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How 5 Rabbit went from craft beer to the courtroom
When bottling day begins at 5 Rabbit Cerveceria, a 25,000-square-foot microbrewery in Bedford Park that opened in late 2012, employees hustle to the iPod speakers. It’s a big deal. Depending on who’s quickest, the bottling line might vibrate for the next several hours with hard metal or acid jazz. But not all of the internal competition at 5 Rabbit has been so good-natured — despite the brewery’s early success. In the two years since co-founders Andres Araya and Isaac Showaki moved to Chicago to start their own brewhouse, 5 Rabbit has reached an annual production capacity of 10,000 barrels; it’s shipping its Latin-style craft beer to about 500 bars, restaurants and retailers each month, including 15 Chipotle restaurants. They recently began brewing their seventh beer, a hibiscus ale,* and plan to expand their distribution in Ohio and Pennsylvania this spring.
In recent months, however, 5 Rabbit’s momentum was nearly derailed by a fierce quarrel between Araya and Showaki. The dispute began late last year and spilled onto the public stage in January, when Araya sued Showaki for defamation, claiming Showaki falsely accused Araya of misappropriating $25,000 and of having an adulterous affair with a former 5 Rabbit intern. Araya’s complaint alleges that Showaki made those comments in an attempt to weaken Araya’s standing with the company and seize exclusive control.
As Grid went to press, Showaki hadn’t filed a response to the complaint, and he won’t comment on the allegations. But on Feb. 21, he and Araya announced the dissolution of their partnership, as Showaki sold his share of the company to 5 Rabbit’s new commercial director and another investor. However the ligitation is resolved, Showaki will no longer be a part of 5 Rabbit.
In the heady days when they launch their startups, entrepreneurs like Araya and Showaki face all sorts of hurdles. There’s the difficulty of drafting a business plan, raising capital and monetizing the model. But beyond that, a startup’s stumbling blocks can be as nuanced as the elements of friendship. 5 Rabbit’s story is now two stories. No matter whose you believe, it’s a tale of how a partnership suited to building a business may not always be a partnership suited to running one.
Showaki and Araya met in Panama City while working as consultants for Bain & Co. Their six-week assignment, to turn around a Panamanian brewery, was all-consuming. They spent 120 hours a week in the same hotel room, parsing data and ordering cigarettes from room service. “Eventually we thought, ‘I’d rather be doing what [the brewers] are doing,’” says Araya.
When the project concluded, the two went home to Mexico City, where they parted ways. But they stayed in touch, and in 2010, Showaki flew from New York, where he’d moved, to Miami, where Araya was stationed on another Bain project. It turned out both wanted to bring their Panama-City discussions to fruition. They wanted to start a brewery. Over dinner, the pair started to hash out a plan. Araya initially hesitated to take the leap from a steady consulting gig. He was five years older than Showaki and had a wife and child, whereas Showaki was unmarried. Still, Araya had been toying with the idea for years, and it still held plenty of appeal.
“[Consulting] was something that I could do,” Araya recalls. “But not necessarily something that I would want to do for the rest of my life.”
After hammering out the details and discussing the idea with his wife, Mila, Araya decided to make the leap. He gave his notice at Bain.
Their vision: to be the first Latin-American-style craft brewery in the country. “We wanted to do something completely different,” Showaki says. Araya and Showaki chose Chicago as their base, drawn to its unsaturated beer market, large Latino consumer base and thriving food scene.
They moved to the city, hired brewery consultant and influential beer writer Randy Mosher as creative director,* raised a small amount of seed capital, and began contract brewing — using another brewery to produce their recipes — in May 2011. But the product was often late and the batches were small. When their first contract expired, they agreed to accelerate plans to open their own brewery.
Opening their own line required significant capital. Over the course of 18 months and five more contract brewing agreements, Showaki and Araya raised $1.2 million from fewer than 10 investors, relying on personal relationships to sell their vision. “[Investors] trust you more than they trust the idea,” Araya says.
The search for a brewing site took eight frustrating months, as various sites proved unsuitable for various reasons, and the duo agonized over how soon to include a brewpub in their plans. But through it all, Showaki and Araya’s relationship held. The partners seemed to have complementary skill sets, which led to distinct roles. As CEO, Araya focused on brewing and other operations, while Showaki, the COO, handled sales, marketing and other external matters.
