Starbucks (with Howard Schultz)

Alright, we're rolling. We're rolling. We get to see how you guys do this. It's kind of interesting.

Usually a pump up music. We can do that. We can do that. I saw your turntable.

That's beautiful. What do you want to hear? Now we're starting. Ben's keeping us on track.

Who got the truth? Is it you? Is it you? Is it you?

Who got the truth now? Is it you? Is it you? Is it you?

City down? Say it straight. Another story on the way. Who got the truth?

Welcome to Season 14, Episode 5 of Acquired, the podcast about great companies and the stories and playbooks behind them. I'm Ben Gilbert. I'm David Resenthal. And we are your hosts.

Seven years ago, David and I did an episode on the Starbucks IPO. Just the IPO. That episode was a mere one hour and 24 minutes and Starbucks is a $90 billion institution in our world that deserves the full acquired treatment. What were we thinking?

Well, it actually was amateur hour back then, David. Gotta start somewhere. Well, today we have a very special third co-host to discuss this third place, Howard Schultz. Howard started working at the small chain of three Starbucks stores in 1982, eventually buying it and becoming CEO.

As you probably know, he is effectively the founder of the Starbucks we know today that exists on every corner of the earth. I come to you, David, and listeners, as an unabashed Starbucks fan. In this tumultuous time for the company, I am absolutely pulling for them in every way possible, and that is going to come through in our conversation. You may have seen the news recently that they had a very rough last quarter with a key metric that you may remember from previous episodes as same store sales.

These dropped, and their stock price plummeted as a result. This is on top of a tumultuous pandemic era and some of their stores unionizing and a change in leadership. We thought that this would be the perfect time to sit down with Howard and unpack. Why did Starbucks work in the first place?

And how did it work at such grand scale? What can other founders and business leaders learn from what got them here? And although he is no longer CEO, where do they go now? It really is incredible.

One of the very, very small number of food and beverage establishments that has scaled to the entire world. Yeah, most of those types of concepts do not work in different countries and continents. But Starbucks is different. Today they're in over 80 countries with 39,000 stores across the world.

They're even huge in China, a country that didn't consume very much coffee until Starbucks arrived. They are a bank scale financial institution as well. At any given time, Starbucks holds $1.7 billion that customers have loaded onto gift cards, but not yet spent. So how did they go from one-store selling beans, not even drinks and cups, just beans, to the default meeting place in communities everywhere?

Today we tell that story. And listeners, this episode has video. We recorded it in person in Seattle at the Schulz Family Foundation, and you can watch it on YouTube. And if you want more from David and I, you should check out our second show, ACQ2, where we interview founders, investors, and experts, often as deeper dives in topics that we covered on the main show.

Recent episodes have been awesome with the CEO and the founder of Synopsis of Starfish Space, for their exploring the space industry. And we've got some great stuff and payments coming up next, too. We do. Alright, so with that, this show is not investment advice.

David and I may have investments in the companies that we discuss, and this show is for informational and entertainment purposes only, on to our episode with Howard Schulz. Well, I do have to tell you, and I think I've told you this off camera, for the last, almost 10 years, every single day, starts with a spinach and feder wrap. I assume there are other people like me in the world, but it's always an iced almond milk latte with whipped cream and a spinach and feder wrap. And so thank you for powering approximately a third of the cells in my body.

Oh, God. It's a great start. And also, here's another stat that David... You've done the math on it.

I have done the math. I exported all of my credit card transactions since 2011. Of course you did. And I wish I had more history than that, but that was the oldest I could get.

I've spent $23,000 at Starbucks since 2011. Oh, God. Okay. So we want to start with Starbucks 1.0, and listeners may know that there were three founders of Starbucks, none of which were named Howard Schulz.

Correct. So take us back, you know, in the Starbucks prehistory before you arrived, how did the company start? Well, since I wasn't there, this is what I know. There were three founders, Jerry Baldwin, Zev Segal, and Gordon Belker.

And the story that was told to me is that one or both of them were going to school in California in the Bay Area. And they became enamored with Pete's coffee company, which Alfred Pete was more than anyone else in the history of coffee in America was the true pioneer. He brought specially coffee, Arabica coffee to Northern California. And Jerry Baldwin and Zev became so interested and intrigued with what Pete's was doing and given the fact that they were from Seattle, beside that they would try and bring Starbucks coffee in the form of Starbucks to Seattle, Washington.

Now, what is not known is that when Starbucks opened in the Pike Place market in 1971, they were using Pete's coffee. Really? No one knows that. That's new because they were not roasting coffee.

So they were bringing coffee from San Francisco to Seattle. They were not calling it Pete's, they were calling it Starbucks. So it's Pete's coffee and Starbucks bags. Yeah.

