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The Entrepreneurs: Marvin Samel and Jonathan Drew were fraternity brothers at SUNY College at Oneonta's class of 1992, where they studied business administration and political science.
The Idea: The two made a pact while at college to start a business together after graduating. They both loved to smoke cigars and they thought it made sense to sell something that they enjoyed. "We didn't come into this business with a grand master plan," Mr. Samel says.
In 1995, Mr. Drew, then 24 years old, was a law student and Mr. Samel, then 25, was embarking on a mortgage banking career. The pair put up $60,000 each of their own and their parents' money. With the initial capital, the two spent $7,000 a month on a retail kiosk in the World Trade Center Mall in New York and purchased as many cigars as they could -- calling their business Drew Estate Cigars.
Fortunately, the partners tripped onto a cigar boom. Cigar smoking was so popular in the U.S. at that time some traditional manufacturers were having trouble keeping shelves stocked, Mr. Samel says.
"After the first few months we opened, we were like, 'Wow, we struck oil,' " he says. Soon demand far outweighed their meager supply, and the higher-end cigar manufacturers were on back order.
The Opportunity: Samel and Drew had decided early on that they wanted to make their own cigars, and when the cigar manufacturers couldn't provide Drew Estate with enough inventory, it was an opportunity to start rolling tobacco. Starting in 1996, the friends began purchasing high quality Nicaraguan tobacco and cigar wrappers, and hired two cigar makers to roll cigars from a dimly lit second floor walkup in lower Manhattan. They called their brand La Vieja Habana, or The Old Havana, after the capital of Cuba. At first, the small operation was producing 30 boxes of cigars a day, with 25 cigars to a box.
As demand grew, Samel and Drew started getting calls from other Manhattan retailers asking if they could sell La Vieja Habana cigars in their stores. Mr. Samel recalls the fledgling company had no business model to speak of. "It was like 'I Love Lucy,' where they are jarring sauce, and realizing they are losing money on every one they make," Mr. Samel says.
In 1998, Drew Estate sold $180,000 in cigars. After three years in the kiosk, Drew Estate let go of its lease to concentrate on the manufacturing end of the business. The business owners preferred the manufacturing and distribution to the retail side of the business.
Mr. Drew moved permanently to Esteli, Nicaragua in 1998 to gain access to the country's rich-tasting tobacco and set up a local manufacturing operation. He began experimenting with new ways to make cigars, infusing them with oils, herbs and botanicals, such as rose petals, coffee and jasmine. Drew Estate called it their ACID cigar. Back in New York that same year, Mr. Samel had quit his secure finance job to devote himself full-time to the business.
The Snags: Business was brisk, but the cost to make the ACID cigars was tremendous. Drew had to purchase not only tobacco, wrappers and packaging, but special oils herbs and botanicals. Between 1995 and 1998 Drew Estate had borrowed $500,000. The duo had sold all their personal assets, and both of their parents had taken out second mortgages their houses to fund the operation.
Released in 1999, ACID cigars were immediately popular. "We were in our 20s, and you cater to who you are. Initially we assumed the typical ACID smoker was like us. We were wrong; many were in their 30s, 40s, 50s and older, who wanted to try something different," Mr. Samel said.
The cigars were constantly backordered because Drew Estate had underestimated demand. The tobacco had to age up to three years before it could be rolled, and cured another six months after being hand-rolled into a cigar. Samel and Drew had to guess on cigar demand that was months or years away, and they guessed wrong.
The Money Options: With expansion dependant on buying more assets, Samel knew he needed a professional bank loan to fund his company's tremendous sales growth. The main problem was that all their assets were in Nicaragua, a country which had been politically unstable during the 1980s. In addition, Drew Estate's premium cigars required an unusually long curing period, which meant the fledging business's inventory would be tied up for years in a foreign country. Banks typically prefer funding inventory that is quickly sold.
Mr. Samel was turned down by "dozens" of banks, "Every bank with headquarters between 34th street and 57th street," he said. A couple banks offered to take the company public, but Mr. Samel says they were leery about relinquishing control of the firm.
By 2002, Drew Estate had borrowed $1.25 million. After emptying the pockets of friends and family, Mr. Samel was "borrowing from any unsavory character I could find."
Meanwhile, in Nicaragua, Drew had put every dime into the business. With no money left for lodging, he slept on the floor of the 1,000-square-foot glorified garage in which Drew Estate rolled its tobacco.
The Funding: In 2002, the owner one of Drew Estate's Manhattan retailers introduced Samel and Drew to Jeffrey Koslowsky, executive vice president of Gerber Finance, a New York financier. Gerber Finance had funded international operations before, but usually companies much larger and more mature than Drew Estate. Despite the fact that Drew Estate didn't entirely fit Gerber Finance's profile, Mr. Koslowsky was willing to take a chance and extend Drew Estate a $200,000 line of credit.
"I saw two young guys with a ton of passion," says Mr. Koslowsky. But, he says, he also saw disorganized operations and, for Gerber, low sales. Still, he says Drew Estate had a prompt payment history and strong sales growth.
"They were as close to a punt as I ever took in this business," Mr. Koslowsky says.
To buoy sales the company spent the cash on more tobacco, and commercial cigar packaging such as boxes and labels. Gerber gave them another $100,000 six months later, and to date they've accepted over $2 million in a revolving loan. Periodic payments are required, but the loan can be added to when needed and doesn't need to be paid back in any defined time period. With Mr. Koslowsky's help Drew Estate brought in a professional chief financial officer, who budgeted and organized the company's finances.
The Payoff: Now based in Miami, Drew Estate sells its cigars in about 3000 specialty retail shops and plans to do sales "well north" of $15 million this year, up from $180,000 in 1998 and over $3 million in 2001. Drew Estate just broke ground on a 100,000 square foot cigar production facility in Nicaragua, the physically largest in that country, Mr. Samel said.
Like many successful entrepreneurs, Mr. Samel wouldn't trade his job for anything. "I love what I do," he says. "There's nothing like driving home from work while smoking your own cigar."
Mr. Samel also says he enjoys the camaraderie of the cigar business. "You can walk up to anyone on a street corner and say, 'Hey, what are you smoking?' and spark up a conversation. Try doing that with someone drinking a latte."
Article Courtesy of WSJ Online |
