Supported by Greenhaven Road Capital, finding value off the beaten path.
Ken Grossman tells the story of founding The Sierra Nevada Brewing Company in his book Beyond the Pale.
There must be something about breweries. There are notes here from Jim Koch (Sam Adams) and Dick Yuengling too. My guess is that brewing beer satisfies the soul. A link between work and outcome could be another Incentive.
One more thing to chew on before we get started. In March of 2017, Yuval Noah Harari started a podcast tour to talk about his books; Sapiens and Homo Deus. I haven’t read the latter, but the former was good. It was built on the idea that sapiens succeeded because sapiens used stories. This blog uses stories too, but do you?
The TLDR version of Grossman’s story is this. Thanks to some early positive male influences, Grossman was able to channel a nonconformist streak into productive skills such as wood and metal working, electronic, bicycle, and auto repair and eventually homebrewing. Lacking funds, Grossman built out his brewing capabilities one jury-rigged piece of equipment at a time. As such, Sierra Nevada expanded slower than possible but never overshot demand. Two other major factors were good timing (luck) and Grossman’s dogged work ethic.
Grossman was lucky in many ways. Danny Meyer wrote that luck is when naivete goes unpunished and that was true for Grossman. As I read the book I thought he would have gotten along well with Yvon Chouinard. Both liked to be outside, figure out their own solutions (for Grossman this involved some illegal activities), and not to listen to authority.
This inclination could have had disastrous outcomes. The list of anti-social outcomes is much larger than pro-social ones for someone with this attitude. Luckily Grossman ended up as an entrepreneur. You can rebel against the world in only so many ways.
Grossman was lucky to be nudged in this direction thanks to some kind neighbors and teachers. He didn’t see much of his dad after he divorced Grossman’s mom so it fell to other men to fill the role of father figure.
One was Big John across the street. “Another one of Big John’s traits that rubbed off on me was a thirst for knowledge…Anything was fair game.” Grossman started to read widely and learn. Another positive influence was shop class, which Grossman calls an “adult-sanctioned” hobby.
These figures were important because there’s a see-it-to-believe-it quality in a lot of people’s success. For Michael Lombardi, it was seeing a name. For Reed Hastings, it was seeing streaming on YouTube. For Judd Apatow, it was seeing Steve Martin washing his car. Here’s how Malcolm Gladwell put it:
As for the rest of school? “School sucked – I couldn’t stand the confinement, rules, and authority.” It’s not that Grossman was lazy, “I have always had the need to keep busy, not just physically but also mentally.” It’s that school really does stink. Someone once told me that they build prisons and schools the same way. When I pick my kids up from school it’s unnerving how true this is.
Grossman graduates high school but has no plans. His hobbies are hiking, photography, electronics, cars, and home-brewing. Grossman tries college but drops out. Instead, he gets his XMBA running a satellite bike shop. Grossman writes that his location was profitable, well stocked, and had a loyal customer base. The main shop did not. It was through seeing what to do but also what not to do that Grossman learned about what it takes to run a business.
After the bike shop goes out of business Grossman opens The Homebrew Shop. It’s a place homebrewers can go for supplies and support. There’s limited demand. Grossman is married and has a child. The Homebrew Shop doesn’t earn enough money so he gets a weekend job at another bike shop. Four years later he founds Sierra Nevada.
To set the backdrop let’s pull a quote from Jim Koch. In the 1970’s and 80’s American beer was like making love in a canoe – fucking close to water. It was the nadir of American breweries. Many small companies were going out of business because they were trying to be like the big breweries. They sold mostly the same product but due to economies of scale couldn’t compete on price. Grossman, along with fellow Californian Fritz Maytag (Anchor Steam), wanted to be different and make a new kind of beer. The trend for beer was “not to offend anybody’s taste sensibilities,” Grossman writes.
“Our lives became consumed with bringing our dreams to fruition,” Grossman writes, “Everything we did was with that goal in mind.” He tried to get a small business loan but he had no credit. This turned out to be a blessing in disguise as the prime rate soon climbs to 21%.
Short on cash Grossman scours bankruptcy auctions of old dairy equipment. It’s good enough, but not designed for a brewery. Grossman returns to school to classes like welding, agriculture, and refrigeration. This also gets him access to equipment so he can make modifications on his second-hand equipment. The first year of Sierra Nevada Brewing was all construction and equipment acquisition.
Grossman (eventually) got everything working and brewed a consistent batch. He sold it around Chico only, lacking the volume for distribution. During the 1980’s the industry started to grow and looking back Grossman realized that the breweries that failed made two mistakes.
- Inconsistent quality.
- Borrowing money.
Rather than keeping a low overhead, breweries borrowed too much. Not Grossman. “Our plan was to save every penny we could to generate enough cash flow to survive our first year.” Sierra Nevada didn’t grow as fast as they could have, they often had to limit shipments to their distributors, but they survived. Soon they got some buzz from San Francisco magazines and being served at Chez Panisse.
Grossman’s hours didn’t decrease. “(I) felt torn about not being able to spend more time with my family,” wrote Grossman. “Running a brewery was as difficult as running any other kind of business – hard work, long hours, low funds, and tough decisions.” To be good at anything requires some commitment – say 10k hours – and that precludes other things.
Here’s what that growth looked like:
- 1985 4k barrels.
- 1986 7k barrels.
- 1989 20K barrels. (Breaks ground on a second brewery)
- 1992 60K barrels.
How did Grossman do this? One step at a time. “If I looked at the obstacles we faced all at once, I would have thrown in the towel.” One example that could have inspired Elon Musk was a clandestine utility modification. Frustrated with a water line that kept breaking, Grossman writes, “I solved that problem when I rented a trencher and ran 500 feet of new pipe to the meter early one morning without telling anyone.”
Once they hit 60,000 barrels a year, Grossman hired a sale rep. A rep, for the entire country. They didn’t need more because the best marketing is a good product. Scott Galloway calls this the “first rule of marketing.” The beer sold itself.
Grossman didn’t do it on is own. The people who worked at Sierra Nevada “loved what we were doing, and it was a fun place to work.” As the company became more successful Grossman built The Oasis, an onsite medical facility with massage and lactation rooms. He also built Little Foots childcare on site. I told you he would have gotten along great with Yvon Chouinard.
He also needs to credit his family. Running a brewery is “all encompassing” and his family “has suffered from a lack of attention.” But the glove fit for Grossman. He felt for brewing like Bill Gates felt for computers or Mohnish Pabrai felt for investing. Grosman doesn’t know if this will apply to his kids. “I knew all too well how tough my business was to run, and unless they were as passionate about it as I was, it would not have been a fun or successful livelihood.” Most of Grossman’s successful brewing friends are “highly engaged and somewhat consumed by their companies.”
The great careers are infinite games. “This is a journey; there is no definite end point, and we will continue to strive to great great products.” Ray Kroc wrote that business isn’t like a painting you put finishing touches on and hang on the wall.
Thanks for reading.
In the first draft, I wrote ‘jury-rigged’ as ‘jerry-rigged.’ Not sure if I was correct I searched out the word origins. I had hoped that it would be Jerry after an industrious tinkerer, possibly in memory after a Darwin Award. Alas, it’s nautical. A jury-mast was a temporary one.
I’ve got a new thing, it’s called Mike’s Notes.