Again, I wasn't there, but that's kind of the folklore. After the three founders built that store, opened that store, I get the sense that there was some kind of fallout between the three of them and Zev Segal. Eventually left the company. That brings us to 1979, 1980 around that time when I came to Seattle, Washington for the first time.

So I was working for a Swedish housewares company based in Sweden called Hammerplast. That company had a beautiful non-electric coffee maker, kind of a thermal unit. And we had a big customer in Macy's in Northern California. And I was in California on a sales call and I had heard that there was a small company in Seattle, Washington was buying a lot of this product.

So given the fact that they're going to Seattle, I was already in West Coast. I figured I'd come to Seattle and see what was going on. Starbucks buying it for use in their store. Now, but here's the consumer device.

Yeah. But you have to remember Starbucks Coffee Company from 1971 until around 85, 86 only sold pounds of coffee. There was no beverage. That's, you know, we're going to get into the epiphany of it.

Yeah, of course. And so I walked into the Pike Place store for the first time on a beautiful day. Just like this, the sun was out. There was snow on the mountains, the clean fresh air and I walked into the Pike Place market and I walked into the Starbucks store.

And I was blown away by the experience, the romance of coffee, the education. And it just spoke to me. I had never met Jerry Baldwin, the founder who was the CEO at the time. And I became interested in and treat with what Starbucks was doing and asked if I could meet Jerry.

One thing led to another, I met Jerry Baldwin really hit it off and we established kind of a vendor customer relationship over a course of a year or so. Starbucks had three stores at the time, only three. And over the course of the next year or so, I became more and more interested and intrigued with the possibility of leaving New York City. Jerry and I were dating, we're not married.

And I kind of maneuvered my way into a job working for Starbucks. And so Jerry and I drove to Seattle, Washington on Labor Day weekend in our old Audi car with a Golden Retriever. And we came here because I was offered the job as a head of marketing for Starbucks when they were getting ready to open their fourth store in 1982. Still just selling beans.

Only beans. That's the whole, yeah, still beans. The interest that the company had in me at the time I think was they were really interested in expanding, but their dream or the plan at the time was, could we expand to Portland, Oregon? Remember, it was a tiny company.

It was Grand Ambition. Yeah, and I never had any idea, of course, what was about to happen in unfold of the subsequent years, but that was, I arrived in 1982 as a head of marketing. So when you and Sherry arrived here, like, what was the coffee landscape? I mean, there were these three soon before Starbucks beans store here in Seattle, Alfred Peave was down in the Bay Area.

But what was coffee culture? I mean, it was like folders and maxiles. Yeah, it was, it was Deminimus. It was another coffee company, which was Seattle's best coffee, which was another retailer that was kind of at the same size and scale at Starbucks, both equal at the same time.

But you couldn't even get a New York Times in Seattle in 1982, 83. It was not no good food to speak of. And Starbucks was a true pioneer where they were educating customer after customer about what could coffee taste like. And the pipe place market gave them an interesting vehicle because of the tourists.

And so Starbucks actually started establishing a mail order business as a result of all the people who are coming into Seattle. And I think if I remember, there was so many points that I can remember where people were talking about Starbucks way outside of Seattle, as if it was some kind of iconic big company. I think people came to Seattle. Is this it?

This is the 800 900 square foot store in Seattle, Washington and Pike Place Market. This is a mecca. And so tourists would come, they would buy a bag and then they would fill out some kind of information. So I'd like to have this mailed to me.

And so I'm having a great mail order business in my city. Yeah. That's what happened. Because coffee has a shelf life of basically a week to 10 days and we didn't have a vacuum bag at that time.

We were shipping small amounts because to Jerry Baldwin's credit, he had such a fastidious point of view about quality and freshness. And I think that had a huge impact on me. But this couldn't have been like a great business. You're shipping small amounts.

No, it was the logistics costs, you know, the scale like. This was a small business. But the equity of the brand, even back then, was much larger than the size of the business. And the opportunity that I saw, even when we had four or five stores, was well beyond Portland, Oregon.

And I was always kind of pushing. We could do so much more. And then the whole thing blew up for me when I went to Italy in 83. Okay.

So before the Italy trip, I just want to really contextualize coffee in America. I think coffee had been declining since like 1940. It's still part of the American culture, but it's not that it's on the way out, but there's nothing new or interesting, except for this little segment of special which was tiny. And I think what you've just described, the reason for that is that coffee was terrible.

It was instant coffee, stale coffee, and primarily robust beans, which is the low-grade coffee that Starbucks was never involved in. Yeah, walk us through the two types of beans. There's mainly two types of agricultural coffee grown for commercial use. Robustab beans, low-end coffee, primarily in instant coffee, and high-grade arabica coffee.

