Acquired - Episode 46: Blue Bottle Coffee

Episode Date: October 8, 2017

Today our heroes cover a deal that might have more impact on life in Silicon Valley than AI, wearables and AR/VR combined… Nestle’s acquisition of Blue Bottle Coffee. Will hipster entrepreneurs and the VCs who love/need them continue to line up around the block for their minimalist coffee experience of choice, now that it’s owned by the Nesquik Bunny? Is this the beginning of Blue Bottle pod machines filling the empty counter space left by Juicero’s demise in VC offices throughout South Park? We investigate.Sponsors:ServiceNow: https://bit.ly/acqsnaiagentsHuntress: https://bit.ly/acqhuntressVanta: https://bit.ly/acquiredvantaMore Acquired!:Get email updates with hints on next episode and follow-ups from recent episodesJoin the SlackSubscribe to ACQ2Merch Store!Topics Covered Include:The rise of “Third Wave” coffeeBlue Bottle founder James Freeman’s “classical” (music) influences Venture capital and the coffee business Achieving liquidity when companies and founders’ don’t want to go public, and don’t want to sell their stakes Nestle’s position in single-serve coffee market and potential brand impact of Blue Bottle The Carve Out: Ben: There Never Was a Real Tulip FeverDavid: iPhone SE

It can't be turtles all the way down. There has to be a pool at the bottom. Oh man, I'm using that as the teaser quote for this episode. 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. 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. Yes, yes. There have been lines around the block that are forming their own lines around the block just to hear the news. So great. Where will the VCs and entrepreneurs congregate now?

Yeah, I mean, what's the sort of like island-ish one? Philz. Philz. Yeah. Fourth wave of coffee. Fourth wave. We'll get into it. We will. We will. Okay, listeners, now is a great time to tell you about longtime friend of the show, ServiceNow.

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acquired we've done uh we did the disney uh trifecta um and then the fourth of course with with bam tech um we've done sports we did the la clippers that was that was out there but but fun we've done a bunch of gaming episodes and now we've got our second coffee episode on the heels of the starbucks episode so well this is a this is a you know primarily seattle dominant uh podcast so we we do have to do multiple coffee episodes but next we'll have to do the seahawks next yeah yeah uh so coffee 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. And we alluded to third wave coffee, which really is kind of the reaction to Starbucks, uh, Starbucks being second wave. If, if the first wave was kind of Folgers and Maxwell house and brew at home coffee, the second wave being Starbucks, uh,

an experience, a place you go to, uh, the third wave is really all about the quality of the coffee people. You know, it is, it is really the origin of hipsterdom starbucks sucks it's super corporate we're going to focus on the artisanal quality of it's burnt it's dark it's you know no care put into it it's a factory everything is made exactly the same you know call it operationally efficient and and you know praise their business model or you know uh hate on it because it's it's systematized but um it's definitely definitely a reaction to the the mass market success of starbucks yeah and so third wave places like um a counterculture was one of the first in in durham durham north carolina stump town and down in Portland, which is now owned by Peet's,

interestingly, or Intelligentsia, which I think started in Chicago, is also now majority owned by Peet's. Cafe Vita in Seattle, all these folks, they really focus on the drink itself. And probably, arguably, nobody focused more on the drink than Blue Bottle. So let's dive into Blue Bottle. So it was founded by a very interesting, interesting guy named James Freeman. And highly recommend, we'll link to this in the show notes, but he did the Stanford entrepreneurial thought leader talk. He gave a talk there last year. Really fun to listen to. He basically, let's just say he starts it with an analogy to Merce Cunningham and John Cage, the sort of avant-garde, you know, modern dance choreographer, Merce Cunningham and his

partner, John Cage, who is an avant-garde musician and their work together as an analogy for his whole talk. And then he goes on to quote Sartre and Proust, very philosophical. Honestly, David, one of my favorite things about this show is learning about the insane and talented and driven people that start these companies. There are no normal people that start enormous companies. No. And James is, is no exception. He, unlike most of the founders we talk about, he is definitely not an engineer.

Not even remotely connected with the tech world, except for the fact that he lived in the Bay area. He was a freelance clarinetist, a classical musician who played the clarinet. And he did that for until his mid thirties. And then he, he kind of woke up one day and he realized, you know, I'm never gonna be the best clarinetist. Um, and maybe I should find something else to do with my life. And what else could he do? It turns out he had this side hobby of roasting his own coffee beans in his oven at home. So he would buy beans and he would roast them at home in his kitchen, in his oven. Apparently made lots of smoke. And his wife at the time was not a fan of this hobby.

But he made these beans and he would drink the coffee himself and he would give it to his friends and people loved it. And he thought, well, maybe I'll turn to coffee for my life. So he started in the early 2000s. He quits the music world and he lived in, I don't know if he actually lived in Oakland or if he started the company in Oakland. He was living in the Bay Area, starts Blue Bottle in Oakland. And the original business plan is that he's going to keep doing what he's doing and and deliver beans to two people's houses. These great beans that he's roasted, you know, in his kitchen the day before will deliver them to his friend's houses. So it kind of sounds like an on-demand startup truly truly his time and and hilariously you know that the

part of the the business fast forward a little bit they operate now that's a coffee delivery service they acquired another company to to do that called tonks um when they they sort of moved into a bit of a different uh different sector yep so he's sort of the the company is back to its to its origins now with that acquisition later but he he does that for a little while and then and then they kind of realize like probably not going to become a really large business if he's roasting you know roasting coffee in his own kitchen and it's hilarious following the parallel to Starbucks, like both started with this model of beans only and, you know, selling those and focusing exactly on that

and then realizing, boy, there's this whole other, you know, retail coffee experience to be created. Yeah, exactly. And Freeman, sort of similar to the Starbucks story, where it wasn't the Starbucks founders who realized that there was this retail opportunity. It was Howard Schultz. Freeman himself kind of stumbles into it. So in 2003, he signs a lease for a roastery so he can get it out of his kitchen and start roasting in a commercial space. And then it's not until 2005 that he actually opens up his first, uh, retail location, uh, which is in Hayes Valley in San Francisco.

