Episode 46 Blue Bottle Coffee

Summary Notes


In episode 46 of "Acquired," hosts Ben Gilbert and David Rosenthal discuss Nestle's acquisition of Blue Bottle Coffee, a move that perplexed many in Silicon Valley due to Blue Bottle's non-tech nature. Despite its artisanal, third-wave coffee approach, Blue Bottle attracted substantial VC interest, raising funds from the likes of Lowercase Capital and Index Ventures. The acquisition, valued at $425 million for a 68% stake, reflects Nestle's strategic entry into the high-end coffee market and potentially revitalizes its Nespresso brand in the U.S. Despite Blue Bottle's commitment to quality and customer experience, the deal raises questions about the scalability of boutique businesses and the future of coffee retail. Additionally, the episode features a promotion for Pilot, an accounting firm for startups, emphasizing the importance of focusing on core business strengths and outsourcing non-essential tasks.

Summary Notes

Introduction to Acquired Podcast Episode 46

  • Acquired is a podcast about technology acquisitions and IPOs.
  • Hosts are David Rosenthal and Ben Gilbert.
  • Episode 46 focuses on Nestle's acquisition of Blue Bottle Coffee.

"Welcome back to episode 46 of acquired, the podcast about technology acquisitions and IPOs. I'm Ben Gilbert." "I'm David Rosenthal, and we are your hosts."

The quotes introduce the podcast and its hosts, setting the stage for the episode's discussion on Nestle's acquisition of Blue Bottle Coffee.

Nestle's Acquisition of Blue Bottle Coffee

  • Silicon Valley has shown significant interest in the acquisition despite Blue Bottle not being a traditional tech company.
  • The acquisition has caused a stir in the tech community.
  • Discussion on where the community will congregate post-acquisition.

"Today we are covering an acquisition that the tech audience cares a lot about, even though it's not really a tech company. Nestle's acquisition of Blue Bottle." "Shockwaves have gone through Silicon Valley."

These quotes highlight the unexpected interest from the tech community in a non-tech company acquisition, suggesting the cultural and social significance of Blue Bottle in that community.

The Rise of Third and Fourth Wave Coffee

  • Third wave coffee focuses on coffee quality and artisanal preparation.
  • Fourth wave coffee is mentioned but not expanded upon.
  • Comparison to Starbucks as the second wave and the reaction of third wave coffee to it.

"Third wave coffee, which really is kind of the reaction to Starbucks, Starbucks being second wave." "Fourth wave of coffee."

The quotes discuss the evolution of coffee culture, with third wave coffee emphasizing quality and artisanal values as a response to the mass-market approach of Starbucks.

Pilot as a Sponsor and Accounting Services for Startups

  • Pilot is a startup-focused accounting firm offering comprehensive financial services.
  • The company's growth and endorsement by prominent investors, including Jeff Bezos.
  • Pilot's role in allowing startups to focus on core product development by outsourcing accounting.

"Pilot is the one team for all of your company's accounting, tax, and bookkeeping needs." "Startups should focus on what makes their beer taste better."

The quotes explain the services offered by Pilot and the philosophy of outsourcing non-core functions to focus on product and customer value.

Coffee and Tech Synergies

  • The cultural and economic parallels between coffee waves and the tech industry.
  • Blue Bottle's focus on meticulously crafted coffee and its Japanese inspiration.
  • The podcast's history of covering coffee-related topics due to its Seattle roots.

"We talked quite a bit in the Starbucks episode with Dan Levitan about waves of coffee and the parallels between the coffee world and the tech world." "It is very austere. There is very little in the locations except for the coffee."

These quotes draw connections between the evolution of coffee culture and the tech industry, and describe Blue Bottle's minimalist and quality-focused approach to coffee.

Blue Bottle's Founding and Growth

  • James Freeman, a former freelance clarinetist, founded Blue Bottle.
  • The company's growth from a home roasting hobby to a significant retail presence.
  • The influence of Japanese coffee culture on Blue Bottle's philosophy.

"He was a freelance clarinetist, a classical musician who played the clarinet, and he did that until his mid-thirties." "He's actually more influenced by the sort of Japanese style of coffee."

The quotes provide background on Blue Bottle's founder and the cultural influences that shaped the company's approach to coffee.

Venture Capital Investment in Blue Bottle

  • Blue Bottle's early VC funding rounds and the notable investors involved.
  • The skepticism and surprise from some observers about VC investment in a coffee company.
  • The successful outcome for investors in Blue Bottle's funding rounds.