But even within the arabica coffee, there's significant segments of quality and integrity, and Starbucks has always played from 1971 to today at the highest level. And my understanding from our research is that the robust market really developed, as you say, with the instant coffee market, and that was kind of a product of World War II, right? It was like, hey, we got to get the troops, this product to survive. And so we just need a lot of beans, and we need to ground them up and create this instant product.

I believe Maxwell House was involved in inventing. Yeah, you're exactly right. I mean, it was just fuel and bitter, acidic, and yeah, and I think World War II and the GIs were kind of the impetus for that kind of quality coffee, not quality coffee to exist and have any kind of run after the war. So you show up at Starbucks, you know a little bit about the market because you've been a supplier of theirs, but you happen to be a pretty talented salesman from your time at Xerox.

I want to make a tie here. Our previous episode was the Microsoft episode, or at least Microsoft volume one. You were selling word processors made by Xerox. Tell me what word processors were in the mid-says.

Yeah, so my territory was 42nd to 48th Street from Fifth Avenue to the river. And I had to make 50 cold calls, physical cold calls a day. That was a job. The Xerox job taught me incredible amounts about not only selling but humility, humility, because the rejection every day was so significant.

And you put on your suit and tie and you go in and office building. There's no security at that time. Just go in and you go from the top floor to the bottom. And then there are other people selling other products.

We're doing the exact same thing. And you had to get by the receptionist. I was making $1,000 a month and living at home when I started. Okay, the word processor was a big machine in which you are editing on that machine to basically create a letter.

And doesn't it have a screen or it has a typewriter? No, it's a typewriter, no screen. It's like a typewriter with like a little bit of cash, right? Yes, yes, yes.

Mistakes for one line, right? Yeah. The job at Xerox at the time was like working for Google. Xerox and IBM were the two pillars of technology and high tech companies.

You tell somebody you work in Xerox, you had a whole different patina that you were working with Xerox. Well, that's working with Xerox. And so you quitting, well, Hammerplast, but you know, quitting what seemed like a stable of pretty good jobs to drive across the country to provincial little Seattle. I mean, that's nuts.

I knew after a couple of years if I stayed at Xerox for a longer period of time, it was going to be locked in there. But I'll tell you the story that got me to realize I've got to get out of here. At the end of the year, the performance appraisal at Xerox was basically a scorecard from one to five. So you'd have a qualitative discussion with your manager and then he would give you a number.

And when I got a three, I said, I just say myself, I worked all year. I just had a performance manager and I'm a three. This is amazing. How much else got a three?

I got a three. I got a three. And as soon as I got the three, I swear at that moment, I knew I've got to get out of here. And that's when I started putting myself in a position of meet other opportunities and by and large, I was able to get the Hammer Plus job, which was the general manager of the company, which was based in Sweden in the US.

But I was a three. Do you think having that background at Xerox did that give you a piece of perspective that helped build Star Wars today? When I hear the question, I have to go back to my childhood and think everything that I've experienced growing up in the projects in more or less a dysfunctional family because of the pressure of money. Getting the Xerox opportunity and having some level of success, but realizing I wanted more, the humility, which came with rejection, the shame I had as a poor kid living in the projects, all of that I think crystallized in me and give so much credit in realizing that together we wanted to build a different kind of life and gave me the courage, the conviction and the drive to try and do something that I felt I was destined to do.

I didn't know what it was. I certainly didn't know moving to Seattle was going to create the opportunity of a lifetime, but I always felt I had to get out of that station in life where I was positioned not to get to the level that I thought I deserved to be. I don't think it is common with someone for your background, poor kid in the projects coming from nothing to get a great job, two great jobs and be wildly dissatisfied and not feel like I've made it, but rather, no, there's got to be something more than this. There's something deep inside you that caused you to be willing to take a risk.

I was really insecure about not succeeding. I didn't view what I was doing as the success that I was not destined for. That sounds wrong. That I had the appetite for.

All right. We're getting to the big risk. The year takes over to 1983, you are sent, or maybe you asked to go to an international housewares conference in Milan. What do you discover?

I went to a trade show called Macha, which is a big convention center and it's a giant housewares show with equipment and all kinds of stuff. I was staying at a relatively cheap hotel in walking distance to the convention center. I get out of the hotel. I've never been in Italy before.

I am all of a sudden being intercepted with the physical manifestation of one coffee bar after another in the business that I'm supposed to be in, but it wasn't the business that Servox was in. I walk in like a normal person that's never seen us before. I am just like, I'm in a black and white movie and all of a sudden everything was color and it was so rich. I couldn't get enough of it.

I just went from one to the other to the other to the other and I was just blown away and more or less raced back to America, sat down with Jerry and Gordon and said, holy shit. What's happening in Italy is the business that Starbucks has to be in and they had seen it. They've been Italy and they said, no, that's not what we want to do. I just said, seriously?