And it's in a friend's garage. So he has a friend who loves his coffee and, uh, his friend has this garage on a little side street in Hayes and, um, says, why don't you come open up a kiosk and actually, instead of just selling beans,

uh, sell coffee there. James is, is excited about this. And he's sort of approached to coffee, even though the name Blue Bottle comes from Blue Bottle Coffee in Vienna, which was one of Europe's first coffee houses. He's actually more influenced by the sort of Japanese style of coffee. So whereas Howard Schultz was influenced by his time in Italy and the Italian coffee houses, the whole approach of Blue Bottle is very, very Japanese centric. And the Japanese approach to coffee is very third wave. It's all about the very, very meticulously crafted,

perfect cup of coffee. And James talks about this in his, his ETL talk at Stanford that, uh, part of his inspiration is this, this coffee shop in Japan, where the first thing you do that the barista does when, when you order a cup of coffee is they have a wall with all these cups on it. And, and the barista, he or she will, will go look at the wall and decide which cup they're all different is perfect for you. Wow. And so that's the inspiration for Blue Bottle. And listeners, if you've been to Blue Bottle, if you live in the Bay Area, I'm sure you have or travel there often.

This is the anti-Starbucks. It is very austere. There is very little in the locations except for the coffee. There's no Wi-Fi. There are no power outlets. They do have some food, but very little. It is truly all about the coffee. This idea of the cups, James also talks about much later in the company's history.

They had cups specifically made for Blue Bottle. These are ceramic to-st stay cups. They don't like doing to go cups. Um, that are the cups are perfectly sized. They're not perfectly round, but they are sized exactly for the size drink that, that you get a blue bottle. There are no sizes. You just get, you know, you order whatever it is you order and it's one size. David, I can't take take it it's so hipster the synergies with the tech community are just too perfect so you pay software engineers more money and more disposable income and they want to be better than everyone else and they want to

buy more pretentious things they love coffee they need coffee to be productive i know i'll sell them really expensive coffee that they don't have to think about because they're thinking about writing the code so we do the thinking for them but it's really good exactly exactly it's like the steve jobs one outfit reduced cognitive load thing exactly exactly i mean that is that is blue bottle which is very different from phil's which we'll come back to in a minute phil's is the competing bay area chain i should say like blue bottle is freaking amazingly good like the coffee is really good i'll rip on it for like this whole episode but um you know it's it's an unbelievable product it really is i, you can't, you know, be from Seattle and not, not appreciate

good coffee and it is very good coffee. So after the kiosk, the first very little store in Hayes opens up, it really starts to take off and spreads kind of by word of mouth. Uh, they start to open more locations in the Bay area. Then they go to New York City, they go to Los Angeles, and then they go to Tokyo, to Japan and the sort of inspiration for all of it. And so there's stores in all of these cities now. But they start to grow fairly rapidly. And in 2008, so this is very early in kind of the rise of sort of the modern startup and VC industry. I mean, arguably, even maybe I would say before lots of capital, the sort of modern Series A and beyond type startup, they raise a venture round, and they raise $5 million from a firm called Kohlberg

Ventures, and Chris Saka and Lowercase Capital. This is just when Chris is getting going. That dude gets into everything. Unfreaking believable. The nose on Chris Saka to find those early stage. Amazing. It was a $4 million fund. So tiny by today's standards, but he was in everything.

Blue Bottle, Uber, Twitter, many, many more. A bunch more of Twitter that he could on the second market so five million dollar round uh from kohlberg and and lowercase in 2008 then a few years later in 2012 they raised a 20 million dollar round uh led by index ventures uh and google ventures and then a whole bunch of other individuals. So Kevin Systrom, a number of other tech CEOs, Tony Hawk, the skateboarding legend, invests. I mean, this coffee, I mean, this is the thing. I think we might have talked about this a little bit in the Starbucks episode. You're literally selling drugs to your customers.

Yeah. Oh my God. I was doing some, one of my favorite things to do research for this, um, this podcast is to go look at all the core responses to, um, reactions around the deal and sort of tease out what I think is, is a great point. And, you know, things, things I want to bring up on the show. And there was one really great quote that I was going to wait to wait to say later, but, um, I think, I think it's worth bringing up now from from daniel james on quora in this 20 million dollar round the the question was something around like you know why is blue bottle getting all this investment what are the vcc's and he goes coffee is a legal addictive unregulated psychoactive drug with cheap ingredients premium pricing and a huge worldwide growth market blue bottle is a quality brand with a good team and a strong history of well-managed growth.