"They raise a venture round, and they raise $5 million from a firm called Kolberg Ventures and Chris Sacca and lowercase capital." "Coffee is a legal, addictive, unregulated, psychoactive drug with cheap ingredients, premium pricing and a huge worldwide growth market."

The quotes detail the venture capital interest in Blue Bottle and provide insight into why investors saw potential in the coffee company despite it not being a typical tech startup.

Twitter Family and Blue Bottle's Ecosystem

  • Early-stage companies like Twitter and Blue Bottle Coffee attracted similar types of visionary founders and product-focused individuals, creating a mutually beneficial ecosystem.
  • Sightglass Coffee was co-founded by early Blue Bottle employees and Jack Dorsey, which also served as an early pilot location for Square.
  • Blue Bottle's customer base included influential and wealthy individuals who later became investors, indicating the company's ability to attract a valuable segment of the market.

"blue bottle was joined at the hip very early and they got a lot of sort of because they were both, at least very early on, incredibly product focused companies with sort of super tasteful, visionary founders."

This quote emphasizes the close relationship between Twitter and Blue Bottle Coffee, highlighting their shared focus on product quality and visionary leadership, which helped them attract a specific, high-value customer and investor base.

Physical Proximity to Twitter and Customer Acquisition

  • Blue Bottle's strategic location near Twitter's headquarters in Mint Plaza created a natural customer base among Twitter employees.
  • Physical proximity to tech companies can be seen as a strategic customer acquisition method, but the effectiveness of this approach has diminished over time, with digital targeting now playing a larger role.

"the first sort of canonical blue bottle store, larger than the kiosk that was in Hayes, was in Mint Plaza. And Mint Plaza is like two blocks away from the Twitter building."

This quote explains how Blue Bottle's location near Twitter's headquarters provided easy access for Twitter employees, thereby fostering a customer base through physical proximity.

Blue Bottle's Growth and Nestle Acquisition

  • Blue Bottle raised significant funds over time, including $25 million in 2014 and $75 million from Fidelity in 2015, indicating investor confidence and a trajectory of expansion.
  • Nestle's acquisition of a 68% stake in Blue Bottle for a reported $425 million in 2017 was a major liquidity event for the company and its investors, valuing the company at $625 million.
  • The acquisition raised questions about the founders' shares and the decision to opt for a majority buyout rather than a full acquisition, considering the potential implications for the company's independence and growth.

"in surprise announcement in the middle of September and September 14, 2017, it is reported that Nestle comes in and the large conglomerate and buys out a majority stake in the company for reported $425,000,000."

The quote details the significant financial event where Nestle acquired a majority stake in Blue Bottle, leading to discussions on the implications of such a buyout for the company's future.

Tension Between Growth and Ideals

  • Blue Bottle's founders were vocal about not wanting to go public, creating tension with investors like Fidelity, who sought returns and liquidity.
  • This tension reflects a broader issue in the tech world where companies raise substantial funds but resist going public or being sold, leading to a disconnect between founders' desires and investors' expectations.

"I don't know anybody at Blue know personally, but Freeman and Brian Meehan, who's the CEO, he came in and took over as CEO a number of years ago. But Freeman's still very, very involved. They both were very vocal about saying they never wanted to go public."

The quote highlights the founders' stance against going public, which contrasts with the expectations of investors, especially those looking for liquidity events like Fidelity.

Blue Bottle's Business Model and Future

  • Blue Bottle's business model includes both physical store sales and an online subscription service, raising curiosity about the revenue mix and growth potential.
  • The acquisition by Nestle brings into question how Blue Bottle will balance growth with maintaining its brand identity and product quality.
  • Comparisons are drawn between Blue Bottle's potential growth trajectory and that of Starbucks, as well as the unique position of Blue Bottle as a high-end retail experience within Nestle's portfolio.

"I don't think they have anything quite like blue bottle, which is like a physical retail experience. So this is something kind of new and different for them."

This quote suggests that Blue Bottle offers a unique business line for Nestle, one that focuses on a high-quality retail experience, which poses both opportunities and challenges for growth and integration.

Acquisition Strategy and Category

  • The acquisition strategy for Blue Bottle may involve leveraging the brand's prestige to expand its physical presence and product offerings.
  • Nestle's potential use of Blue Bottle to enter or enhance its position in the premium coffee market raises questions about the valuation and future cash flows of the business.
  • The discussion around the acquisition touches on the importance of maintaining Blue Bottle's brand identity and the risks associated with integrating it into a larger conglomerate.

"they bought brand here. They bought coolness."

The quote captures the essence of Nestle's acquisition of Blue Bottle, emphasizing the value of the brand's image and reputation in the market, which Nestle aims to capitalize on while navigating the complexities of growth and brand integrity.