Araya “was the production guy, the admin guy, better with numbers and accounting and stuff like that,” Showaki says. “I was always more outgoing and loved talking to people.”
And even as time and roadblocks piled up, Showaki remembers feeling like both were in it for the long haul. “We were going to be together for the next 10 to 20 years,” he says.
In summer 2012, the team finally found the space they wanted, in heavily industrial Bedford Park. When they paid their first month’s rent for September, Showaki and Araya’s vision had taken physical form. In October, 5 Rabbit’s Latin-style Witbier won a bronze medal at the Great American Brewfest in Boulder, Colo. A few weeks later the founders were named to Crain’s Chicago Business’s coveted 40 Under 40 list.
But even as 5 Rabbit’s stars seemed to be aligning, the partnership that launched it was beginning to unravel. Neither will say how it began to strain, but according to Showaki, the trouble started in October, and quickly deteriorated. In November, he says, the rancor was so bad that the co-founders hired lawyers to advise them on breaking up the partnership. Araya won’t comment on Showaki’s version of events.
But no deal was reached, and the partners’ feud spilled into the news in January, when Araya sued.
Neither of the former partners will speak to specific disagreements, citing the pending litigation. Araya’s complaint alleges a power struggle at 5 Rabbit, and both men say that while they’d been united on big strategic decisions, they clashed often on routine questions about how to execute.
“The broader strategic decisions we had made two years ago, and had agreed upon two years ago,” says Araya. “Most of our disagreements came in day-to-day management.”
Fallouts between business partners are far from uncommon, though it’s perhaps surprising to see tension erupt when the business is on the upswing. But Kevin Willer, CEO of the Chicagoland Entrepreneurial Center, says it’s not only hard times that can drive a wedge between entrepreneurial duos.
“When the business takes off, one co-founder says ‘Let’s do what we’ve been doing and not go off course,’ and the other co-founder might say, ‘We have to keep innovating,’” Willer says.
Part of the issue may have been 5 Rabbit’s corporate structure. Araya and Showaki were the only two members of the board, leaving them with no tie-breaker or referee as discord grew. “Partnerships of two people, where there isn’t a final decision maker, I think they’re doomed to have a harder time,” Araya says. “What color do you want to paint the brewery — I want red, [you] want blue. So what color do you paint it? If you don’t have an agreed-upon mechanism, if we can’t agree upon something, what is done?”
Unable to answer that question, the 5 Rabbit partners decided to call it quits. In December, Showaki says he triggered a clause in the partnership agreement that allowed either partner to force a buy-out. That appears to have set the stage for the brewery to carry on, albeit without one of the men who first conceived of it.
Salvaging a business after a bitter personal dispute between partners is not an easy task — nor is broaching the subject of a partnership agreement to govern a future break-up, says Antonio Giuliani, a professor of entrepreneurship at UIC’s Liautaud School of Business. “You usually start a company, especially if you’re a novice entrepreneur, with someone you know very well, a co-worker or friend.” Between friends, he says, when one party asks the other to agree in advance to a dissolution process, it “sounds like distrust.”
Showaki says the buy-out clause was his idea (Araya won’t comment). “It was kind of like a premonition. I never thought that I was ever going to have a problem with him, but just in case,” he says. “You never envision a fight with your partner. That’s not the way you start your business.”
The quick sell-off has allowed everyone to move on, though they remain engaged in legal combat. Showaki says he wants to start another business but he’s not yet sure what. Araya and Mosher plan to add new 5 Rabbit brews and let beer fans help them build recipes.
Mosher, 5 Rabbit’s Creative Director and a spectator to what he calls a “deep-seated and personal” dispute that might have destroyed the nascent company, is happy to be able to focus on making beer.
“It’s never a fun thing, a good thing,” Mosher says of the conflict. “But it could have been worse.”
*The original version of this article called the hibiscus ale a golden ale, when instead it has a pink color. We regret the error.
*The original version of this article named Randy Mosher the brewmaster, rather than the creative director. We regret the error.