Wired founder becomes real-life Willy Wonka

SAN FRANCISCO (Reuters) - The world doesn't need another chocolate company, according to digital media pioneer Louis Rossetto, but that didn't stop him from starting one anyway.

Rossetto, co-founder of Wired magazine, began his relationship with "chocolate garage startup" TCHO as its first investor and later became the company's CEO.

The high-end organic and fair-trade chocolate company, which launched in 2005, is the brainchild of former NASA space shuttle contractor Timothy Childs and Karl Bittong, a 40-year chocolate industry veteran. Childs's idea behind TCHO was to apply innovative Silicon Valley start-up methodologies to the chocolate industry.

Central to the company's approach to making chocolate is a "Flavor Wheel" Childs invented to map the company's six different flavors: chocolatey, nutty, earthy, floral, fruity and citrus.

"If you were to look at the beans, they don't just come from some place, they have some flavor inherent in them like grapes do for wine," said Rossetto, adding that most chocolate is sold on the basis of its percentage of cacao and not for what it tastes like. "That's kind of backwards."

To shift that focus, TCHO developed a program to work closely with growers and co-ops in cacao-producing countries to ensure the quality of supply. "Flavor labs" were created with what Rossetto described as "scrappy technology" that includes re-tooled turkey roasters to cook the beans and hairdryers to warm the grinders.

"It's the lowest-cost, most-efficient technology to get the job done," Rossetto said about the labs that currently exist in Ecuador and Peru and will soon be built in the Dominican Republic, and possibly Ghana. Rossetto added that many farmers had never even tasted chocolate made from their beans prior to working with TCHO.

"We showed them how they could improve what they do, and get better prices, rise up from being commodity producers to be specialty premium producers, not unlike what you have in the Napa Valley with grape growers, where they could sell table grapes or they could sell wine grapes for really good wineries," he said, noting the name TCHO (pronounced "choh") is a variation on the phonetic spelling of the first syllable in chocolate.

TCHO sent samples of its chocolate to consumers, who could then log their tasting notes on the company's website (www.tcho.com) and the formulas were tweaked on that feedback. A year and 1,000 iterations later, the first four flavors were launched.

TCHO products sell anywhere from 75 cents up to $8 and margins, depending on the product, are between 30 and 50 percent, Rossetto said. TCHO produces about 10 to 20 tons of chocolate every few weeks, but its factory has the capacity to produce thousands of tons.

TCHO's largest single customer is Whole Foods, while Starbucks is its largest private-label customer. TCHO's dark and milk chocolate bars are sold in the coffee giant's 11,000 stores across North America.

On the professional side, Rossetto said TCHO supplies its baking chocolate to a range of distributors, including some of the most famous restaurants in New York such as Mario Batali's restaurant chain. Internationally, the chocolate is only available at Paul Young in London and Fresh and Fresh in Japan.

THE PITCH

TCHO launched at a time when high-end retail markets in North America were getting hammered by the recession, but Rossetto maintains the chocolate industry "has seen really strong growth" that has outpaced background inflation.

Last year chocolate sales were up six to eight percent across the spectrum, he said, and in fair trade, organic and high-end chocolates, the growth rate was 35, 40 and 50 percent.

"We're in a sector of the market that's basically recession proof and we're in a high-growth sector of that market," said Rossetto.

One of TCHO's biggest advantages, according to Rossetto, is that it's an American company and largely unaffected by fluctuating currency prices.

Rossetto said his initial investment combined with a second round of funding by 60 family members, friends and former Wired colleagues totaled in the "millions and millions." (Rossetto and partner Jane Metcalfe reportedly sold Wired magazine to Conde Nast for about $80 million in 1998.)

Rossetto said first revenues for TCHO started below $1 million in 2009 and tripled a year later. He said he expects to triple revenue again this year and "break even" early next year.

"By 2012, we're onto double-digit millions and beyond that we're looking at a nice healthy growth ramp," Rossetto said, adding TCHO is looking to add to its 20 full-time employees and expand to about the size of American chocolate counterpart Scharffen Berger, another San Francisco-based company founded in 1997.

Rossetto said there are a lot of people who work with chocolate, but not many who produce it. In the U.S., on any scale, he added, there may be 20 companies that make chocolate.

"The scale can be gargantuan," he said. "You get the Nestles and the Mars and the Hersheys, you're talking multi-billion dollar companies that have been around for a century in some cases; we're not playing in that domain, we're a craft producer."