July 09, 2016
Philip Tadros sat among his food-and-beverage industry peers on an entrepreneur panel in February, speaking with the confidence and swagger of someone accustomed to getting what he wants. The self-proclaimed serial entrepreneur best known for his Bow Truss coffee shops told the crowd that in the previous year, "we've probably raised like $2 million" in investments just from customers of his businesses. The secret, he said: "I make it super easy to give me money."
A fountain of ideas, with a sensibility for design and branding, and a seemingly unlimited supply of charm, hustle and connections, Tadros in the past decade has persuaded mostly sophisticated, high-net-worth investors to back his businesses, which include Bow Truss, a chain of 10 coffee shops and a roaster that also sells wholesale to more than 160 accounts, like Whole Foods and Virgin Hotels in Chicago; technology/marketing/branding agency Doejo; Bowmanville brewery Aquanaut; and Budlong, a chicken restaurant.
But as Tadros seeks new investors to fund at least a dozen more Bow Truss shops, an Aquanaut brewpub and more locations of Budlong—using Facebook to hawk the opportunities in some instances—he has left in his wake at least 15 lawsuits, plus failed businesses, unhappy clients and vendors, and angry investors, some of whom say they don't expect to recoup their invested capital, not to mention a return on those investments.
A review of Tadros' operations, coupled with interviews with more than two dozen former business partners, associates, investors, vendors and clients, reveals a pattern of mismanagement, questionable accounting practices, and, some say, a penchant for falling behind on bills and a knack for burning through other people's money. The vast majority say they would never do business with Tadros again.
Some of Tadros' current and former businesses, clockwise from top left: Bow Truss, Budlong, Doejo, Dollop and Aquanaut. - John R. Boehm photos
Photo by John R. Boehm photos Some of Tadros' current and former businesses, clockwise from top left: Bow Truss, Budlong, Doejo, Dollop and Aquanaut.
Tadros dismisses any suggestion of impropriety. Disputes with clients and vendors, as well as lawsuits, are part of the normal course of conducting business, he says. "We never did anything wrong," Tadros says at Doejo's Lakeview offices recently, dressed in his usual T-shirt and jeans. "And if we did, we would never do it because we wanted to do something wrong." He says Doejo is profitable, and Bow Truss, Aquanaut and Budlong would be, too, if their proceeds weren't being plowed into growth.
Former investors and associates expressed discomfort with some aspects of the way Tadros ran his businesses. For one thing, it was hard to tell where one Tadros company begins and another ends financially, according to these people and bank records obtained by Crain's.
The bank records, which cover a 16-month period for Aquanaut and more than two years for Bow Truss ending in 2014, show dozens of bank transfers that follow a similar pattern: Nearly every month, money went back and forth between Aquanaut, Bow Truss, Doejo and other accounts associated with Tadros, even though each entity had a distinct group of investors. In total, approximately $800,000 moved between those accounts via wire transfers and checks, according to a Crain's analysis of the records. The transactions were typically preceded by new investment or were conducted to bring bank accounts back into positive territory, a near-constant struggle for Bow Truss, the records show.
"The stench here is overwhelming," says Chicago attorney Neal Levin, head of the fraud and internal investigations practice and the internal intelligence unit at law firm Freeborn & Peters. He reviewed the documents at the request of Crain's. Levin says the volume of wire transfers and other transactions among the separate companies controlled by Tadros "is highly irregular for a legitimate business operation" and "beyond sufficient to justify a complete audit and accounting of all associated businesses."
Tadros says such "intercompany transfers" were conducted routinely to "patch" shortfalls at each company. Because either Tadros or his tech firm, Doejo, are majority owners and managers in each company, he insists that the transactions are proper, as long as all the accounts are reconciled.
"We're doing best by our companies and people by patching and reconciling," he says. "If somebody needs help, you help them, you document it and you reconcile it. Nothing has ever been wrong. That's a fact." If that means Bow Truss needs to transfer money to Aquanaut or Doejo needs to transfer money to Bow Truss to make payroll, "you better believe . . . we're going to fucking make payroll because we're managing our babies," Tadros says.
Many companies treat the movement of money between separate businesses as loans, which pay interest, but Tadros says his companies did not. "I think our tax lawyer said that there's a way that we're supposed to do something like that . . . but no, we don't do interest," he says. "It's basic business."
While the existence of the transfers alone does not indicate wrongdoing or malfeasance, investors are right to raise questions, Levin says. Most troubling is that the funds appear to be being used for purposes other than investors intended, Levin says.