Nestle's Market Penetration and Strategy

  • Nestle has a dominant presence in the European coffee market with a 70% share via Nespresso.
  • In the US, Nestle's Nespresso has less than 5% penetration, losing to Keurig and Tassimo.
  • Speculation on whether Nestle could regain US market share with a Blue Bottle single-serve coffee product.

"Nestle had to do something in coffee because they have dominance in Europe with Nespressos... they tried to penetrate in the US and completely lost to Keurig and Tacimo, and they have less than 5% penetration in the US on those single serves."

This quote highlights Nestle's need to innovate in the US coffee market due to its poor performance against competitors like Keurig and Tassimo.

Profit Margins and Business Opportunities

  • Nestle's overall business margins are about 15%, but beverage margins are higher at 25%.
  • There's a significant opportunity for Nestle to increase profits by expanding beverage lines, especially in the high-margin single-serve coffee market.

"Across Nestle's businesses, their margins are about 15%, and in their beverages, it's about 25%."

This quote emphasizes the importance of the beverage sector for Nestle's profitability, suggesting a strategic focus on this area could be beneficial.

Market Strategy and Brand Leverage

  • Discussion on whether Nestle should create a separate business line for Blue Bottle single-serve or rebrand Nespresso in the US.
  • The potential conflict of interest with two divisions competing against each other within Nestle.

"If it is a separate business line, like, this is a totally new thing that may or may not work, which is a leveraging of the brand into something that the brand may not be able to be leveraged into."

This quote discusses the strategic considerations Nestle must weigh when deciding how to leverage the Blue Bottle brand for single-serve coffee products.

Venture Capital Fund Lifecycles

  • Venture Capital (VC) funds typically have a 10-year lifecycle, after which they need to wind up and return money to investors.
  • Extensions are common, but VCs must regularly seek approval from investors, which can become challenging over time.

"The typical life of a venture capital fund partnership, limited partnership, is ten years... from the time the fund was raised until whatever that date is again, typically ten years, you're supposed to wind up the whole fund and give all the money back to investors at that point."

This quote explains the expected duration and end-of-life process for VC funds, highlighting the pressure to provide returns within a set timeframe.

Implications of VC Fund Life Extension

  • When VC funds extend beyond their lifecycle, they face the challenge of managing investor expectations and potential fatigue.
  • If limited partners (LPs) refuse extensions, shares may be distributed to them, complicating the company's cap table and operations.

"What would happen then is those shares would get distributed out to the investors in the VC fund, the limited partners, and that would be really bad for the company too."

This quote outlines the negative consequences for a company when a VC fund's shares are distributed to individual investors due to a lack of liquidity options.

The Role of Private Equity

  • Private equity could provide an alternative exit for VC investors, as seen with SurveyMonkey.
  • Private equity firms can buy out existing investors, providing needed liquidity.

"You saw this with SurveyMonkey... several times the various private equity firms came in and bought out the existing investors in SurveyMonkey."

This quote illustrates how private equity can serve as a solution for VC investors seeking exits from their positions in private companies.

Venture Capital Evergreen Funds

  • Evergreen funds do not have the same lifecycle constraints as traditional VC funds.
  • Alignment among VC partners and LPs is crucial for the success of an evergreen fund model.

"Some VCs do. So like Sutter Hill is an evergreen fund."

This quote introduces the concept of evergreen funds in the VC industry and mentions an example of a firm that operates such a fund.

The Return of Brick and Mortar Retail

  • Online companies are opening physical stores, often serving as brand awareness and customer experience centers.
  • The trend indicates a shift from big-box retail to boutique retail experiences.

"The return of brick and mortar in a different way than it was used before is really interesting to me."

This quote reflects on the changing landscape of retail, where online brands are establishing physical presences to enhance customer experience and brand visibility.

Aggregation Theory and Customer Experience

  • Superior customer experiences offered by boutique stores can lead to success in physical retail.
  • Physical stores cannot achieve winner-take-all status as easily as internet platforms due to logistical and capital constraints.

"You can have a much better, purer experience of that thing in that store."

This quote suggests that focused, high-quality customer experiences in boutique stores can be a winning strategy in the retail sector.

The Dynamics of Winner-Take-All Markets

  • Winner-take-all dynamics are more common in internet businesses with low marginal costs.
  • Physical businesses like coffee stores can still achieve rapid global expansion but are not inherently winner-take-all due to market segmentation.

"Coffee stores are not actually winner take all, despite the fact that Starbucks, it's not just the Internet that allows you to quickly saturate a global market."