To me, this seems much better than a VC bet with many consumer internet companies. I know, and it's so funny. I mean, I actually think, and I remember this round, the 2012 round. Nobody really paid attention to the 2008 one, but the 2012 round was like, you know, it was sort of similar

when we were starting Rover and people are like, this is a sign of the apocalypse, like Airbnb for dogs. Like who's going to use that? It was the same thing then. It was like, what are these VCs thinking? Like they're investing in a coffee company. And to be clear, like there was never any even pretense that this was like going to be an internet company. It was like, you know, James and Bluebird, they're like, no, this is a coffee company. we make coffee we have stores people come they buy the coffee they drink it like there's you know we have a website but like reduce cogs and and like lower variable costs like nope nope none of that uh no no this is a coffee company um and

people are like why are these vcs investing in this turns out uh they did well and particularly that round uh did very well but we'll come back to all that it is worth pointing out like this super interesting um near self-fulfilling prophecy of this the sort of twitter family and blue bottle was was joined at the hip very early and they got a lot of sort of um because they were both at least very early on incredibly product focused companies with like sort of super tasteful visionary founders like they attracted the same sort of people and they and they magnified each other so you look at like um sight glass that was a couple of uh of early blue bottle folks that left to start their own thing like they co-founded that with Jack Dorsey

and was an early pilot for using Square at that location. And you see the types of people that were attracted to Blue Bottle as a product and as a lifestyle and put money into it. I mean, it is like they just won over the most valuable segment as customers and then brought them on as investors. Yeah, and this is something, I mean,

we've talked about this on this show before, but like, especially if you don't live in, in the Bay area or in Seattle or LA, or, you know, you're not kind of in the ecosystem, it's easy to forget, you know, you read about these companies in the press, they become so valuable. They're almost like these celebrities, like these are real people and these companies exist in real locations. So I don't know if it was the second, but the first sort of canonical blue bottle store, you know, larger than the kiosk that was in Hayes, uh, was in mint Plaza and mint Plaza is like two blocks away from the Twitter building. So like, well, you know, where do all the Twitter, you know, employees go

when they want coffee, like they go to the blue bottle in Mint Plaza. And it's just like these ecosystems, like, everybody's, you know, everybody's right there. And and that's how these things sort of feed on one another. Yeah, I thought about this as like a customer acquisition strategy of if you have a company and you want people at another company to buy it for B2B purposes, like buy all the Facebook ads of the employees at that company so that you can like get get their doing, you know, attracting Twitter people, um, you know, could you, could you target them all over the place, uh, digitally as well as having a physical location there? Cause I feel like, um, while blue bottle sort of pioneered that, I feel like that's no longer novel to, you know, put something right outside of, uh, a company that anyway, to put, to put a physical location. That growth, growth hacking tactic doesn't work anymore. Could you, could you be digitally close?

Yeah. Yeah, seriously. But it definitely worked for blue bottle. And I think, I think Biz Stone is, was an investor. I don't know if F Williams was, uh, I don't, I don't think, you know, Jack was obviously an investor in, inglass, a competitor, but it worked. So 2014, they then raise another $25 million. And then in 2015, they raised $75 million from Fidelity. And that was like, wow, you know, this is like a lot of money from like a real, you know, public markets investor. And then they keep expanding, you know, within those cities that I mentioned before, but grow to, you know, 2017, it is reported that Nestle comes in and

the large conglomerate and buys out a majority stake in the company for reported $425 million. We don't know the exact number, but it's been pretty widely reported that they paid about $425 million. And that was for 68% of the company. So they bought out the investors and James and the rest of the management team are keeping their stake. So they keep 32% of the company, its own separate board. Uh, but all the investors are bought out. Uh, so the valuation on the company is 625 million, assuming that the 425 million figure is correct. And here we are. Pretty amazing. I mean, I wonder, the first thing that comes to mind is, did the founders keep all their shares? Was there a little bit of a secondary there where they took money off the table? They

had to have taken something, right? Like they had to... I don't know for sure, but they may not have. There had been some secondaries along the way. So I believe some of the money from some of the later rounds was secondary sales that the founders and management team were taking money off the table. So I actually don't know in this case whether Nestle paid out anything to any of the employees. Yeah. paid out anything to any of the any of the employees yeah well i will say you know as um i for lots and lots of reasons um believe that full acquisitions are better than these sort of majority buyouts um particularly for for startups like this i mean they're a 40 store retail location but you know early-ish mid-stage company but if you're going to do it in this manner where you're not acquiring the entire company i love the idea of it running independently and the founders still having a ton of skin in the

game to make this thing you know grow in valuation you know there's sort of an interesting thing of like uh it has to stay a separate company like like about this. How, if you're those founders, do you think about how your shares get valued now? There's not really a competitive market to do the next round. It's not going to... There's not a market to value your company. It's certainly not anywhere near getting valued

on a reasonable sort of price to earnings ratio. So are you hoping that at some point, Nestle just decides to buy you out? Is it actually in their best interest to do that? I love the incentive. I'm curious on the mechanics of how that works. I think you're hitting on all the right questions here, Ben. I think part of the reason this happened as it did is, you know, I have to wonder, I don't know anybody at Blue Bottle, you 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.

They didn't think being public made sense for Blue Bottle as a company. And it also just was something they weren't interested in. And yet the company continued to grow. But at the same time, they'd raised all this money. And in particular, in some of these later rounds, I'm bringing in folks like Fidelity. Fidelity is a mutual fund. They're a public company investor. Like they, you know, uh, they, they want to return all the investors want to return, but particularly them and they want liquidity. And so I can only imagine the tension that must've been building as they were making these decisions to take these partners on along the way, these partners as investors who just had sort of fundamentally different goals than what it sounds like James and the team did. Yeah. OK, so here's the question is, you know, did that dichotomy just continue to grow and grow and grow where they were diametrically opposed to going public?

