Timbuk2 looking to stay on the growth fast-track

Only two weeks after being acquired by private equity investors, in an impressive deal that slightly eclipsed $22 million according to SNEWS® insiders, Timbuk2 Designs garnered 27th place in the Top 100 Fastest-Growing Private Companies in the Bay area list compiled by the San Francisco Business Times.

Mark Dwight, CEO of Timbuk2, sees that as recognition of a brand that has very loyal and passionate customers, inspired employees, and nothing but growth possibility ahead of it.

“I truly believe we can take Timbuk2 to $100 million before too long,” Dwight told us, clarifying the comment with his plan to create an “enterprise value” in Timbuk2 of between $50 million and $100 million within five years.

Dwight pointed out that private equity investors typically seek an ROI of three times investment in five years, which underscores his commitment to boost sales well over $60 million before 2010.

With the investment, many questions have been asked regarding Timbuk2 and its future, with some telling us that $22 million was an unrealistic investment for a company that sells primarily messenger bags. We felt that to better understand where the company is going, one must know where the company has been.

Tracking the growth
SNEWS® pulled its growing Timbuk2 file and poured over notes dating back to the mid-90s from interviews with company ownership (both past and present), as well as conversations with insiders close to the company. From the scribblings and musings, we put together a history of Timbuk2, and perhaps offer more insight into where the company might be heading.

1989 – Rob Honeycutt, a bike messenger in San Francisco, used a sewing machine located in a warehouse in San Francisco’s run-down Mission neighborhood to launch Timbuk2. His stated goal was to create a “safer way to make a buck,” and create a product that worked for bike messengers. It was a niche market, but a very passionate one. Honeycutt’s ultimate goal, however, was to have bike messengers be able to custom-design their own bags in bike shops that Timbuk2 would then create and deliver to the retail store.

1995 to 1999 – It was reported that the average yearly growth of the company was 56 percent during this period, with sales reaching a peak of $3 million in 1999. Timbuk2 had been turning heads at Outdoor Retailer Summer Market by bringing sewing machines to the trade show floor and customizing bags for retailers and press right on the show floor. Place your order in the morning, have a bag by the end of the show — sometimes by the end of that same day. But despite all the efforts, Honeycutt told us then that it was frustrating getting retailers to pay attention to his vision of selling customized bags at retail. The Dell-approach to selling bags was not resonating with retailers.

With the business making money but not making a profit, it took the Salt Lake City tornado, which destroyed the company’s booth and sewing machines, to inspire Honeycutt and then company President Brennan Mulligan, to take the company in a different direction — direct sales to the consumer through the Internet. Though the company by no means abandoned retail sales, the Internet would become a driving force in the future development of the company, its brand image and its product offering.

2000 – The company launched Bag Builder, which allowed customers to design messenger bags to their own specs, buy them online, and have them delivered right to the their homes within a week. Turning out 400 custom-designed messenger bags weekly, made of the trademark colorful strips of canvas fabric, and with 25 employees, the company found it needed more outside investment to continue growing. Too small to matter to most venture capitalists, Timbuk2 garnered the support of a unique fund, Silicon Valley Community Ventures. SVCV was a fund that would take an equity stake in companies that were improving a low-income community by offering jobs, often with benefits and training. SVCV also required that a living wage ($11 per hour at the time) had to be paid. SVCV acquired a 2.5 percent stake in Timbuk2 for a reported investment of $250,000.

2001 – Timbuk2 was still all about messenger bags, but that was about to change. A customer emailed the company wondering about a computer sleeve for his G4 PowerBook. Within two weeks of that email, the company sent that customer a custom-designed G4 computer sleeve. That customer posted the news of a new product for Apple users. Other customers suggested bag accessories like a place to stow a water bottle, a place for a Palm and padded shoulder straps. By the end of the year, the man behind the website biz for Timbuk2, Jordan Reiss, told one of our editors that sales had grown for the company by 25 percent — despite the challenging economy and 9/11 — and that just under 15 percent of all sales were now completed online, accounting for nearly one-third of the company’s overall revenue. Still, insiders told us then that despite the strong sales picture, the company was not doing as well as it appeared on the surface as expenses were outstripping revenues.

2002 – In September, Timbuk2, with the aid of SVCV, raised another round of investments to the tune of $3 million, and a new private investor joined the team — a former Cisco exec by the name of Mark Dwight. (Dwight reportedly invested $500,000 of the $3 million that was raised, SNEWS® was told at the time, though Dwight would not confirm this.) Dwight would also be named CEO of the company. SVCV now owned a 10 percent stake in Timbuk2. Following the news, Dwight told us that he very much believed in sharing the rewards of success with employees and that he would be positioning the company for dramatic growth. Dwight also made it very clear that while he believed in the online component of the company, he felt the company would not survive without retail helping it to build the brand. Sales in 2002 were reported at $3.9 million.

2003 – Sales grow to $5.6 million. Dwight, indicating a renewed commitment to specialty retail and continued development of the customization concept, backs out of a deal to sell messenger bags at CompUSA stores simply because, he told us, “Even though the volume was going to be amazing, I felt our business would not be able to survive on the slim margins we’d get in return.” Dwight also told us at the time that it was his mission and the mission of the company to work even harder to develop the brand image of the yellow sun swirl to be as recognized a trademark as the Nike Swoosh.

