs and Apple being only one of many examples), people can both be a fan of a visionary icon and continue to buy products from the company that spurned him. Tate’s exile does not automatically spell the end of Balcones any more than it serves as a bellwether for other companies.

Furthermore, if the corporate suits followed their standard operating procedure, they snookered Tate into signing a contract with a no-compete clause. We don’t know if that happened yet, but I would not be surprised if it proves to be the case. If so, the wise move for Tate would be to get that clause voided as part of a buy-out settlement, since otherwise he is stuck writhing on a hook, owning part of a company he no longer runs and helped compromise.

While it is clear that the way the Balcones board handled the dispute with Tate was an undoubted public relations disaster, that does not necessarily mean they destroyed the distillery in the process, despite its brand identity being so closely identified with its founder and head distiller. Beyond that, just because Tate, an engineer and brewer, signed a lousy deal doesn’t mean the craft sector is riddled with them, just like, say, the music industry.

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3 comments

  1. Capn Jimbo's Rum Project

    The idea that a bunch of wahoos would simply hand Tate $10M (now $15M) in a suitcase and wait to see if his novel and variously reviewed creations would translate to a mass audience, without the normal and customary corporate controls including a no-compete is simply foolish. Second, the notion that Tate was snookered and run out at the first opportunity? Likewise, silly.

    Even if that was the plan, they’d have waited until the new facility was up and running, that they’d extracted every bit of alleged expertise possible over the next three years (his no-compete), and only then ease him out. The only version that supports this sudden blow-up is the possibility that Tate simply doesn’t play well with others, is a micro-manager who can’t give up a micro-shred of control, and indeed has a temper – a possibility ignored here.

    Last, the notion that Bacones is Tate and vice-versa overlooks his friend and co-distiller Himstedt, who did much of the distilling, who knows the equipment and who has won yet another award, after the exit of the boy genius. They are now operating quite well with a team approach. Balcones has made clear they are going forward with or without him.

    As I write, yet another court date (Nov 7) seems to have been either rescheduled (or unreported, which I doubt) while mediations go on. Frankly, I doubt the Judge would approve yet another Tate sought delay, unless both parties assured that a resolution (or buyout). The company holds all the cards Tate – in a moment of grandiosity – signed, sealed and delivered. He made his bed. My view: for his own benefit this young experimenter must get over it, find a way to work with the company, and to finally, establish a mass-market reputation (that shows he can, in fact, produce the goods at a large distillery).

    It’s hard to imagine any other solution that will really work for him, and the more time that passes (and awards won in his absence) the less likely it will be. We should all hope that the parties can find a way to common ground once again…

    • … and is it no surprise that Cap’n Jimbo the Rum Burglar is a crank and a blowhard who came by months later and shot his mouth off without reading the article, just like he has at every mention of the Balcones thing? NO IT IS NOT.

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