This quote highlights the differences between internet and physical businesses in terms of market dominance and growth potential.

Physical Experience and Business Models

  • Physical experiences cannot be replicated like digital products.
  • The ambiance and experience of a place like Starbucks or Blue Bottle Coffee are unique and cannot be standardized across locations.
  • Traditional marketplaces used to house multiple merchants in one location, but premium brands avoid such environments to maintain exclusivity.

"It's kind of like if you go back to a traditional version of marketplace. Like before, it was this category of vc investable businesses. It was large square footage areas where multiple merchants were in a single place."

The quote discusses the nature of traditional marketplaces and their contrast with the desire of premium brands to maintain a distinct, separate presence.

Coffee Market and Brand Positioning

  • Coffee brands like Blue Bottle and Starbucks have different market positions and may not appeal to every customer segment.
  • Starbucks is successful but may not be the universal answer for all coffee consumers.
  • There is a discussion about whether Blue Bottle could or should move down-market to compete directly with Starbucks.

"Starbucks is killing it. They're doing great. But are they the answer for everyone?"

This quote questions whether a single coffee brand, even a successful one like Starbucks, can meet the diverse preferences of all coffee drinkers.

Business Expansion Strategies

  • Starbucks has attempted to move up-market, but winning over coffee aficionados is challenging.
  • Blue Bottle might consider offering a cheaper product line to attract a broader customer base.
  • The possibility of single-serve packaged coffee as a home product is mentioned as a potential strategy.

"Could blue bottle move down market at some point and open Starbucks competitors? And there's blue bottle classics, and then there's like, blue bottle something new."

This quote speculates on Blue Bottle's potential strategy to expand its market by introducing a lower-priced product line.

Winner-Take-All Business Models

  • The speakers discuss the limitations of winner-take-all business models in the context of physical businesses.
  • They note that internet businesses like Google, Facebook, and Instagram can serve a wide audience, but physical experiences are harder to standardize.
  • Amazon is highlighted as an exception due to its online nature and broad appeal.

"I just don't think you can do a winner take all business and create a product for everyone when you have to think about cramming in the physical experience of it, too."

This quote reflects skepticism about the feasibility of applying winner-take-all business models to sectors that involve physical experiences.

Acquisition Analysis

  • The speakers grade the acquisition of Blue Bottle by Nestle, considering the various stakeholders involved.
  • The discussion includes the strategic fit of Blue Bottle within Nestle's portfolio, particularly concerning the Nespresso brand.
  • They debate whether the acquisition had a clear, singular rationale like other successful acquisitions (e.g., Facebook's acquisition of Instagram).

"I think I give it a b right now because this certainly was a good outcome for everyone. But I just wonder if it was the right path and what would have happened if maybe Blue Bottle had made some different decisions along the way."

This quote presents an evaluation of the acquisition, acknowledging its success but questioning if alternative strategies could have led to a better fit or outcome.

Tulip Mania and Economic Bubbles

  • The speakers discuss the Dutch Tulip Mania as the first recorded economic bubble.
  • Recent analyses suggest that the impact of Tulip Mania on the Dutch economy may have been overstated.
  • The story of Tulip Mania is used as a cautionary tale in discussions about modern economic bubbles.

"It was super interesting. Like this thing that's gotten quoted and quoted and quoted and referenced over and over again."

This quote introduces the topic of Tulip Mania and its significance in the context of historical and modern economic bubbles.

Personal Technology Choices

  • The speakers share personal anecdotes about their technology choices, including the use of older iPhone models.
  • They discuss the trade-offs between the latest technology and personal preferences for form factor and functionality.
  • The liquid secondary market for Apple products is highlighted as a benefit for users who wish to upgrade or downgrade their devices.

"I'm always like, all my whole life I've been a bleeding edge adopter, but the form factor I just kind of realized again, maybe I'll probably change in a couple of years. But I was like, it's just nice to be back to being able to have my phone in my pocket."

This quote reflects a personal decision to prioritize the convenience of a smaller phone over the latest technology, despite a history of adopting new tech early on.

Crusoe Cloud Computing

  • Crusoe is a clean compute cloud provider specializing in AI workloads.
  • They partner with Nvidia and utilize wasted, stranded, or clean energy for their data centers.
  • Crusoe's model offers better performance per dollar and environmental benefits compared to traditional cloud providers.

"Because Crusoe's cloud is purpose built for AI and run on wasted, stranded, or clean energy, they can provide significantly better performance per dollar than traditional cloud providers."

This quote explains the unique value proposition of Crusoe in the cloud computing market, emphasizing its focus on AI and energy efficiency.

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