Acquired - Blue Bottle Coffee

0:00It 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.

0:35Today, 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 BlueBottle. So... Shockwave's 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?

1:05Yeah, I mean, what's the, what's the sort of like islandish one? Fills. Fills. Yeah. Fourth wave of coffee. Fourth wave. We'll get into it. We will. We will. All right, listeners. Now is a great time to talk about a new partner of ours here on Acquired. LaGora, the agentic operating system that is redefining how the world's best legal teams work.

1:32Yup, it's sort of obvious that AI is going to completely change the legal industry. I bet most of you listening have dropped a contract into some sort of AI chatbot out there. Lugora took that insight and asked the question, what if you really built something with that power from the ground up for the legal industry? So the founders did exactly what great founders do, operate with obsessive customer focus. They embedded inside a massive law firm.

1:59for months. They sat with the lawyers just watching how the work really gets done. And that's how you get features that customers love, like tabular review, where you drop in a folder of hundreds of contracts and it pulls every key term into a grid a lawyer can actually work with. Lugora's bed here is interesting. Since it lets each lawyer handle more complexity, any given person can increase the quality of their work and do higher value work. And this means that the pie can grow even as each individual task takes less time.

2:28And they recently launched LaGora agent offering greater intelligence and performance. The agent lets lawyers set an objective. Then it can handle the planning and the execution and delivery of the final product. Legal teams get to maintain full control and transparency since they're still involved where judgment is required. And LaGora works where you already work. You can use it within Microsoft Word while redlining or drafting. The early LaGora numbers essentially speak for themselves when they have a head-to-head pilot with their top competitor they win 70% of the time. Legora now has over a hundred thousand lawyers on the platform from 1200 legal teams in 50 countries and crazily they went from one million to a hundred million in ARR in about 18 months. Truly insane numbers and that is the real test.

3:21Plenty of things demo well, but the question is whether a busy associate actually reaches for it during crunch time, or whether a partner trusts it before going into a conversation with a major client. If your legal team wants to check it out, whether you're a law firm or you're in-house at a company, you can learn more at legora.com slash acquired, and just tell them that Ben and David sent you. All right. David, that's all I've got for pre-show. All right, well.

3:48Before we dive in, I was thinking about this episode and it was kind of funny. We've got these series of mini series here on Acquired. We did the Disney trifecta, and then the fourth, of course, with Bam Tech. We've done sports. We did the LA Clippers. That was out there, but fun. We've done a bunch of gaming episodes.

4:11And 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 podcast. So we do have to do multiple coffee episodes. Next, we'll have to do the Seahawks next. Yeah. Yeah. So coffee, we talked quite a bit in the Starbucks episode with Dan Levitan about waves of coffee in 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. Starbucks being second wave. If the first wave was kind of Folgers and Maxwell House and you know, brew at home coffee, the second wave being Starbucks an experience of place you go to, the third wave is really all about

5:08the quality of the coffee. People, you know, it is really the origin of hipsterdom, Starbucks sex. It's super corporate. We're going to focus on the artisanal quality of it. 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, hate on it because it's it's systematized, but it's definitely definitely a reaction to the the mass market success of Starbucks. Yeah, and so third wave places like A counter-culture was one of the first in Durham, North Carolina, Stumptown in Downham Portland, which is now owned by Peats, interestingly, or Intelligencio, which I think started in Chicago, is also now majority owned by Peats. Cafe Vida and Seattle, all these folks, they really focus on the drink itself, and probably arguably nobody focused more on the drink than Bluebile.

6:15So let's dive into Bluebottle. 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 they're worked together as an analogy for his whole talk, and then he goes on to quote, start an imprused, very philosophical. Honestly, even one of my favorite things about this show is learning about the insane and talented and driven people that start these companies. Like, it is, there are no normal people that start enormous companies.

7:15No. And James is no exception. Unlike most of the founders we talk about, he's 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...

7:41until his mid-30s, and then he kind of woke up one day and he realized, you know, I'm never gonna be the best clarinetist, and maybe I should find something else to do with my life, and what else could he do? He 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 in 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.

8:30And 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 Bluebottle in Oakland. And the original business plan is that he's going to keep doing what he's doing and deliver beans to two people's houses. These great beans that he's roasted in his kitchen the day before will deliver him to his friends' houses. So it kind of sounds like an on-demand startup.

8:59Truly. He was ahead of his time. And hilariously, you know, the part of the business fast-forward a little bit, they operate now. That's a coffee delivery service. They acquired another company to do that called Tonks when they sort of moved into a bit of a different sector. Yep, so he's sort of the company is back to its origins now with that acquisition later.

9:22but he does that for a little while 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.

9:47Yeah, 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.