I banged on the door for two years and in two years they finally let me open up a coffee bar on the corner of Fourth and Spring in Seattle and it was the sixth Starbucks door. Out of about 1200 square feet, I got 100 feet and I designed and opened the coffee bar, worked behind the counter as a barista. Starbucks probably had two to 300 customers a day selling home coffee. We were at 500 in a week with introducing lattes and cappuccino to the espresso.

There's nowhere else. No one else had it. I thought, well, to get a coffee I grew had it and that was Dave Olson. After a few months or six months or so, Jerry said, I don't want to repeat this.

I don't want to be in the restaurant business. What was the objection? He didn't think about the restaurant business. I don't want to speak for Jerry.

I have so much respect for him. He didn't think it was clean. He didn't like it. Now between 83 and 85, Jerry Ball went because of his love of peats and his relation with Alfred Pete had an opportunity for Starbucks to acquire a peats coffee company.

He did. Unfortunately, Starbucks buys peats and they get into financial trouble. Really, at this point, it was like their mentor was retiring. This person was a steward of the industry.

Roberting six points of retail distribution in Seattle for Arbeens. Why don't we just buy your effectively the same business, but in Northern California? Keep them separate for now. It's important to know that between the opening of the fourth and spring coffee bar inside of Starbucks.

Starbucks number six. Yeah. And Jerry and Gordon saying, we don't want to repeat this. I was so frustrated.

I said, I'm going to leave Starbucks. What did I do? I had no money to open up a coffee store. So Jerry says, Starbucks does not want to open up coffee bars, but we will invest in Iljunali.

Which was the company you started to? Yeah. So before they get into financial trouble, Starbucks is an investor. I've always thought he did that, so I would sell and market Starbucks coffee in the coffee bar, which I would have done anyway.

So Starbucks makes an investment. A couple of people that we know make an investment, but I didn't have enough money. So I go to see two Italian companies. I've never told this.

One is the espresso company, Fayema. And one is the large Italian coffee company, LaVazza. Oh, yeah. And I asked them both to invest in my idea, in both of them, term down.

So at this point, you're in Italy, you're trying to get ideas and investors for what would become Iljunali. For the first of July. And only Starbucks and a couple other people have committed. But I have enough money.

I still needed more money. And I'm raising 1.6 million. About 1.6? Yeah.

1.6? 1.7 million. And they said, you know, no one is going to buy Italian espresso once you go or America. So stupid because you watched it happen.

I ran the store for six months and like it was fine. They didn't want to do it. So they think LaVazza and Fayema, just get that on the record, turn me down. Okay.

They'll deny it. That's a fact. So then I go back to the US. I'm trying to raise money.

And I hit the three titans in Seattle. Jack Neneroya, Herman Sorkowski and Sam Strong. Three of the leading citizens of Seattle, Washington at the time. And the three of them have a little bit of an investment together in other things.

And they say, we're going to believe in you. And they take me over the hump. Wow. Okay.

And we open three, ill genologies, two in Seattle, one in Vancouver, BC. And all three are doing well. All three. But I didn't have enough money to expand.

And needing the money to expand just to pause on that for a minute business-wise. Obviously, coffee bars are a much better business long-term than coffee beans, but probably more capital intensive, right? Eating more staff? Yeah, more labor.

Yes. But the stores weren't that expensive to open because they were small, less than 1,000 square feet. And we understood how to do it. And I was working as a barista with Dave Olson and other people to keep the costs down.

We were behind the counter and I had no salary. And no salary for almost two years. Well, I'll share it with her first show. So looking increasingly worse from a traditional perspective of leaving a high-quality job moving across the country, then just a couple years later, here you are not making any money again, well, raising millions of dollars to try to start your own business.

The kid's worst. Sherry is six, seven months pregnant. She's working. Her parents visits you out.

They're from Ohio. Her father asked me to take a walk. Oh, no. God, it's my way.

It's a true story. Take a walk. And he says, whatever you're doing, I respect it. But it's not a job.

It's a hobby. You need to get a job. My daughter's pregnant. She's working.

You're not. I start crying. I'm so embarrassed. And I come home at three, four o'clock in the afternoon, whatever it is.

I don't say a word completely shaken by the whole conversation. My parents got a bed after dinner. I'm sitting with Sherry and I said, I gotta tell you something happened. She was so angry at her dad and so upset.

And she said, there's no way we're turning around. We are going. So she is the glue to everything that's happened. And I don't know if she'd ever had a conversation with her father.

I'm sure she did. But the whole thing could have been over. And that would have been a very understandable response if Sherry said, I'm. Right.

I wasn't going to say anything. Yeah. Look at our situation objectively. Putting ourselves and your father-in-law's shoes.

How could you not feel that way for your daughter and her impending family? Yeah. And her father was a great guy. And I understood, but I was embarrassed and humiliated.