They were taking on investors that needed them to go public or needed to have a big liquidity event and in a reasonable timeframe. And like they sort of were in a rock and a hard place. Yeah, I mean, that is the question. And I think the question for both for Blue Bottle and for us in terms of in this show, like looking at what's going on in the tech world, like Blue Bottle, we were joking in the beginning of the show that it is unapologetically not

a tech company. But this type of dynamic is rampant these days. I mean, so many founders of tech companies have raised all this money and yet are adamant that they never want to be public. And a lot of them also say they don't want to sell the company either. So like, what are you going to do? Yeah. I mean, it seems like that would have been a nice thing to be aware of upon investing. It does seem that way. It does seem that way. Um, and it's so funny. It's also so, uh, is that lip service, David? Like, is it like how,

if you want to run for president, you're supposed to say like, I'm not interested in being president. And then like you reluctantly do it. So you don't seem power hungry. Like, is it like, oh, you know, we never want to sell out. And then like you inspire your employees and your mission driven forever. And then until the day that it happens, it's never going to happen. Yeah. I don't know. I mean, you could say so, but then but then like you know we've talked about this in so many episodes you know whether about snap and or about facebook um you know these companies the majority of them obviously not snap and facebook but have been private for so long now and they just keep staying so you know u, Uber, Airbnb and all these companies, many, many others certainly could be public companies and probably should be. But the

founders are, for whatever reason, either delaying or even, you know, saying they don't want to. But I think it also like there's a tension here. I mean, on the one hand, I think we've been painting it for the last few minutes as bad, or at least that this is a disconnect, which it is. But on the other hand, if you go back to sort of what Blue Bottle is, and this whole third wave of coffee, which we're using as an analogy for, you know, the state of the tech world right now, does it make sense for Blue Bottle to be a public company? I mean, it makes sense for Starbucks because Starbucks' goal is to be everywhere and on every corner.

But if Blue Bottle's goal is to be about the cup of coffee and what is actually in the cup, does it make sense to be as big? I don't know. Yeah, I mean, Blue Bottle has 40 locations, right? Like, they have plenty of growth ahead of them if they want to. I mean, Starbucks has 24,000 locations. You know, you don't need to be a public company to be a 40 location coffee shop. I'm actually very curious, too. They also have this online business selling directly to customers. I'm super curious what the revenue mix looks like i would suspect a lot more of it is is either buying coffee in the stores you know in liquid form or buying the beans in the stores

and then the the online subscription business is smaller but interesting to think about that too because that then you start to think about it still not an internet company like i'm really sick of the fact that like oh we sell it online and like people subscribe to it. Like that's a slight business model shift, but ultimately like it fixed costs, distribution costs, like still not an internet business. But then you at least drift closer to something where you're like, okay, this is different than, you know, uh, all the brick and mortar stuff that exists today. We've posed some questions here. And I think, you know, James Freeman and the Blue Bottle team were very clear what side they came down on those questions, which was that Blue Bottle can't be a public company and maintain its ideals.

And also that it's not an internet company. Um, but I, I do think, you know, in terms of where I come down on this, like, I'm not sure that that's the dichotomy that makes sense, right? Like I think about Apple, right? Like an Apple store and a blue bottle store are, are eerily similar. Um, and Apple is maintaining what an old what apple store used to be anyway like i think the the days of believing that an apple store is a sparse simple uh location is is far over well no but but you come you you walk into an apple store and they're you know you can count on well you used to be able to count on both of your hands the number of products they were selling there. It's more now, but it's certainly not relative to the number of

square feet that they have. The number of products that they're selling is way smaller, but that has been able to scale and touch just about everyone in the world. Whereas, as you point out,, blue bottle has 40 stores. I'm curious to get into acquisition category. Cause I'd, I'd love to get your take here. Do you want to, you want to dive into that now? Yeah, let's do it. All right. So, uh, I'm curious what you think. The thing that I have bolded in my show notes of our categories, people, technology, product, business line, asset, or other is product because they are this, you know, it's a really, product, business line, asset, or other is product because they are this, you know, it's a really fantastic product, a lot of care in every cup, truly differentiated in terms of, you know, once you have it, you kind of want to go every day to that. You don't want

to go for anything less. Do I think Nestle could create that? Probably. Like, do I think they could create that for a way less than they paid for Blue Bottle? Certainly. Would it be successful? Almost certainly not. I think ultimately what they've bought here is the brand and the prestige around the brand. And they're going to try and leverage that into all sorts of, well, I think they're going to try and leverage that into all sorts of interesting ways of using their supply chain to really amp up the growth rate of interesting ways of, you know, using their supply chain to, um, to really amp up the growth rate of blue bottle to potentially sell other stuff in blue bottle to sell blue bottle coffee everywhere where they have store space. But they, they bought brand here and they bought coolness. Yeah. See, I was going to go business line. Um, because yes, there are all those things that Nestle could do with Blue Bottle,

but there's such a risk if they do that they destroy the brand, right? And I don't know that Nestle, I don't know the full ins and outs of their corporate structure, but I don't think they have anything quite like Blue Bottle, which is like a, you know, a physical retail experience. So this is something kind of new and different for them. But I think you also, you know, raise a great point that like this is a business line, but it's not one with a ton of crossover. Like there's crossover potential, but there's so many landmines in there. Yeah. I don't think I really considered that that much. The question is, I mean, if it's a business line, then it should be freestanding. And that means that you should believe that the summer future cash flows on this thing are going to be $625 million. That's a lot of growth. on the other hand so they uh well a foreshadow we'll get into this more in tech themes um but this really is kind of like it's so interesting like this is a like facebook style acquisition

being done by nestle right like they're keeping the team separate all the rhetoric is that you know they're gonna let blue bottle just keep doing its thing it's a separate board the employees and james the founder still own a significant chunk of the company, you know, separate from Nestle. Yeah. I don't know. What do you think? Is it going to work? Well, I mean, so what are they going to do that? The question is like, what are they going to do with it? Are they going to try and put blue bottle in more places? Because I believe Nestle can probably do that. Like if, if that's the goal and you know it's it's really just uh create a ton of the exact same blue bottle experience in more places yeah they can probably do that and a big capital infusion is a really good idea to do that yeah but i was really