Paul B. Cogswell is managing director of compliance and corporate investigations at accounting firm McGovern & Greene in Chicago. "Even if you put the money back, you have deprived a shareholder from the temporary use of capital which was intended for the sole purpose of bettering the business that he invested in," says Cogswell, a certified fraud examiner who has no dealings with Tadros. "At the very least, he may have some explaining to do."
Eric McNeil, co-founder, head brewer and a minority shareholder in Aquanaut, says that when he learned of the transfers in and out of the Aquanaut account, "I was definitely pretty upset about it and pretty vocal about how this was not at all good." After McNeil raised the issue with Tadros, he says, the activity stopped. "A lot of it happened without me knowing at first," McNeil says. "We now have our own operations guy who is helping keep me updated on our activity."
INVESTORS GET OUT
When investors learned of such activity, many of them sought to get out. Of the first six partners in Bow Truss, founded in late 2011, just two remain today. One is Tadros' tech company, Doejo; the other is Chicago serial investor Alan Matthew.
Matthew, who has invested in more than 30 companies, including parking app SpotHero and Raise, a gift card marketplace, says he put more than $200,000 into three startups controlled at least in part by Tadros: mobile apps Tagyoureit and MeUngry, as well as a game, "Map of the Dead."
Tagyoureit and MeUngry were both dissolved. "Map of the Dead" still exists, but Matthew says he doesn't expect to see a return on those investments or see any of his money back. "That money is gone," he says.
Tadros confirms that Matthew lost money on the three web projects and says investors in "Map of the Dead" will not be paid back. "You know, we tried," he says.
As an early investor in Bow Truss, Matthew says he has requested the company's financial data several times in the past 12 months, which the company is required to provide to investors per an operating agreement. He says he has yet to receive any documents.
Tadros responds that Matthew "can have whatever he wants, but we just don't want to talk to him."
Other Bow Truss investors, including co-founders Josh Elyachar of New York and Chicago tech entrepreneur Seth Kravitz, exited Bow Truss because of concerns about the way Tadros was running the company, several sources tell Crain's.
At least one—Kravitz—abandoned his entire six-figure investment in Bow Truss, dissolving his shares without payment to make a quick exit and distance himself from the company, those sources say. Kravitz confirms that he walked away from Bow Truss without recouping his investment but declines to comment further.
Elyachar and another Bow Truss investor, Brett Holmes, exited both Bow Truss and their investments in Aquanaut, sources say. Elyachar and Holmes decline to comment.
Tadros says his early group of investors "were inexperienced in building something" and "were blocking me from growing," so he "had to remove them and buy them out."
Aside from Kravitz, all original Bow Truss investors have been or are in the process of being paid back, Tadros says. He adds that his new investors, which include two real estate firms, are seasoned, "drama-free problem-solvers" that know how to build companies.
Tadros, 37, was born in Chicago and grew up in Palos Heights, the son of Jordanian immigrants. His late father was an entrepreneur who owned seven neighborhood grocery stores. An uncle, Musa Tadros, is a well-known Chicago real estate developer.
In 2000, the same year he stopped attending classes at Columbia College in Chicago, Tadros, 21, bought Don's Coffee Club in Rogers Park for $14,000. He sold the business less than a year later for $34,000. (Published reports on the price Tadros paid for the business range from $13,000 to $20,000.) Over the next several years, he opened four more coffee shops on Chicago's North Side: Chase Cafe, Dollop, Noble Tree and Kickstand Espresso Bar.
It was also during the mid-2000s that a profile began to emerge, several sources who knew Tadros at the time tell Crain's. Tadros was disarmingly funny, carefree, creative and generous. He was relentlessly optimistic, a skilled salesman adept at building out fashionable storefronts and persuading people to invest in or alongside him.
The same sources say Tadros also had a grandiose self-image and fell woefully short in his ability to run a business. "He's a guy with great ideas," says one former business partner who declines to be named for fear of legal action. "A person who's always on top of the latest trend. But he never sees anything through. When things go sideways, Phil runs away."
Tadros denies that he runs away from problems. "We just take (a lot) of risks on people and ideas, and some work, others don't; but that's life, we are trying our best."
Tadros has lived large—driving a Mercedes-Benz G-Class, dining at expensive restaurants, holding his wedding reception at the Four Seasons Hotel—even as some of his businesses underperformed.
Shaye Robeson ran Dollop with Tadros from 2004 to 2011. The cafe, which has become a nine-store chain under new ownership, was never as profitable as Robeson envisioned. Robeson says he fronted about $80,000 to launch Dollop, with Tadros earning a 30 percent share of the business for managing its build-out and operations. Robeson says his old friend was "creative, inspiring and sociable," but was "incredibly scattered and disorganized" and "had no idea how to run or grow a business."