How could I not be? When he gets that's another dimension here, too. This was not 2024. It's not like being an entrepreneur was a glorified profession here.

In a business that he clearly did not understand. You know, a coffee store. The other interesting thing to point out around this time is for the people who were seeking high risk business investments, you know, this is the late 80s. It's time to look at tech.

Like we're now 12 years into Microsoft, apples, four years past the Macintosh. And I'm trying to raise money for a coffee house chain with names that people couldn't pronounce and serving it in a paper cup to go. That does not sound innovative to me. I don't know why I'm putting my risk capital into your.

Yeah. You know, I would bring investors to the two or three stores and I would make sure there was a fair amount of people in the space. And that's when I started talking about the language of community and the third place. And that's what I saw in Italy.

The unlock and the epiphany, of course, it was the romance of espresso, but it was the sense of community. And that is what was happening very early on in the two stores in Seattle and the one in Vancouver. You could see it. What would people do after they bought the coffee?

You said these are very small places. They would stand up because the two stores didn't have seating right away. They would stand up at the coffee bar at the window on Columbia Center and it was at eight, nine o'clock in the morning. And then they would come back and you could just feel the relationship that people were having with one another around human connection.

I know it sounds trite, but I could see it back then. And as I was talking to people about the investment opportunity, I was pointing out, what's happening here? Something happening. There's some magic going on here.

It's not just the coffee. The coffee was the conduit. All right. So we're at the pivotal moment Starbucks and Pete's gets into financial trouble.

And the debt to equity was north of six to one for a company was tiny. Jerry comes to me and says, Jane and I, his wife, are going to move to California. And we're going to keep Pete's and I'm going to sell Starbucks. And my heart is pounding.

I said, okay. And then he finished it. And he says, I think you're the person to buy Starbucks. I said, that's fantastic.

I don't need money. You're going to give it to me. I don't know money. How much is it?

$3.8 million. Now we're in 86, 87. Now we get into a story I have told, but not 100%. Because I protected it.

I'm going to tell it. I go out to raise money. I'm having a hard time. So Jerry gave me about I think he gave me 90 days to raise $3.8 million.

Around the second month, he just came to me and said, where are you with all this? And I think I had about half of it raised. I might have fived a bit and said I had a little bit more, but I didn't. I had about half.

And he lays a bomb on me and says, how are listen, we're in a tight situation here. And one of your investors has put a cash, all cash offer on the table with no due diligence and wants to close right away. For him to take it over, not you. Yeah, I'm out.

I'll be out. And I said, who is it? And he told me. I'll save that.

And I'm absolutely annihilated, crushed because I didn't have the wherewithal. And I could just envision as soon as I heard that name, I knew it was over. I was in a basketball league at the Seattle club. I'm playing basketball that night.

My good friend, Scott Greenberg, who's an attorney at a prestige firm in Seattle, the Gates firm. I'm basically crying to him after the game and telling him the story. And he says, you've got to come to the office tomorrow and meet our senior partner and tell him the story. Bill Gates, senior.

I said, well, tighten. The other time. You forced out of this. There were three times.

There were three titans there. But here is the type. And that was six foot seven. Six foot seven is a mountain of a man and very imposing nine o'clock in the morning.

I put a suit on. I must have been sweating through my shirt. I was just so anxious, so nervous. And at the same time, so scared about what's going to happen.

I go in there and I must have been trembling. I was just so nervous. I tell him exactly what I just told him. And he interrupts me and says, Howard, I'm going to ask you two questions.

Is everything you told me true? I said, Mr. Gates, yes. Have you left anything out?

No. And he says, come back in an hour. I said, OK, to do what? He says, I'll see you in an hour.

And so we walk out and walking around. I think we probably went to Columbia Center to get a coffee and come back and go back with Scott. And Mr. Gates says, Scott, I'm going to see how we're going.

And Scott leaves. Now I'm alone in his office. I hardly sit down. And he says, we're going for a walk.

And I said, where are we going? And he says, we're going to see the man who was Sam Strom. One of your investors. One of the investors.

We walk across streets of the rear tower, the old rear tower. I think Sam had one of the biggest offices we walk in there. And I swear, even though so many years later, I have a perfect vivid account for what took place. Sam is sitting behind his desk.

And this is what happened because it was five minutes. Bill Gates. Remember, he's a huge guy, leans over to the desk with his hands on Sam's desk and says, I don't know what you are planning. But whatever it is, it's not going to happen.

Wow. And he says, Howard Schultz is going to acquire a Starbucks coffee company. And he's never going to hear from you again. That was it.

And we walk out. That's it. It's the whole thing. And so did you hear from Jerry that the bid had been dropped?