you know i mean nestle has more can be a much larger capital provider than even you know however much money blue bottle could raise as a as than even, you know, however much money Blue Bottle could raise as a, as an independent company. You know, even they raised 75 million from Fidelity, but Nestle could, could write that in a week, you know? Right, right. So I was reading this interesting Quora post that's like, it gives a good order of magnitude for, um, what, uh, individual cafes sell. And I, I feel like I should have gotten the starbucks comp because that would have been better but this uh this says in australia 60 of cafes sell between 200k and two million dollars per year so let's say that on the revenue side you know that's that's two million dollars of revenue per store that that blue bottle generates like that's a lot of stores

to get to 625 million dollars well and it's not just revenue i to get to $625 million. Well, it's not just revenue. I mean, back to your point a little while ago, this is not a tech company. Like, you know, let's say they have 40 stores doing 2 million of revenue in each. Right, like, okay, they had 80 million in revenue, like let's say, but you know, the margins on that are not software margins.

Right, right, right, right. I did read one interesting piece that I thought was pretty interesting that said that basically Nestle had to do something in coffee because they have dominance in Europe with Nespresso's. And by the way, I have a Nespresso machine. We have one at work. These things are freaking awesome. 70% of the single serve market in Europe is Nespresso. And they tried to penetrate in the US and completely lost to Keurig and Tassimo. And they have less than 5% penetration in the US on those single serves. And so the question is, if they came out with a blue bottle single serve thing at home, you know, would they be able to win some of that

back? And the reason that it's important is because across Nestle's businesses, their margins are about 15%. And in their beverages, it's about 25%. So any way that they can that, you know, make more of their business lines, beverage business lines, they can generate, you know, much higher margins. And this could be, you know, much higher margins. And this could be, you know, a huge missed opportunity if they have to forfeit the single serve coffee market in the US as it just skyrockets in popularity. Yeah, interesting, interesting. So this is like the, uh, this is bad, but like the, the, the right way to do the, the juicero. Yeah, actually, David, I tried the other day just squeezing my Nespresso pods and they made

amazing coffee on their own. I don't know what I paid a hundred bucks for this thing. Yeah. Well, you can't do that with coffee. No, no, it is, you know, so let's paint this scenario. 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 in the sort of single serve home thing. Like would they pit Nespresso against Blue Bottle and have two divisions making similar things selling against each other? I mean, maybe it'd be the same division and they would just, you know, sort of relabel the Nespresso stuff.

Well, if Nespresso, and I agree, they really do make good single serve coffee, much better than Kerrigs. But if they have such small market share here, maybe they just rebrand the whole thing in the U.S. as Blue Bottle. Yeah, I wonder. And, you know, how much of a say do the Blue Bottle folks have in that? I mean, presumably Nestle makes the decisions now and has the controlling interest. Yeah. But again, remember, like it's not a they don't own 100 percent like the Blue Bottle team still, you know, has a large stake.. There's just a lot of complexity to this deal for so many reasons, as we've been talking about. Yeah.

I like your assessment of business line. I'm curious. I mean, it is that for now. I'm curious to see what sort of integration we start to see. I feel like we've talked a bit about what would have happened otherwise, but I guess if Nestle hadn't come in and acquired blue bottle, uh, or, or, and nobody else had for, for a while, I mean, what happens? So like fidelity is sitting there on their cap table at a very large stake and is, you know, they're not in the business of, of owning, owning you know shares in private companies for 20 years what happens yeah i mean presumably another nestle would have to come along in some amount of time i mean you can really see the dynamic here play out right where the founders are like we don't

want to sell and they end up keeping all their shares and the the you know fidelities are like we need to get out of this business like we've've seen great growth, but like, my God, we need a way to get out of this. You almost wonder did Fidelity, you know, tee this whole thing up with Nestle. Well, and, and not just Fidelity too. I mean, don't forget there've been VCs, you know, on the cap table here since 2008. Um, so almost 10 years and, you know, venture capital funds, you know, have a, uh, have a life cycle. This is something that, you know, I think a lot of people don't really understand, um, unless you're, you know, an insider in the business, but the typical life of a venture capital fund partnership, limited partnership is, is 10 years. And what that means is that from the time the fund was raised

until, you know, whatever that date is and get typically 10 years, like you're supposed to wind up the whole fund you're having to go back to your investors every year and keep asking for an extension. And eventually they're going to get tired until you know. And then what happens, David? It's a good little VC 101. What if the LPs say no, and there's still shares owned of these private companies that haven't got liquidity yet? Well, 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, because now all of a sudden, instead of, you know, XYZ VC, say, you know, let's say Index, right, who led the Series B in, uh, in blue bottle.

So instead of index as your investor and sitting on your board now, radibly all the, the, in proportion to the, those investors in index, they all own like little bits of your stock now. And, you know, they're in totally different businesses. Like they're not in the business of sitting on your board, helping you grow. You know, they may have different liquidity timeframes, return hurdles. It just turns into a nightmare. And so then you could have, you know, 50, 100, 200 new entrants on your cap table. Yep.