10:10And then it's not until 2005 that he actually opens up his first retail location, 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 his friend has this garage on a little side street in Hayes. And it says, why don't you come open up a key ask and actually instead of just selling beans, sell coffee there.

10:35James is excited about this. And he's sort of approached a coffee, even though the name Bluebottle comes from Bluebottle Coffee and 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 to Bluebottle is very, very Japanese-centric. And the Japanese approach to coffee is Very third wave, it's all about the very meticulously crafted perfect cup of coffee. And James talks about this in his ETL talk at Stanford that part of his inspiration is this coffee shop in Japan where the first thing you do that the barista does when you order a cup of coffee is they have a wall with all these cups on it.

11:27And the breeze to he or she 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 Bluebell on it. And if listeners, if you've been to Bluebell, if you live in the Bay Area.

11:43I'm sure you have or travel there often. This is the the anti Starbucks is very austere. There is very little in these in the locations except for the coffee. There's no Wi-Fi, there's 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 stay cups. They don't like doing to go cups. Of course. The cups are perfectly sized. They're not perfectly round.

12:23but they are sized exactly for the size drink 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 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 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 blue bottle, which is very different from Phil's, which we'll come back to in a minute. Phil's is the competing barrier chain.

13:20I should say blue bottle is freaking amazingly good. I'll rip on it for this whole episode, but it's an unbelievable product. It really is. You can't be from Seattle and not appreciate good coffee, and it is very good coffee.

13:42the kiosk, the first very little store in Hayes opens up. It really starts to take off and spreads kind of by word of mouth. They start to open more locations in the Bay Area than 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 their store is in all of these cities now. But they start to grow fairly rapidly and in 2008, so this is...

14:10very 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 Colberg Ventures and Chris Saka and Lowercase Capital. This is just when Chris is getting going. That dude gets into everything.

14:38Unfreak and believable. The nose on Chris Socket. I find those early stage amazing. It was a four million dollar fund So tiny by today's standards, but he was in everything blue bottle Uber Twitter And then a bunch more a bunch more of Twitter that he could on the second market so five million dollar round from Colberg and and lowercase in 2008 than a few years later, in 2012, there is a $20 million around, led by index ventures and Google ventures, and then a whole bunch of other individuals. So Kevin Sestrom, 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 talked, we might have talked about this a little bit in the Starbucks episode. You're literally selling drugs to your customers. Oh my God. I was doing some,

15:33One of my favorite things to do research for this podcast is to go look at all the core responses to reactions around the deal and sort of tease out what I think is a great point. And you know, things I want to bring up on the show. And there was one really great quote that I was going to wait to say later, but I think is worth bringing up now from Daniel James on Cora.

15:56And this $20 million round, the question was something around like, you know, why is blue bottle getting all this investment? What are the VCCs? And he goes, coffee is illegal.

16:06addictive, unregulated, psychoactive drug with cheap ingredients, premium pricing, and a huge worldwide growth market. Bluebottle 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 actually think 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 gonna use that? It was the same thing then. I 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 gonna be an internet company. It was like,

16:53You know James and blue by the way, no, this is the coffee company We 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 no Nope, none of that. No, no. This is a coffee company. And people were like, why are these VCs investing in this? Turns out they did well, and particularly that round did very well, but we'll come back to all that. It is worth pointing out like the super interesting near self-fulfilling prophecy of this. The sort of Twitter family and blue bottle was joined at the hip very early, and they got a lot of sort of

17:35because 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 site glass that was a couple of early blue bottle folks that left to start their own thing like they co-founded that with Jack Dorsey. It was an early pilot for using square at that that location and you see the types of people that were attracted to blue bottles of 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 we talked about this on this show before, but especially if you don't live in...

18:21in 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 larger than the kiosk that was in Hayes, was in Mint Plaza. Mint Plaza is two blocks away from the Twitter building. Where do all the Twitter employees go when they want coffee? They go to the blue bottle in Mint Plaza. It's just these ecosystems, everybody's right there, and that's how these things feed on one another.

19:10I thought about this as a customer acquisition strategy. If you have a company and you want people at another company to buy it for B2B purposes, buy all the Facebook ads of the employees at that company so that you can get their attention even outside of typical channels. If you aren't right next to the Twitter building, but you're interested in doing attracting Twitter people. Could you target them all over the place digitally, as well as having a physical location there? Because I feel like, while BlueBottle pioneered that, I feel like that's no longer novel to put something right outside of a company that, anyway, to put a physical location there. Yeah, that growth hacking tactic doesn't work anymore. Could you be digitally close? Yeah.