We walk out. And I say to Miss. He's still leaving the money. I say, Miss Gates, what just happened?

And he said, you're going to buy Starbucks coffee company. And my son and I are going to help you. Wow. And we raised the money.

And that's the story. I never spoke to Sam Strom again. I've never mentioned his name publicly. I never mentioned his name in his book.

And I say it respectfully. I'm not trying to. But that's the story. And Sam, I mean, for anyone who doesn't live in this Seattle area, his name is on buildings and community centers.

I mean, this revered philanthropist, I actually don't know his business background. How did he become the Titan that he was? He was involved in real estate and also in those auto stores. How did you get him off the Elisor and Al A.

Cap table? Like wasn't he an investor? Yeah, he was still in about. He was in the family investors to the end until they got out.

Oh, wow. Looking back now, what do you think happened? Did he have any legitimate criticisms of you as running the company? No, he had he had a henchman who was his money guy who figured out we could just take this company and what do we need our chills for?

Who is his young kid? And Sam had experience with retail with those auto stores. I see. So he could install some professional management from some other venture.

Yeah, run the playbook. Yeah, it would have been over. But the thing about Bill Gates is I saw him socially a hundred plus times. He never ever said anything public about what he did.

He never took credit for it. So for listeners, Howard's told this elsewhere, but you spoke at the Microsoft CEO summit, you recounted the story to the Fortune 500 CEOs and Bill Gates III, Microsoft founder comes up to you afterwards and says, yeah, who was the guy? Bill did not know the whole story. He didn't know any of it.

He didn't know what his father had done for me. He's hearing it for the first time. And this is 2015 or something. So Starbucks, like you would think someone would want to tell their family I played some significant role in this, but that's not the type of guy he was.

Bill Gates, senior never told the soul he did for me. Again, the humility. Incredible lesson about your money. It's amazing.

Yeah. And so we're Bill Gates, senior and Bill Gates III investors in that $3.8 million round. Bill's senior was, but I don't know if it was part of Bill or Microsoft. Interesting.

So I asked Sherry about this when I was preparing for the episode. Her recollection was it was something like one to two weeks before the three month exclusivity for you was going to be up. And so you're basically like, this event happens, but now you need to come up with the money and you have this unbelievably short period of time to do so. And so she said that you were calling everybody you knew she was calling her clients because she's a designer calling her clients trying to just, you know, find pockets of 50k here, 100k there anywhere you could to make it happen.

But I had another angel who helped me by the name of Jack Rogers, who became a lifelong friend who passed away a couple years ago. He was part of an investor group and he brought them along. So the accident goes through. Yeah.

August of 87. Yeah. We bought the six Starbucks stores. We had the three children, Ali's, and there were two stores under construction.

So at the end of the calendar year, we had 11 stores and 100 employees in 1987. On the Northwest. Yeah. Meanwhile, the original Starbucks folks, they've now gone to California.

When did Pete open coffee bars? Many, many years later. So they, you weren't competing no way. No, but this is one of the great observations David.

Iljournale buys the Starbucks stores, rebrands Iljournale incorporated as the Starbucks corporation. And the original Starbucks buys, you know, had owned Pete's and now needs a new name. So it rebrands the company Pete's. So Pete's was actually Starbucks was actually Iljournale.

Yes. Amazing. Some stats just for listeners to understand the gravity of the situation. For the initial 1.6 million that you raised for Iljournale, you talked to 242 investors, 217 of which said no.

So anybody who's griping about their fundraising journey, you know, those are looking numbers. But you asked me a question earlier about what are the years at Xerox teaching me? So the rejection I was going through, the Italians turned me down. People in the US turned me down.

Nobody would believe in the idea. It was like I was cold calling again at Xerox. The other thing that is worth pointing out is the Starbucks company with the six stores, when they bought Pete's with that six to one debt to equity ratio, basically back themselves into a corner where now they had these big debt service payments to make. There was really no risk they could take or innovation that they could do because the whole business needed to spit out a certain amount of cash every month so they could pay down the debt.

And so when you're in that situation, Starbucks in the 40 years ahead, from this point in the story, has tried all sorts of crazy things to become the business that it is today. And when you first created this combined company, you were pretty religious about no debt. No debt. I want any debt again because of my childhood.

I was going to ask you, was that informed by the what you had seen with the Starbucks situation? No, no, it was total my childhood. My parents were always in debt. Bill collectors were always calling.

And no, we never had any debt the entire time. Never. This is probably a good point in time to talk about the business model a little. OK.

You've alluded to kind of a stigma, at least among potential investors and the original Starbucks founders of the restaurant business. What did the economics of the business of the coffee bar business look like when you bought the Starbucks stores? So what did we buy? We had the stores, we had the brand name, and we had a roasting facility on Airport Way in Seattle.