Yep. And not just new entrants, but new entrants with wildly divergent, you know, interests. Right, right, right. And, you know, presumably at some point that starts to starts to trigger some things that need to happen with the SEC because you have so many shareholders. Yeah. Now, the rules have changed on that a little bit with the Jobs Act. But but still not no bueno. Yeah, no bueno yeah no bueno so you know i i kind of think we talked about this before but like we're gonna see a bunch of this in the coming years like if some of these

companies don't get public or acquired like there's gonna have to be some sort of transaction that takes place and maybe private equity is a path. So that might've been one thing that might've happened. Otherwise, um, you saw this with survey monkey. So similar situation, um, the, the company, uh, it was Dave Goldberg, Cheryl Sandberg's late husband was the CEO and he was adamant, never wanted to go public to go public but it raised all this money and so actually several times the various private equity firms came in and bought out the existing investors in in survey monkey and then sometimes and then even larger private equity firms came and bought out right there there there is a bigger fish for a while at At some point, they run out of big fish and the public market is where you need to go.

It can't be turtles all the way down. There has to be a pool at the bottom. Oh, man. I'm using that as the teaser quote for this episode. Love it. Okay, one other VC 101 moment. So why not so of course every day is uh is a day that goes by where it would be nice to um have a return on your capital so you could invest it elsewhere

but why don't vcs more typically do an evergreen fund so they don't have these sort of artificial uh fun vintage triggers to to um you know force this to happen well uh some vcs do uh so like sutter hill is an evergreen fund the thing about that though is that you have to everybody has to be aligned in the partnership both the vc partnership and then the limited partners about wanting that. So all of the limited partners have to be able to say like, yep, we don't care about timelines and liquidity. Uh, but then even more importantly, you know, the general partners in the VC fund have to also be willing to say like, I don't care about liquidity either. And, um, you know, most VCs, uh, some are, you know,

very wealthy independently, or have been VCs for a long time and have gotten liquidity and aren't as motivated, but, but really if, you know, if you look around the industry, especially in these multi-generational firms where the folks that are running the show or making investments now, maybe aren't necessarily the founders, you know, they're not, uh, um, you know, they're not in a position where they can just indefinitely go without liquidity either. Um, so it really, it really, and especially, you know, as a, as a VC and investor in these types of companies, it's not like, you know, if the company is making, generating positive cashflow, it's not like, you know, if the company is making, generating positive cash flow, it's not like they're dividending it out to you. So, you know, whereas if you're a founder

of a company, you can do things, you can start to pay yourself a lot more. You know, if there, if there is cashflow, you can dividend it out or you can do bonuses or whatnot. None of that money comes back to VCs. Yeah. Yeah, great point. Great point. Well, thanks for sidetracking there with me. All right, listeners. Our next sponsor is a new friend of the show, Huntress.

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making, you know, taking 97% of retail growth, Walmart growing a little bit and everyone else shrinking, and especially big box stores shrinking. And this return of kind of boutique retail where even the online companies, Warby Parker, Bonobos, the sort of direct from internet to your doorstep companies are opening stores. And in many cases, they're doing the stores very differently. So like, you go to the Warby Parker store, you don't actually buy glasses there, you buy them on the website in the store. but you can kind of try it on it's more like it's it's almost like a marketing expense like a brand awareness expense um and a way to make the experience a little bit better now as i said i was walking myself into a corner this isn't quite the case with um blue bottle but it is sort of part of this you know boutiqueification of retail away from the man

to invoke ben thompson a little bit like it is a little bit of aggregation theory in that what these experiences new retail experiences do have in common is they are a superior customer experience versus you know you're going to warby you know, you're, you are going to Warby Parker for one specific thing. You're going to blue bottle for one specific thing. You're going to an Apple store for a one specific thing. Like there, there aren't thousands of SKUs just lying around on the floor. And so as a result, you can have a much better, purer experience of that thing in that store. And as a result, you can, if you're able to get distribution, now this is where it breaks down a little bit in the physical world versus, you know, aggregation theory on the internet. If you're able to have distribution wide enough and you have that superior customer experience, you will win every time.

I mean, if there's a blue bottle next to a Starbucks, like I'm going to the blue bottle, you know, but in the, in the physical world, and I think this has also been what you were talking about in the beginning of the episode, like blue bottles been valued, like it, you know, is an internet company, but, but it's not like they need to have a store everywhere to, to do that. And that's going to require a ton of capital. Yeah, it's pretty interesting. I mean, the way I like to think about internet companies being differentiated is super low, if not zero marginal cost. You can have super high fixed costs, but low marginal costs, especially marginal costs, especially, you know, not businesses like

Apple that make hardware, but like internet companies. As you sort of look around at those businesses, they tend to be winner take all. You know, Facebook is a winner take all business, and Amazon will be a winner take all business. And Amazon doesn't quite fit, but like maybe Amazon as the third party seller group kind of fits. So the interesting thing here is like, coffee, you know, coffee stores are not actually winner take all, like, despite the fact that Starbucks, you know, it's not just the internet that allows you to quickly saturate a global market. It's many other factors of our world today, too. It's, you know, our ability to do logistics at mass scale, our ability to do

single advertising campaigns at large scale, where you quickly make a brand understood by many, many people. So, you know, it's slower than if it were just bits, because it's in the real world. But, you know, Starbucks, while expanding to a global market fairly quickly, I mean, 24,000 stores, it turns out there actually are segments. And it's not a one size fits all for everyone to create the best experience. When you're in the real world, and maybe even when you're in software too, you can't create the thing that's best for everyone under one single company. Well, you can though, if you're a marketplace, right? Like, and I think that's what Amazon, that's why Amazon can be a winner take all business in retail, because like you can buy

the, you know, uh, I don't know what's some trivial example, like, um, an iPhone dock, right? Like you can buy the, you know, $3 iPhone dock from China on there. But you can also buy the like $500 artisanal, you know, you can get your Starbucks and your blue bottle on Amazon. Well, that works on a product perspective, but doesn't work in a physical experience perspective. Yeah, exactly. I mean, even if I could get exactly blue bottle coffee, like if I'm going to a Starbucks to get that, like it's not the same.

