Markus Raty is sitting in an Italian trattoria in Toronto discussing what doing business in Nicaragua is like when he stops mid-sentence. He points to a middle-aged woman sitting a few tables away. "The woman over there is the woman I was about to go work for when Mombacho came along," the co-founder of Mombacho Cigars and a former investment bank researcher says.
"I was about to go back to banking and my heart wasn't in it, but education and experience led me in that direction. Then this opportunity came up. So, do I go with the structured, guaranteed life?" he asks, "Or do I risk everything and start a cigar business?"
The moment sounds scripted, but it wasn't. Yet, the Mombacho story is almost reel-worthy.
A Latin American vacation in 2005 was the beginning of a bold entrepreneurial move few young Canadians have taken up. Long-time friend and Toronto beer entrepreneur Cameron Heaps visited Nicaragua, where by chance he met cigar-master Silvio Reyes.
Mr. Heaps, already president of independent beer-maker Steam Whistle Breweries Co., immediately "fell in love" with Mr. Reyes' family and business, Mr. Raty says, and returned home with another enterprising itch -- to create a premium cigar business in Canada.
The timing was right for Mr. Raty, a University of Toronto business graduate who was looking for a career away from Bay Street. Mr. Heaps, Mr. Raty and another friend Martin Ritchie, who's no longer a partner in the venture, spent the following year mulling the idea while researchingthe Canadian marketplace.
They quickly learned the domestic industry was virtually bereft of home-grown cigar firms, Mr. Raty says. There were domestic distributors of imported brands,
but almost no one making their own. "We came up with a logo, we came up with a vision," Mr. Raty says. "We got to a point where we'd done some cursory research and were thinking this idea might
fly," Mr. Raty says. In the spring of 2006, the three flew to Granada, Nicaragua, to formalize a partnership with Mr. Reyes. "We shook hands, and that was the beginning," Mr. Raty says. No paperwork, simply a handshake. "That means more to us and Silvio than a 20-page contract with all kinds of clauses," he says.
"We don't have the capital requirements that most companies might have because we partnered with a family -- we don't own the factory."
Nor the in-roads into Nicaragua's tobacco suppliers, for that matter. "All of this comes down to relationships," Mr. Raty says. "Through connections and relationships, we got access to the very best tobacco in Nicaragua.
"That accelerated us up the curve, where otherwise we'd be here," he says, gesturing under the table. "Scrambling."
The initial startup financing for things such as bulk tobacco and production was relatively inexpensive and came from the partners, Mr. Raty says. It's one of the benefits of working in Nicaragua -- it's cheap. Renowned for the quality of its tobacco, Nicaragua's agriculturally reliant economy is the poorest in Latin America, with gross domestic product per capita of $1,030 a year, according to International Trade Canada.
Additional funds for equipment and shipping were secured through a Toronto credit union.
Back in Toronto, Mombacho was officially formed with Mr. Raty as president. While Mr. Heaps returned to running Steam Whistle, Mr. Raty redoubled his research efforts, "basically sinking my teeth into cigars. The industry, the history, everything."
He had to iron out logistical challenges and customs relationships to get cigars into Canada. The company even outfitted Mr. Heap's Toronto home with a humidor the size of a small room to hold inventory.
"When we shook hands in June 2006, I wanted to sell cigars by Christmas," Mr. Raty says. In reality, it took two years.
"We knew the cigar itself was nailed from the beginning," he says, but securing quality packaging and reliable transport in Cental America proved difficult. "If you rely on getting things done like you might here in Canada where A leads to B leads to C ... It's not going to happen," he says.
The company, for example, found it impossible at first to find the level of craftsmanship that could make the Spanish cedar boxes that would house the cigars.
Reliable customs brokers were equally challenging to find. "Controls are still in their infancy from the standpoint of importing and exporting things from the country," he says.
"We've had cigars stuck in El Salvador for eight days in some warehouse, and when they got here they were ruined" from humidity and tobacco beetles.
Applying for the necessary vendor permits to sell tobacco in Canada also proved "arduous," Mr. Raty says. "There was a lot due diligence on the government's part."
It wasn't until this February that Mr. Raty began to see light at the end of the tunnel. That's when the company received its permits. The chronic issue of poor package-making was solved weeks later when Mr. Reyes' wife found a dependable box-maker from Esteli, Nicaragua's tobacco heartland. In turn, the box-maker linked Mombacho up with arguably the best customs broker in Nicaragua. Waiting for cigars and boxes went from weeks or "never arriving at all," to landing in Toronto overnight, Mr. Raty says. "Again, relationships, right ... I can't find that relationship on my own.
"It allowed us to schedule the launch party."
In July, Mr. Raty arrived in a 1963 Mercedes Unimog in a hangar at Toronto City Centre Airport to officially launch Mombacho Cigars. More than 650 friends and clients greeted him. Orders for the cigars, which sell for $385 for a box of 24, have poured in since.
As for swapping investment research notes for tobacco leaves? "It was a slam-dunk decision."
Monday, August 18, 2008
Source: Financial Post