After a bit more than a year in business, Robeson took on Dollop's financial management "because it was clear Phil wasn't doing any of it. I don't think Phil had any idea what a (profit-and-loss statement) was," he says.
Tadros confirms Robeson's account and says his former business partner should have taken control of Dollop's finances from the beginning. "That's not my forte by any means. It never was," he says. "Everybody knows that."
Within about four years, Robeson says, Tadros was largely disengaged from the business, instead focusing on his other projects. After battling Tadros for control of the business, Robeson eventually bought him out in 2011 and sold Dollop later that year. While he was negotiating his exit from Dollop, Tadros scored a five-year contract to manage three cafes on the campus of Columbia College through a new company, Cafe University.
Two of the cafe's vendors have complained that Tadros was late with payments or withheld them altogether.
One was Tony Dreyfuss, founder of Metropolis Coffee. Dreyfuss sold Tadros coffee for his Columbia College cafes but says he had to write off "several thousand dollars" of unpaid bills.
The other was Southport Grocery owner Lisa Santos, who sued Cafe University in 2012 over more than $13,000 in unpaid invoices. The case was settled out of court, with Tadros agreeing to pay Southport $10,000, Santos says. "If I didn't take him to court, I wouldn't have seen any of this, and that's a huge hit for a business our size," she says.
Tadros blames the unpaid balances on Jacob Shapiro. In February 2011, Tadros signed over Cafe University and two other coffee shops to Shapiro, effective Dec. 31, 2010. "He racked up that bill, and I got stuck with it," Tadros says.
When Shapiro took control of the business, he inherited unpaid invoices to Southport of about $9,600, according to Southport's lawsuit.
Shapiro says he handed the shops back to Tadros in about July 2011, purposely defaulting on payments to Tadros after finding the business had liabilities far beyond what Tadros had communicated before the sale. "The amount of accurate, quality, industry-standard bookkeeping that was going on was a sum total of zero," Shapiro says.
Tadros says he eventually paid Santos back—both for bills accrued on his watch and Shapiro's. He does not comment directly on the bookkeeping but says he's been involved in many companies, and "had a lot of situations good and bad."
Columbia College says it declined to renew Cafe University's contract in 2015, though Tadros says he walked away because he was not interested in a one-year option offered by the college.
The Southport suit was one of at least 15 filed against Tadros and his related businesses in Cook County Circuit Court since 2004. The complaints range from unhappy clients claiming they didn't get the services or products they paid for to a landlord claiming Doejo owed $58,000 in back rent. Nearly all were settled out of court.
Among the cases:
• Erineo Carranza alleged that Doejo was paid $261,266 in 2012 to begin work on a renovation project for Chicago's Congress Theatre, but Tadros refused to provide a full accounting of expenses. Carranza said in the suit that the money paid for the services was "greatly in excess of the work performed (and) material provided." He alleged that Doejo spent the money "for personal purposes" and applied it "to projects unrelated" to the Congress property. The case was settled out of court in March 2014.
Tadros says he did branding work and bought "tons of furniture and equipment." He says he settled, paying Carranza about $40,000 in unspent funds.
• Chicago-based e-commerce company GimmeAnother said it paid Doejo $70,000 to build mobile apps, but Doejo failed to deliver on several key provisions and refused to refund the company for work not delivered.
"Sometimes you're going to get some startup clients who want, and want and want more, and don't understand the process," Tadros says in response. The case, in which GimmeAnother sought more than $50,000, was settled in February 2014 for unknown terms.
• A Russian web development company alleged that it provided services to Doejo starting in 2011 but that in June 2013 Doejo stopped paying its invoices. In a lawsuit, the company alleged that Tadros and Doejo partner Darren Marshall "comingled (their) own funds" with Doejo's, diverted funds from Doejo and used Doejo funds "to pay for personal purchases, vacations, meals, and travel for personal use and other personal transactions."
Tadros says he disputed invoices from the contractor because its work was subpar. The case, in which the web development company sought $67,897, was settled in April. Tadros says he paid the company "like $20,000."
• The Chicago branch of office-sharing company Industrious sued Tadros in early 2014, alleging he took its client lists, blueprints, building plans and pricing strategies to start his own competing co-working space. Tadros, who had a 3 percent stake in Industrious' Bureau River North, admitted in court that he tried to solicit several of its tenants for his competing co-working company, Space by Doejo, which opened blocks away about a year later.
"The episode with Phil Tadros was a painful moment in the early days of our company," Industrious co-founder Jamie Hodari says. "I'm sure we're not alone in wanting to forget and move on from our dealings with him."