The ability to source and roast coffee and put that through the supply chain of a beverage gave us probably at the time and 80% gross margin. Wow. Yeah, that is not the quote unquote restaurant business people are mentioning. And I could begin to see even early on the accretive nature of frequency where I can see what was going on here is people were not coming for coffee in the morning anymore.

They were starting in the morning. Russia was getting bigger, the need for more labor. And I could sense that the business that Starbucks was in was going to be significantly in the back and the beverage and the romance of the theater. And the third place was the hero.

It didn't take us long to realize we had the beginning of lightning in the bottom. Even the best, most successful restaurant you could possibly imagine. How many times are there most loyal customers going to come there in a week? Yeah.

Well, there was a time in the northwest when we were really at our peak where the average customer is coming 18 times a month. I should rephrase it. Maybe the most loyal was coming 18 times a month. There's some magic to this idea that it's not a terribly expensive item.

I think it's also research that said that it's sub 1% of someone's household income and often far less than that. But it is repeat and it is high gross margin. And so when you say lightning in a bottle, there's a cultural lightning in a bottle, but there's also this like ridiculous business model where the way it shows up is your stores basically from this point forward for all of Starbucks's life, you build a new store and the profits from that store would totally cover the costs within two years and often a year and a half. But I'll take the economic model that we we apply to every single store we were opening.

You know, by the way, I chose the first 500 locations myself. I was in it in so many ways, but the economic model and when we went public 92, when they heard the models, we never seen them out like that. And the model basically was a sales to investment ratio of two to one and a operating profit of 20%. So what does that mean?

Sales to investment ratio? So if the sales were a million dollars, the investment was 500,000. No, just the sales to it had to be a two to one. Wow.

And you're one of operation? Yes. And the operating profit was north of 20%. Wow.

So cash on cash return was so you get that two years or less. Yeah. The retail world had never seen a model. No, there was no physical storefront that could have had this business before this.

Early on, it became clear to us that customers were also starting to customize the beverage on their own. So we were just braced. It was kind of counter and somebody would say, can I can you put something else in there? Yeah, what do you want?

And then so that just started the average ticket started growing. As a result of the customers personalizing and customizing their beverage. And to be clear, like the era of Starbucks we are in right now, you produce drip coffee and you produce espresso and you can put that espresso in froth milk. And that's basically your option.

Yeah. Like none of this. Yeah. Exactly.

But can I take on a steak I made? Please, please. When Ilternally was getting ready to open. It's a standard cup in the world was that terrible styrofoam cup that is used in diners in New York City.

Remember that cup? Yeah. I put boiling water into that cup five minutes later, the cup is starting to turn like a golden color because of the chemical. It can't be good for your insides or the taste of the coffee.

And so we had to find we had to change the cup. This is such a smart move in retrospect, but we were just trying to figure out now, no one in America that is in the paper business had any kind of cup or lid that was compatible with what I was trying to do. In fact, they didn't understand it. Why not use the cup that exists?

Is it no because it doesn't taste good and it doesn't feel right? Right. Why go to the trouble of this perfected roast of these beautifully sourced or rapid beans from all these farmers? If you're going to pour it in this iron foam.

Yeah. Okay. So you were a hippie like when you were telling the like, I don't think this is me. So we went to Chicago to the international paper company and they had a cup, but the cup didn't have a lid, a compatible lid.

And so we found they found a lid that beautiful, sipplid, which is now ubiquitous in the world. How are Joe should have said to them, I want an exclusive on that because that lid became the standard for the world. If I would have just understood that, the other thing I didn't do is we introduced Cafe Latte to America. We didn't trademark it.

You know, we trademarked for Appuccino later on, but we didn't trade Mark Cafe. What? It wasn't thinking about it. You got enough, right.

You don't get enough. Right. No, I missed it when the sizing. Ground Day, Venti.

Oh, that was the hidden drink. Yeah. And right. When did that start?

There was a brilliant, brilliant guy who was the architect of the name Starbucks named Terry Heckler in Seattle. And he's a fantastic design guy. And we're just sitting one day and I just talking about the importance of language. We got to get the language right.

And we got the cup, got to get the language. And we just started talking about changing it from pedestrian words of small, medium, large to what it became, which was short, tall and grande. People made fun of it, but they loved it. Was it not an original?

Venti, we didn't have that size. We started that was later on. Wow. Who was somebody who wanted us?

This is America. Yeah. This is my one more question on this. Writing the customer's name on the cup.

That didn't come from me. As the stores got busier and busier, the baristas were having a hard time with whose cup is it? What are we going to do? And someone at Starbucks, I don't know who it was, started writing names on the cup, writing names.

And it just became standard. So much of Starbucks success came from customers asking for things we weren't doing. And Starbucks employees who became partners in 91, understanding the business better than me. And this is all like, you know, to my mind, just starting to create this incredible flywheel, right?

