Sowing the Seeds
John Scharffenberger grows his businesses from the ground up
The best. They spent the first year scouring the world for the main ingredient of dark chocolate: cacao beans. They also experimented with antique European grinding machines that give elite brands like Valrhona their smooth texture.
Since creating a good product is only half the battle, they pitched their story and chocolate to everyone they thought could help. Steinberg cold-called Alice Medrich, author of several chocolate cookbooks. Although she gets lots of calls from would-be chocolate entrepreneurs, she was impressed by Steinberg and loved the chocolate. She agreed to join the company's board, giving the venture credibility. "They raised the level of the whole playing field" in the chocolate industry, she says. Scharffenberger shared a piece of the chocolate with his acquaintance James Kohlberg, who is a son of leveraged-buyout maven Jerome Kohlberg and runs his own investing firm. It took just one bite to get him interested in becoming an investor: "I am a bit of a foodie, but when I first tasted their chocolate, I was totally blown away," Kohlberg recalls.
They were also careful about selecting the company name. The wine business taught Scharffenberger that "people want to see the proprietor." Although the chocolate had been Steinberg's idea, they chose to take advantage of the Scharffenberger name's association with fine champagne.
They decided to ignore the industry culture of secrecy and cutthroat competition by opening their Berkeley factory to the public and were the first to print the percentage of cacao in each bar. "Transparency is something that food manufacturers owe their consumers," Scharffenberger says. "Consumers are different now. They want to know what they are eating."
Though demand for their premium chocolate soon outstripped their tiny factory's capacity, they didn't lower their standards to grow. Daniel Snow, a Harvard Business School professor who studied the company, was impressed to see them throw out an entire batch-worth thousands of dollars-because an experiment with a substitute ingredient resulted in a taste they believed was subpar. "A lot of people who have a great idea fail. But these guys did it the right way," because they expanded gradually, ensuring quality and controlling costs.
After seven years of such tactics, the chocolate was a hit, but the enterprise was unprofitable. The investors and Scharffenberger brought in an employee of Kohlberg's, Jim Harris, to run the company. Scharffenberger says he was glad to hand over the operational details, since he hated dealing with things like insurance. He must have. Harris says that when he arrived for his first day in January 2004, the company's insurance policy was set to lapse in just three hours. Harris quickly righted the finances by raising prices, negotiating purchases, and embarking on a series of experiments to find new machines that have increased production sevenfold without affecting taste.
The newly profitable company became so attractive that in 2005 Hershey's, which was looking for high-end acquisitions, offered a price that Scharffenberger says was too good to pass up-about twice the company's revenues. Hershey won't detail the numbers, but Marcia Mogelonsky, a chocolate industry analyst for the research firm Mintel International, estimates Scharffen Berger's sales are rising by more than 30 percent a year and could top $20 million in 2006.