Yeah, right. So this is where, you know, the analogy breaks down in the physical world. It's kind of interesting. I mean, 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. And like Blue Bottle doesn't want to exist in a marketplace either, much like Southwest doesn't want to exist in a marketplace either much like uh southwest doesn't want to exist in a travel aggregator like i don't want to be seen around all that cruft i want to be

in my own little thing and separated from all that so i guess the tech theme i'm going with here the theme i'm going with here is like some things are uh uncramminable into these business models that are massive and winner take all and look super shiny from an investment perspective. And I think coffee may be one of them. Like Starbucks is killing it. They're doing great. But like, are they the answer for everyone? No. I certainly agree with you in coffee as it exists today. But I'm thinking about like Airbnb though, right? Like, um, you couldn't, a holiday in was very different from a Ritz Carlton, right? Um, there were segments there for sure, but, but both of those experiences and, you know, both below a holiday in and above a Ritz Carlton

exist on Airbnb, a platform like that actually can, you know, address, if not the whole market, you know, many, many segments. Part of it's tied to maybe, maybe it's just the nature of the coffee market, but I think it is also tied to this like physical, physical nature of these businesses. Like you can't do the same with coffee right because the experience of sitting in a starbucks is very different from the experience of sitting in a blue bottle they can't kind of coexist could could blue bottle um move down market at some point and open starbucks competitors and like there's blue bottle classics and then there's like blue blue bottle something new and what's interesting starbucks is doing this right with the roasteries uh they're moving they're going and then there's like blue bottle something new. Well, it's interesting.

Starbucks is doing this, right, with the roasteries. They're moving upmarket. They're going upmarket. Yep. And like, can Starbucks actually win over the coffee snobs? I mean, that's a tougher battle than like suddenly there being a $4 latte that's available from Blue Bottle in a larger location that has Wi-Fi.

Like, then I feel like I'm almost one of the cool kids and i have the product that i actually want well maybe the way they have to do it though is what we were saying earlier which is through the single serve um packaged coffee i go through the home instead yeah yeah interesting. I mean, who knows what direction they'll go, but, um, I'll, I'll put the flag in the ground and say, I just don't think you can, you can do a winner take all business, um, and, and create that, that a product for everyone when you have to think about, uh, um, cramming in the physical experience of it too. I don't, I can't think of an example that is not an internet business that can serve everyone. Like Google can serve everyone and Facebook can serve everyone and Instagram can serve everyone

and Airbnb and Uber. Um, but I mean, even, even actually not Instagram and even not Facebook, like there's so many people that want to select into their social network because Facebook's too public for me or instagram's too you know limited or yeah good point i i'd say we may be nearing no i'm not gonna go there like the pushback of this of the one size fits all but um in in some ways well okay well maybe amazon can right like who wouldn't buy from amazon because it's on the environmentalists environmentalists maybe yep I mean I'm looking for corner cases in some ways but um I do I believe that Amazon will be able to solve the problem of shipping products to environmentalists

yes like that that's a bet I'd make yep but I think you're I think you're onto something like it only works because you don't have to go physically shop at Amazon because before Amazon there was Walmart, right? But like there were whole segments of people that would never shop at Walmart. And likewise, you know, there was, um, you know, whatever high end equivalent of Walmart you want to pick that doesn't exist anymore. Umjay. Tarjay, right. Well, Tarjay is sort of more, I think more mid-market, maybe slightly upmarket, certainly from Walmart, but I don't think it's like, you know, the Neiman Marcus of, you know,

big box stores. Just about every demographic, unless, as you point out, you have a environmental concern, would shop on Amazon, right? Yeah, I mean. Because again, you can get your $4 iPhone dock or your $500 iPhone dock there. Yep. They're getting there anyway. Yep. All right. You want to grade? Let's do it. All right. Uh, you start cause I don't know. Well, this is tough. I mean, it's kind of like everything worked out here, right? Like investors got a nice return, especially the early investors,

the management team and James, you know, certainly seems happy. I mean, they're, they're leaving a ton of skin in the game, so they must be bullish on the future. You know, Nestle is getting potentially, well, they're getting a growing brand and a new business line to add, but they're also potentially getting something that could really be valuable to them in terms of rebranding their Nespresso single shot market. And that's a very big market, but there are these, these like it just feels like this whole thing wasn't the right fit you know as we've had this discussion i think i give it a b right now because like this certainly was like a good outcome for everyone but i just wonder if it was like the

right path and what would have happened if maybe blue bottle had made some different decisions along the way. Yeah, I don't disagree. It does feel like my biggest takeaway is with the successful acquisitions we've seen, when you really dig in, you start to see the one real reason this deal got done. And with Instagram, it's like, oh my God, Facebook can unlock even more supply like an even more ad inventory

and push all of their advertisers into you know a crap ton more ad slots not to mention that's what that deal is about and they had an existential threat in losing mobile well it was very clear what it was about right um and you know that there there's there's others like there's there's you see exactly what facebook i'm sorry what disney wanted to do with marvel right like there's a there's the business is turning super valuable ip into dollars in 11 different forms and boy are they firing on all cylinders of of all 11 of those pumping them into the Disney machine. And like, what I can't see here is like, what's the one reason they did this? Like, I think, I think it's probably a good idea. Like, it seems like a good thing for Nestle to own. You know, I can paint a story where the rebrand of the Nespresso makes lots of sense.