If you've got this 80% gross margin business where the key lever is repeat loyal customer visits. You've got customization that is making customers more loyal and increasing your margin at the same time because you can charge more for it. You've got the interpersonal relationship with the barista, sure. But also even as you scaled in the name on the cup, that's something that scales even as thousands and thousands of people come into the store.

The intimacy with the customer and the barista became a very powerful component of the equity of the experience. And I've always thought in so many ways Starbucks became the first experiential brand at scale. We didn't spend any money on marketing, zero. There was no money from market in the cup.

The iconic cup became a badge of honor because people were doing something that was new and novel and walking in the street with it. And people, you know, what is that? I was a lot of that kind of stuff. It's your free billboard.

Yeah. It's a perfect. Perfect. Wow.

All right, listeners, now is a great time to tell you about a longtime friend of the show. Vanta, AI has scrambled the whole security picture. It used to be that you prove that you were secure once a year on audit or a static PDF. Then everyone would not and you're done.

But in an AI first world, that doesn't hold up anymore. Yep. Your risk surface changes every week now. Vendor turns on an AI feature or someone writes in a new model without telling it.

And your posture is different than it was last week, let alone at your last audit. Vanta's own research found that around 70% of companies have this quote unquote shadow AI running with no security review at all. Right. And that's where Vanta comes in.

They're the leading agent trust platform, meaning they've built the thing that closes the gap and the way that they close that gap is Vanta agent. Think of it as a GRC engineer. That's governance risk and compliance, except that it's software and it doesn't sleep. It finds the issues, drafts, the fixes and cuts the time that you'd spend on vendor assessments in half in half, which is exactly why more than 16,000 companies today run on Vanta companies like ramp, cursor and snowflake all stay audit ready and catch the risks that crop up between audits across every vendor, every AI tool, the whole environment.

And that's the real value. Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off of Vanta at Vanta dot com slash acquired.

That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. So in this era, I mean, you must just be getting more and more excited every day. Oh, I was out of my mind. So David Howard sent me there's a 1988 I can't believe this was filmed.

The 1988 shareholder and employee meeting where it's great. The whole thing's like an hour and a half. It's all there and you're using all the same language that you use today back in 1988. We focus on our people, those people delight the customer, the customer, you know, delights the shareholder, then satisfies the shareholder and the conviction that you have, it's like watching a preacher.

You're up there. You've got, I think, 11 stores or something and you're like, you have no idea what we have here. We are on top of something that is going to change. You don't see the world America and this thing can become America's coffee house.

And it was interesting because I think the whole room was already scared of your ambition of, you know, going nationwide with this thing that there did not exist another example of a national coffee house chain. Everything was just these little cities, these small markets. And there's this great quote that you have at the end of the meeting that says, the company since 1971 has been growing at a very, very slow pace. As a result of that, you combine Iljour Nale and Starbucks together, we're going to take your six stores that you've built in 17 years and we're going to go to 26 in one year and we're going to go to over a hundred in five years.

And that must have just sounded bonkers. But that is literally what happened. That's what happened. Like the pace of growth, approximately, you just doubled stores year over year over year.

Was there some moment in 88, 89, 90 where you're just like looking around, realizing we must expand as fast as we possibly can because this concept is the concept the world needs now. And if we don't pull out all the stops, someone else is going to do it. There were regional competitors who were making noise about doing what we were aspiring to do. And I was very mindful because one of them was franchising.

That was Gloria Jeans at Chicago. And at one point, I think they had more stores than we did because of the franchising opportunity. And that's one of the reasons why I went to Chicago as well in 87, 88. Because Chicago was the first market outside of Seattle and Vancouver, right?

Yes. And it didn't work right away. Huh? How would be hard?

Should be credited with so much of the cultural texture and the tapestry of the humanity of the company said, I will go to Chicago and fix it. He went to Chicago and stayed in Chicago through the winter and recalibrated the mistakes we're making. And of course, he and Orin were so instrumental into the loneliness that exists as an entrepreneur and their ability to help me build the company that you know today. Yes.

I have in my script here, this is literally labeled the H2O era. And for anyone who was a partner at Starbucks, or knows, don't talk about anybody else outside has no idea. But there's two hours, there's Howard Schultz and Howard B. Har and Howard B.

Har joined in 1989 or in Smith joined in 1990. And the way that it looks to me from the outside and you tell me this is right, you were sort of the vision and ambition that would almost like take any ambition that anybody else had and force them to think bigger and faster. And then Howard B. Har was in many ways the soul.

Like he brought the idea of servant leadership. He brought the idea of nothing else matters if we aren't people first. And obviously that became a huge tenant of Starbucks as we knew it through the 90s and 2000s. But that seems like it really arrived with him.