20:02Yeah, seriously, but it definitely worked for Bluebottle and I think I think BizDone was an investor. I don't know if Ep Williams was. I don't think Jack was obviously an investor in encyclasts or competitor, but it worked. So 2014 they then raised 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, over over 30 stores throughout throughout both country and in Japan. And then in surprise announcement in the middle of September and September 14th, 2017, it is reported that Nestle comes in and the large conglomerate. And

21:01buys out a majority stake in the company for a 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 but all the investors are bought out so the valuation on the company is 625 million assuming that the 425 million figure is correct and here we are.

21:38Pretty 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.

21:59was 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. Well, I will say, for lots and lots of reasons, believe that full acquisitions are better than these sort of majority buyouts, particularly for startups like this. I mean, there are 40 store retail locations, but early-ish mid-stage company. But if you're gonna 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 grow in valuation. There's sort of an interesting thing of like,

22:50It has to stay a separate company. Think about this. 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. There's not a market to value your company. It's certainly not anywhere near getting valued on a reasonable price to earnings ratio.

23:19Are 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 Battle personally, but Freeman and Brian Mehan, who's the CEO, he, came in and took over a 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 a 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, bringing in folks like Fidelity. Fidelity isn't mutual fund. They're a public company.

24:16like they, you know, 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 have 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.

24:44Yeah. Okay. 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 time frame. 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 and the show, like looking at at what's going on in the tech world, like BlueBottle, 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, you know, 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?

25:41Yeah, I mean 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 And it's so funny. It's also so 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 gonna happen Yeah, I don't know. I mean, you could say so, but then like, you know, we've talked about this in so many episodes, you know, whether about SNAP and or about Facebook. You know, these companies, the majority of them obviously not SNAP in Facebook, but have been private for so long now and they just keep staying so, you know, Uber, Airbnb, you know, all these companies, many, many others.

26:39certainly could be public companies and probably should be but the founders are for whatever reason either delaying or or even you know saying they don't want to but I think it also like there's attention 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 to 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 the state of the tech world right now. Does it make sense for Bluebottle 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 Bluebottle'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.

27:36Blue bottle has 40 locations, right? They have plenty of growth ahead of them if they want to. Starbucks has 24,000 locations. 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 either buying coffee in the stores in liquid form or buying the beans in the stores and then 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. I'm really sick of the fact that we sell it online and people subscribe to it. That's a slight business model shift but ultimately...

28:21It fixed costs, distribution costs, like still not on internet business, but then you at least drift closer to something where you're like, okay, this is different than all the brick and mortar stuff that exists today. All right, listeners. Now is a great time to tell you about a long time friend of the show, Vanta. AI has scrambled the whole security picture. It used to be that you proved that you were secure once a year, an audit or a static PDF, then everyone would not and you're done.

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29:54Trust has to be continuous now, which is why Vanta automates your security, your compliance and the work to earn and prove trust. We're huge fans of Vanta over here and literally hundreds of acquired listeners have become Vanta customers at their companies over the years. So you can get $1,000 off Vanta at Vanta.com slash acquired. That's V-A-N-T-A dot com slash acquired for $1,000 off and just tell them that Ben and David sent you. We've posed some questions here and I think, you know, James Freeman and the BlueBottle team were very clear what side they came down on, those questions, which was that BlueBottle can't be a public company and maintain its ideals and also that it's not an internet company. But I do think in terms of where I come down on this, I'm not sure that that's the...

30:51dichotomy that makes sense, right? Like, I think about Apple, right? Like, an Apple store and a blue bottle store are eerily similar. And Apple is maintaining what Apple store used to be anyway. Like, I think the days of believing that an Apple store is a sparse, simple location is far over.

31:14Well, no, but you come, you walk into an Apple store and there, 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. You know, whereas as you point up and blue bottle has 40 stores. I'm curious to get into acquisition category because I'd love to get your take here. Do you want to dive into that now? Yeah, let's do it. All right, so 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.

32:01is product because they are this 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 a 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 blue bottle to potentially sell other stuff in blue bottle to sell blue bottle coffee everywhere they have store space. But they bought brand here and they bought coolness.

32:54Yes, yeah, I was gonna go business line 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 announced 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 raised 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. 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 free standing. And that means that you should believe that the summer future cash flows on this thing are going to be $625 million.

33:52That's a lot of growth. Yeah, yeah. But, you know, on the other hand, so they... Well, a foreshadow will get into this more in tech themes. But this really is kind of like, it's so interesting. Like this is a like Facebook style acquisition and being done by Nestle, right? Like they're keeping the team separate. All the rhetoric is that, you know, they're going to let Bluebottle just keep doing its thing. It's a separate board. The employees and James the Founders 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.

34:30I mean, so what are they gonna do? The question is, what are they gonna do with it? Are they gonna try and put blue bottle in more places? Because I believe Nestle can probably do that. If that's the goal, and it's really just 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. I mean, Nestle has more...