I can paint a story where, you know, instead of growing 50% year over year and projected to grow 70% year over year next year, they actually really turn it on and are able to open lots more stores very rapidly because they have all this capital. But do I see the one thing where this fits perfectly in and there's internal alignment within Nestle of how they're going to leverage this asset?

I don't work there, but probably not. I mean, I think the only dark horse being being um the uh nespresso uh i mean that may just be a huge business and they needed a way to invigorate it yeah thank you to the the quora um commenter who suggested that it's pretty interesting um so i'll go B minus, you know, maybe, maybe C plus, but, uh, again, I, I think I've rated things that were way worse than this C's. So I'll go B minus. Carve out. Carve out. So, uh, I was on a flight to, uh, to Ohio this weekend and had lots of free time was clearing out my Insta paper. And this really interesting thing um i first heard about it like two years ago the the tulip mania story there was a dutch tulip bubble uh where people were going insane for for buying

tulips and it grew to a religious fervor where people were paying unbelievable amounts for certain special types of tulips and highly speculative, you know, I'm going to buy this bulb and it'll, it'll be beautiful in some number of years from now. And like total mania, right? The same way that we see bubbles that exist today. And it's kind of like the first macroeconomic bubble that people cite. And it's, you know, theoretically like crashed the Dutch economy and, uh, and it was, you know, incredible despair and people lost fortunes and all this stuff. And the interesting thing was over the last few years, I've actually seen more and more of the story pop up in more places, especially in the technocrat sphere where people love to wax philosophically about if we're in a bubble or not. There's even a movie coming out. I think it's Tulip Mania or Tulip Fever or um like this month and the smithsonian magazine published a really

interesting piece called there was never really a tulip fever oh i've heard about this it was super interesting like this thing that's gotten quoted and quoted and quoted and like referenced over and over again like somebody wrote this book and did a bunch of research and tried to figure out like okay let's you know who were these people that lost their fortunes? And as they dug into it, they realized, like, of course, there was over speculation here. And, you know, the people, you know, a lot of like very wealthy people put lots of money in and lost that. But it never actually affected the working class and it never actually destabilized the whole economy. And it didn't throw anything into like a tailspin and it did not have these trickle-down effects that are so often quoted when wanting to compare

a potential oncoming bubble or 2008 or 2000 to this Dutch tulip bubble. And it's like totally fascinating analysis of why we wanted to believe, um, that this, this mania created even more devastation than, than it actually did. Hmm. Interesting. Relevant to, uh, today's times. Yeah. Yeah. And there are some cool little takeaways in that and suggestions of why we do want to believe it, but I'd say I'll leave it to the author who's way more eloquent at explaining that. So click the link in the show notes if you're if you want to check it out. Cool. My carve out today is actually random seeming but is the iPhone SE classic. So I watched the Apple keynote a couple weeks ago. we talked about it a lot on the HTC episode. It was really great. And, you know, coming out of it. Uh, so I've, uh, for the last

three years, I've been a plus model guy. I got the six plus, and then I got the seven plus and coming about it. I just, I wasn't that compelled by any of the new hardware. Like I see where they're going with the iPhone 10. Uh, it's the future. It's amazing. But I was like, I'm not ready just yet because AR isn't like real yet. It will be in the next generation or two. And then I realized I was like, I was looking at the iPhone 10 and I was like, Oh, that's really, it is smaller. It would be nice not to have such a big phone in my pocket anymore. And then I like just kept looking at my seven plus and I was like, this thing is enormous. And like, I can't sit down with it. And like for the last

three years, every time I've like had lunch or dinner or gone out, like I always put my phone on the table because I can't have it on my body. And so I was like, you know, there's such an active like liquid secondary market for Apple products. I just it on ebay and i got a iphone se on on ebay for way cheaper and i am i'm sure i will upgrade in the next generation but i'm really happy to be back to having a small phone i never thought i would say that this just in venture capitalists decides not to partake in in new high-tech technology and rolls back to the stone ages that's me that is me no it's so i'm like i'm always like all my whole life i've been a bleeding edge adopter but you know the form factor i just kind of realized again maybe i'll probably change

in a couple years but honestly it's just nice to be back to um you know being able to have my phone in my pocket i'm envious i'm envious you're so right on that i think were it not for these cameras and um sometimes when i want two-handed use of a larger keyboard um i miss the crap out of that form factor swipe glide typing though on the the gboard the google keyboard is pretty good you know and and I think this is it for me. Like, I'm not much of a photographer. I don't take that many pictures, whereas I know you do. So it was like the appeal of the cameras for me is AR in the future. And I just don't think it's there yet. So I'm going to enjoy my, you know, one or two years, probably one year with a phone in my pocket.

Well, David, enjoy your non-bionic phone. I know I'm going to miss the bionic. Are you, are you, are you going for a 10? I mean, if I can get one, I'm going to, I'm going to, I'm going to dual wield and have my, my browser open and try and order online and have my apple store app on my phone open and see if you know maybe i'll end up with two i don't know but uh i i i bet i'm i'm into q4 if if not or early q1 next year um well but this is this is the thing about about apple products right like if you are an ios person like there is so like the secondary market is so liquid like yeah you have to pay some

transaction costs but like crazy it's really not that much and they keep their value incredibly they keep their value not like you can swap out like for really not much money um in terms of economic impact um it's kind of crazy it It is. It is. We want to thank our longtime friend of the show, Vanta, the leading trust management platform. Vanta, of course, automates your security reviews and compliance efforts. So frameworks like SOC 2, ISO 27001, GDPR, and HIPAA compliance and monitoring,

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