It started as a thought in a kitchen over a cup of coffee – that people might be interested in buying superlative coffee online. Within 72 hours of the idea, Stephen Rapoport had sold his first bag of Pact Coffee through a fully-functioning website.
It really was a kitchen business; Rapoport was grinding coffee, writing labels and queueing in the post office to send them off. Almost as fast as you can say “skinny cappuccino,” Pact had 500 loyal customers and was generating meaningful revenues.
But even when he was in his kitchen, he was nurturing a global ambition: that Pact Coffee would change the face of one of the biggest markets in the planet.
Today, the subscription-based coffee roaster is buzzing – and not just with caffeine. On a busy day it will sell a tonne of coffee; 30,000 cups of Pact coffee are drunk in the UK every day; and average month on month revenue growth is 25 per cent. While 50 per cent of its customers are in London and the south-east, Pact has customers from Cornwall to the Hebrides.
Stirring up the coffee market
It’s another disruptive tale of our times. Rapoport argues that coffee, the second largest commodity market after oil, is based on an “antiquated” business model.
“We are making a complicated supply chain more efficient. We are the only step between our farmers and our consumers. At present, it’s common for a farmer to be part of co-operative or to trade with local agents. The farmer sells his produce to an agent, who sells to an exporter, who sells to an importer, who roasts in the UK and sells to a retailer who sells to the customer – and everyone takes a margin. We buy from a farmer and sell to a customer and take a margin. It just makes more sense.”
That means they can pay the farmers more for their coffee: the average price that Pact paid for its coffee at origin last year was 151 per cent of the Fairtrade rate.
By connecting producers more closely with consumers, he argues, “we take the time and effort that goes into marketing and put it into the product. We sell the best coffee on the planet, roasted by a genius who cares deeply about the flavour in the cup. Flavour, quality, accessibility and convenience – these are the things that the customer actually cares about. We are enabling people to drink better coffee than they have ever had before.”
Such a dream isn’t achieved with just a coffee roaster. “As a start up, you need to stand on the shoulders of giants,” says Rapoport.
He was still alone in his kitchen when he raised the first round of £500,000, which included investment from two business angels with sector expertise, in order to hire the people to get the business really flying.
The Enterprise Investment Scheme (EIS) was critical to getting the investors’ support. “EIS is one of the most valuable things that the government has done to support early-stage, high-innovation companies,” says Rapoport. “It’s a tax break that encourages successful people to support aspirant successful people.” Last year, Pact Coffee raised a second round of £2.2m.
Building a team
Pact is a committed user of the Enterprise Management Incentive (EMI): every single Pact employee holds share options that are covered by the scheme.
“I am very grateful and happy for EMI,” he says. “It is so important for a business at our stage because it helps us to align our objectives perfectly. Everyone is bought into the long term vision and EMI helps us achieve that.
As an online business, Pact is on the bleeding edge of e-commerce innovation. Pact’s recommendation algorithm (which was, according to Rapoport, “a really hard piece of technology that required PhD-level knowhow in artificial intelligence to build”) qualified for an R&D tax credit.
“The more risk there is in your day-to-day decisions, the more likely you are to make small bets that will move the needle by one per cent rather than the big bets that you need to build a world-changing company,” he says.
“R&D tax credits mean we can push things. They help to de-risk our big bets. They may be expensive. They may not work. Or customers may not want it as much as we think they will. But we need to be able to experiment in that way, and R&D tax credits help us to do that.”
“The only way in which we can compete on the global stage is through innovation and entrepreneurship and I think that the government is doing a huge amount to support and encourage that in the UK,” he notes.
Make that vision a grande
Rapoport vision is one of scale. “There’s limitless potential upside,” he says. At present Pact sells premium quality coffee to British coffee drinkers to drink at home.” There is plenty of growth in that approach. But then there’s the office market. Or there’s international growth – “Pact is a UK business and it won’t be in the future,” he says. Or different forms of coffee dispense (think capsules) or branded retail outlets.
Rapoport is a serial entrepreneur; Pact is his fourth business venture, and by far the biggest. The first two didn’t work out but the third he sold to a US competitor. But, he says, it has taken Pact for him to learn that to be successful as an entrepreneur, “you have to start with love and passion and let that guide your decisions.
“My last business sounded like a smart, commercial business. But if you start a business because you think there might be commercial success at the end of it, someone else will set up in competition with you – and they will be in love with the problem that they are trying to solve and will wipe the floor with you.
“My wife told me to ‘stop thinking like an investor, just do the thing that you love.’ And I have. This business is driven by a passion and love of coffee, of flavour, of delighting customers. As a result, I have a business many times the size of the others combined.”
Visit our page about equity finance for growing businesses to learn more about business angel investors and the Enterprise Investment Scheme. The Business Finance Guide, published by the ICAEW and the British Business Bank, sets out the full range of options for businesses – from start-up to growth.
Tax reliefs and incentives are available to help companies of all sizes to secure funding.
Pact Coffee was a winner of the Investec Food & Drink Entrepreneur of the Year Awards 2014.