Dwight also moved production of new products overseas to China, citing in an online posting at the time that, “Unfortunately, it is not practical for us to make these new products in our San Francisco factory. The labor costs alone would make the retail price absurdly high.”

2004 – The company reports sales of $10 million and takes the concept of customization back to the retailer with a product we dubbed “Best in Show” with its Bag in a Box concept launched at Summer Market. Sold to retailers for $55, a nifty little box contains a card that holds a special code. Each box is sold to customers for $100, so retailers realize a good margin. The customer takes the box home, or gives it as a gift, and then uses the card to access the Timbuk2 website to create his or her own customized messenger bag.

2005 – Sales will eclipse $15 million, according to Dwight. One-third of all sales are computer bags. The Apple Store is Timbuk2’s single, largest retail customer. The company has over 30 product SKUs for bags alone (laptop bags, messenger bags and handbags), and many more accessories. Customized product orders make up over 15 percent of the company’s sales and, not surprisingly, well over 50 percent of all online orders are via the Bag Builder site. While facing stiffer competition from similar companies such as Crumpler, Timbuk2 is holding its own internationally, telling us that 25 percent of the company’s revenues are derived from international sales in Japan, Canada and Europe. It is the direct retail channel that remains king though, as over 50 percent of company revenues are found in the specialty channel.

The company sells to VMG Equity Partners, a newly formed, San Francisco-based private equity fund, and Capital Logic Partners, a Washington, D.C.-based, investment fund. Dwight told us he removed no cash from the equity deal, leaving his entire investment in the company at play.

Rory Fuerst, majority-owner of Keen, and owner of his own design and sourcing company based in the Bay area, as well as a member of the Timbuk2 board, also made a play of his own to gain control of Timbuk2 but was, in the end, bought out, we have been told. SNEWS® has confirmed that Fuerst is no longer on the board, and although he retains an investment in the company, it is a minority and non-controlling share.

True to his promise to be loyal to employees, as well as the operating mandate of SCVC (renamed Pacific Community Ventures in 2003), the company distributes a $1 million payout to 40 employees. Everyone who did not have a vested interest in the company received something, even those who had just joined the company weeks before the deal was finalized, we were told. Some sewers, who had been with the company for a very long time received as much as two-times their annual salary in a one-time bonus payout. Dwight told SNEWS® that the company was also providing investment counseling to help employees deal with the newfound wealth most effectively.

Pacific Community Ventures reportedly received a 3.5 times payout for its five-year investment in the company.

Joining Timbuk2’s board are Ken Pucker, COO of Timberland, and Dennis Jenson, previous president of Burton Snowboards.

Looking to the future
Dwight stated that despite Pucker’s involvement with Timbuk2 as a board member, there were no strategic discussions with any company, including Timberland in acquiring or developing a stake in Timbuk2’s future at this time.

He did say that he was very excited to have both Pucker and Jenson on board as both would be able to lend invaluable guidance to the company as it explored growing its distribution channels.

“Should we go into apparel? Into footwear? How do we take advantage of the brand and expand it appropriately? Do we acquire companies? Do we license other brands? Do we license our brand? Or do we build entirely new brands within our company structure like Burton did,” Dwight told us.

Dwight added that he wanted to make it very clear that whatever came of the growth direction of the brand, Timbuk2 remained very, very committed to the specialty channel of distribution.

“Retailers should be very pleased with the acquisition and new investment as it will address some of the growth pains we have experienced just as any rapidly growing company has. We are bolstering product development, sourcing and fulfillment, and we guarantee that we will become a much stronger partner to our specialty retailers,” said Dwight.

Dwight also reinforced that just-in-time coupled with innovation and customization was and would continue to be the cornerstone of the Timbuk2 brand.

“We will introduce several new customized products in the next year that will build on our manufacturing ability in San Francisco, and my strategy for the company is to continue to build on customization as we move forward,” said Dwight. “Consumer-direct and customization — that clearly works in what is otherwise a high-cost business model.”

SNEWS® View: Although the dollars paid were indeed eye-opening, we believe that this is very, very good for Timbuk2. With the sale, and Fuerst no longer a part of the equation, Dwight can now focus on growing and developing the brand, rather than having to think about defending his turf against another investor bent on acquiring the company. We’re also happy to see Pacific Community Ventures get such a nice return, as that fund is good for communities, good for employees, and was very good for Timbuk2 at a time it desperately needed financial support. As for whether or not Timbuk2 can grow into a $60 million or $100 million company and remain dedicated to specialty that is a very open-ended question. Few companies with such lofty financial goals placed upon them have managed much more than modest growth in the last several years. However, it should also be noted that there were many naysayers regarding the viability of a customized business model, and Timbuk2 simply shut them up with success. If Dwight is able to further develop the customized model, take that concept to an international stage, and widen his reach in the specialty channel, strong growth is possible. Perhaps, too, there is growth to be had through strategic acquisitions and licensing agreements, or the outright development of a new brand within the Timbuk2 family. We don’t see much success behind Timbuk2-branded footwear or apparel frankly. However, if the company is able to translate its quirky, homespun, customized model into the footwear and apparel biz, we’ll be singing a different tune. Hmmmm, UTW, are you paying attention here?

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