Cartel Roasting Co. is expanding without private equity — by asking customers to invest instead

We’ve all seen it: A local business does well, expands, maybe eventually gets bought up. And, suddenly, all of its charm is gone. You walk into a new location and it just doesn’t feel the same.

Cartel Roasting Co. is trying to do it differently. They’ve grown quite a bit in the 17 years since they were founded in Tempe. They now have a dozen locations around the Valley and a spot in Palm Springs.

They’re in the kind of position that a lot of small businesses are in right before they really explode — when they decide to franchise out or take in a huge influx of private equity funding.

But instead, they’re asking their customers to invest in them. It’s through a kind of equity crowdfunding company called StartEngine. Cartel is hoping to use the funding to keep expanding their way.

Cartel co-founder Amy Silberschlag and president and CEO Jesse Pangburn joined The Show to talk more about it.

Amber Victoria Singer/KJZZ

Full conversation

AMY SILBERSCHLAG: I got a targeted ad on Instagram from Mother Road Brewery up in Flagstaff. It just got my attention because it literally just says, "Own a piece of the brewery." And you're like, wow, that's awesome. I love that place.

And you click on it and watch the video and learn about what they're doing and why they're doing it. And it was really neat. And then it was kind of reinforced when I was in Trader Joe's, on their four-packs there were little stickers with QR codes that said, own a piece of our brewery.

And it kind of, I knew about it a little while before I thought, "Oh, I should tell Jason about this. This is something we should look into."

LAUREN GILGER: This is a good idea, yeah. So how does it work, Jesse, as you're trying to get people involved in this? You said the same thing. You sent out an email saying, own a part of the roastery, right?

JESSE PANGBURN: Yeah, same deal. It's truly equity in the business for anybody. Any type of investor that is interested, any community member, $300 is the minimum investment, and you own a piece of the company.

It is regulated through the SEC and StartEngine helps to make sure that businesses like us that don't know all the ins and outs of how these funding things work are doing it in the most compliant way.

You know, we looked at that Mother Road model. At the same time, too, there was interesting people like Death and Co., which is a very popular cocktail bar and brand, and Proud Mary's, an Australian coffee company that has transplanted to the U.S., was doing this as well.

So we were looking around and seeing that there's some success here and there are also other brands that we really respect values-wise. Instead of like a Series A, which generally is a very large private equity investment. This allows us to do a much smaller investment with community members to grow the business, and they'll get annual updates. They also get perks, right, from the time that they invest, as well as being a part of a business hopefully that they really love, right?

GILGER: And you're definitely going to get people who really love and care about it to do it this way, which I think is interesting. But it also sounds like a very interesting way to go about continuing to expand. Like when a business, a local business like yours, has gotten to a certain level, with the normal next step be to start to franchise things out? 

SILBERSCHLAG: Franchise or taking venture capital money or private equity money, a cash infusion that kind of would grow you to kind of the next level, as they say.

GILGER: So why go about this so differently?

PANGBURN: I mean, I think we're really looking at some of the things that come with traditional avenues for growing the business. Bank loans sometimes can be great. Also, you get some pretty hard interest right now, and a lot of those things get tied to things like assets. Which can also be a little bit tricky, because if you want to have some flexibility over the use of funds that limits you.

[Venture capital] is private equity. There's pros and cons to both, but you are giving up a large portion of your business or sometimes all of it. And there's certain expectations that come with that demand of if someone's putting in, don't know, $5 million, $10 million, $20 million, to have it run a certain way.

What we found with crowdfunding is it's quite the opposite. These are the people that are helping you grow, that love what you're doing, and want to see you grow those same efforts, run the business how you have been and hopefully better.

But if certain programs — like our giveback program is a perfect example — where maybe it doesn't make financial sense that we're giving 10% of this particular coffee to a local organization every quarter, but we value that. And that's important to us and it's what makes us us and how we engage with our community.

So, some of those values-driven decisions aren't going to be scrutinized the same way that our community loves that and they want to see more of it.

GILGER: You want to add to that, Amy?

SILBERSCHLAG: Yeah, I was going to say that values alignment where it's kind of people who have interacted with you directly. A lot of people have reached out and have a nostalgic connection. I used to study there in high school. I'm so excited for you.

And they feel like they're getting to, you know, spend some of their money to cheer you on and seeing, you know, the little nuanced things in how you run your business. And knowing that you're going to keep being able to do that, to keep being values aligned and integrated. And not have an outside person telling you, "Scrap this, add this, do this."

GILGER: Right. And we've all seen local businesses we love go in that direction and you see the changes if you're kind of a loyal customer, that's really interesting.

So, you don't have to answer to big money, right. And you're, you're broadening access basically here to to capital for folks. Like it doesn't take a lot to be an “investor,” which most of us would never really see ourselves as, right?

PANGBURN: Absolutely, yeah. I mean, that was something also that we were really struck by looking at some of the other businesses like a Mother Road. I think theirs was a $ 500 minimum investment. And just even thinking that through of access for anybody to have equity in a business that they love and they really do think has trajectory for growth. That access has never really been — I have not seen it, that level of equity made available to anybody that, that is interested and wants to is something that really struck a chord with us, and really again aligned with the values of the business.

If we say we're about our community — which most coffee companies do — here's a really interesting way to actually back that up and, and provide a piece of, you know, of the business to them, and turn Cartel towards a community-owned business, which is something we're super excited about.

GILGER: Is this a step toward employee ownership?

PANGBURN: Absolutely. That's something that Jason and Amy have been very passionate about, providing equity to the employees. Any employee can do this. They're also getting the most aggressive bonus share that we offer. And it also allows a little bit less of the cumbersome, for those that know about employee ownership — things like ESOPs and some of those other ways that they form — are very complex and require a lot of legal, you know, consulting and things like that. So this is a much easier way to do that for a business our size.

GILGER: So, I mean, what do you want to do with this investment? How do you want to grow the business?

PANGBURN: Well, there's been some opportunities that we've been looking at, and most notably is opening a cafe in West Hollywood. We do feel like it's time that — what we have is working here, we want to bring that to more places.

We also have a shop in Palm Springs right now, and it's doing great. It's one of our absolute busiest for such a small town was really intriguing. There's a lot of things going on in LA that kind of feels like it's a bit like you're leveling up in some way. You're, you're on a bigger scale. There's the Olympics coming up. There's the World Cup coming up. So it felt like there was a great opportunity that presented itself. And we really wanted to make sure that we open this one the best we can.

GILGER: How does that feel for you, Amy, I guess like almost 20 years into this, taking a big step to really expand like out of state and online and these subscription services?

I mean, it's, it's an interesting moment and probably a little bit of a scary one for somebody who started in, you know, one shop in Tempe.

SILBERSCHLAG:I t is interesting, because up until this point, we've always just grown naturally. I mean, we've — there's little equipment loans and build out money along the way, but it's really just been a reinvestment of funds. And all along, it continues to be so obvious that we are who we are because of our community, because of our customers, because of our employees. They're kind of like our first customer.

And what I like about it is the opportunity that they could benefit, as opposed to taking outside money and us doing all this, you know, work and push to grow. And then someone with that outside money gets the outside benefit. Thinking about that benefit staying directly in our communities is really amazing.