Tadros says he never signed a nondisclosure agreement and tried to give his shares of the company back after its principals insulted him. Tadros says Industrious wouldn't allow him to leave. "I built that company. I filled up that floor, and I helped them raise a quarter-million dollars," Tadros says. When the company planned to expand, it shut him out, he says. "For me, that's the biggest insult."
The case settled in April 2014, with Tadros' stake in Industrious dissolved in exchange for him being allowed to build Space by Doejo with certain restrictions.
In late 2013 and early 2014, Tadros persuaded a handful of investors—including two prominent Chicago entrepreneurs who decline to be named because they don't want to be publicly associated with the project—to put money toward a tiny Lakeview cocktail bar and restaurant called Oyster Pail.
But after rehabbing a storefront, installing plumbing and electric, and telling investors he was getting closer to opening, Tadros never got it off the ground. As majority owner in a brewery, Tadros says, he could not get a permit because, under state law, he could not own more than 4.9 percent of a restaurant serving alcohol unless it produced beer on premises.
"It's something he obviously should have known," one investor says. Those investors did not get their money back. "Legally, I can say this thing lost," Tadros says. "We all lost."
In January 2015, soon after he told investors to write off their investment in Oyster Pail, he announced he was partnering with Michelin-starred chef Iliana Regan, partner of Elizabeth Restaurant, to open Bunny the Microbakery. But that project, too, was beset by delays when Regan couldn't get required licensing because Tadros hadn't obtained city construction permits for the build-out, sources say.
Tadros responds that in the process of converting the space from an oyster bar into a bakery, "I tried to make some modifications that really needed to be redrafted and submitted under a new entity, so I tried to help and open quickly to help turn the lost project around, and it took longer."
When it finally opened more than six months late, Bunny almost immediately fell short on cash. The bakery closed within three months, a high-profile embarrassment for Regan, who declines to comment.
As of late June, Tadros was late on bills to some of Bunny's vendors. Among them was Local Foods, which was owed about $2,000, says Chairman Jim Murphy.
Tadros says he's making payments or plans to make payments to each of those vendors. "We are making it right and taking it on."
Weeks after Bunny closed, Tadros announced another tenant: his new Nashville-style hot chicken restaurant Budlong. It opened in May, and he's planning at least three more locations.
Tadros has continued to expand Bow Truss, which has 10 locations, including one in Beverly Hills, Calif. He says he's planning to open at least 14 more Bow Truss cafes within the next 18 months, with most on the North and Near West sides of Chicago. He's also launching two more businesses this year: juice company Apotheca and subscription chocolate company Beckon.
To fund the new projects and expansions, Tadros is back on the circuit with an outstretched hand. In January, he solicited investors on his personal Facebook page, touting the chance to get in on two fast-growing success stories. He offered 3 percent stakes in Bow Truss for $250,000, giving the company an implied valuation of $8.3 million. In a separate post, he offered 10 percent stakes of Aquanaut for $250,000, giving the brewery an implied valuation of $2.5 million.
The offers, each viewable to the public, qualify as a "general solicitation" by the Securities and Exchange Commission, which would typically require Tadros to file a form in the event he sold any stock via the Facebook posting. "In general, public advertising of the offering, and general solicitation of investors, is incompatible with the nonpublic offering exemption," the securities regulator says on its website.
Tadros says he was not required to and did not make any such filings because he didn't sell any securities from the Facebook solicitations.
Meanwhile, Tadros values Bow Truss at $13.8 million, based on monthly sales of nearly $500,000. (He says he's raised $1.5 million for the coffee company so far.)
Through a new crowdfunding portal called Funded Foods, Tadros in late June began soliciting investments from all comers, not just so-called accredited investors (those with an annual income of at least $200,000 or a net worth of at least $1 million). The portal, made legal under a new Illinois law that allows companies to raise up to $4 million per year online, will be used to fund both Tadros ventures and other, unrelated food ventures.
Tadros says he's trying crowdfunding because it's a way "for us entrepreneurs to get reasonable debt early on from our fans" without giving up too much equity in their companies. On top of that, he says, he gets emails all the time from customers who want to invest in his companies.
Tadros is convinced that his latest projects—Bow Truss, Budlong and Aquanaut—are poised to hit. "Bow Truss has a chance to be our biggest success," he says. "(We) need more money and time."
Of the approximately two dozen companies Tadros has owned since 2000, however, just seven have paid back his initial investments and produced returns for him, he says. And only two of those—an Evanston wireless retailer he sold a decade ago and Doejo—have produced returns so far for other investors.
Tadros acknowledges that investing in him is a risk and notes that 90 percent of startups fail. Though he says he believes his new ventures are a "safe bet," he doesn't want money from people who "don't understand gambling." As some of his ventures have proved, more often than not, those bets don't pay off.
©2016 by Crain Communications Inc.
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