34:57can be a much larger capital provider than even, however much money BlueBottle could raise as an independent company. Even they raised 75 million from Fidelity, but Nestle could write that in a week. I was reading this interesting core post that gives a good order of magnitude for...

35:17what individual cafes sell. And I feel like I should have gotten the Starbucks comp, because that would have been better. But this says, in Australia, 60% of cafes sell between 200K and $2 million per year. So let's say that on the revenue side, that's $2 million of revenue per store that blue bottle generates. That's a lot of stores to get to $625 million. Well, it's not just revenue. I mean, it back to here.

35:46your point a little while ago. This is not a tech company. Like, you know, let's say they have 40 stories doing two million revenue in each. Right. Like, okay, they had 80 million in revenue. Like, let's, 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, having Nespresso machine, we have one at work. These things are freaking awesome.

36:2270% of the single-serve market in Europe is Nespresso, and they tried to penetrate in the US and completely lost to Curig and Tassimo, and they've 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, 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 make more of their business lines, beverage business lines, they can generate much higher margins. And this could be 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.

37:15So this is like the, this is bad, but like the right way to do the juicero. Yeah, actually do. 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 the hundred bucks for this thing for. Yeah. Well, you can't do that with coffee.

37:37No, 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 Bluebottle 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.

38:07Well, if Nespresso and I agree, they really do make good single-serve coffee, much better than thing Carreigs. But if they have such small market share here, maybe they just rebrand the whole thing in the US as blue bottle. Yeah, I wonder. And how much of us 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, it's not a...

38:36they don't own 100% like the blue bottle team still 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 an acquired blue bottle or nobody else had for a while. I mean, what happens? So like, Fidelity's sitting there on their cap table at a very large stake and is, you know, they're not in the business of 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,

39:32you 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, you know, fatalities are like we need to get out of this business. Like we've seen great growth but like my god we need a way to get out of this. You almost wonder did fatality, you know, tee this whole thing up with Nestle? Well and not just fatalities too. I mean don't forget there've been VCs, you know, on the cap table here since 2008. So almost 10 years and you know, ventured capital funds have a life cycle. This is something that I think a lot of people don't really understand. Unless you're an insider in the business, but the typical life of a venture capital fund partnership, limited partnership is 10 years. And what that means is that from the time the fund was raised until whatever that date is and get typically 10 years, you're supposed to wind up

40:28the whole fund and give all the money back to investors at that point. Now, in most cases, there will be provisions to extend the life of the fund that almost always does happen, but still then, as the VC, 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 and until you know. And then what happened, David? That's a good little VC 101. Like, what if the LPs say no, and they're still, you know, 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,

41:15X, Y, Z, V, C, C, you know, let's say index right who led the series B in in blue bottle. So instead of index as your investor and sitting on your board. Now, radically all 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 time frames, 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 entries, but new entrants with wildly divergent, you know, interests. Right. Right. Right. Right. And, you know, presumably at some point that starts to trigger some

42:09things 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 still. No, no, no bueno. Yeah, no bueno. So, you know, I kind of think we talked about this before, but like, we're going to see a bunch of this in the coming years. Like, if some of these companies don't get public or acquired, like, there's going to have to be some sort of transaction that takes place. And maybe private equity is a path, so that might have been one thing that might have happened otherwise. You saw this with Survey Monkey, so similar situation. The company, Dave Goldberg, Cheryl Sandberg's late husband was the CEO and he was adamant, never wanted to go public, but it raised all this money. And so actually several times, the various private equity firms came in and

43:08bought out the existing investors in survey monkey. And then sometimes, and then even larger private equity firms came and bought out small private equity firms. There, there, there is a bigger fish for a while. At some point, they run out of big fish in the public market. Yes. We need to go. It can't be turtles all the way down. There has to be a pool at the bottom. Oh, man.

43:34I'm using that as the teaser quote for this episode. Love it. Okay, one other VC 101 moment. So why not? Of course, every day is a day that goes by where it would be nice to have a return on your capital so you can invest it elsewhere. But why don't VCs more typically do an evergreen fund so they don't have these sort of artificial fund-vintage triggers to force this to happen? Well, some VCs do. So like Cedar 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. 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

44:41you know, most VCs, some are very wealthy independently or have been VCs for a long time and have gotten liquidity and aren't as motivated, but really 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, they're not in a position where they can just indefinitely go without liquidity either.

45:11So it really, and especially, you know, as a VC and investor in these types of companies, 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 is cash flow, you can dividend it out or you can do bonuses or whatnot.

45:38None of that money comes back to VCs. Yeah. Yeah. Great point. Great point. Well, thanks for sidetracking there with me. All right, listeners. Now is a great time to thank our longtime friend of the show, ServiceNow. If you are running a large enterprise, AI agents are likely spread across every team and deploying them is no longer the hard part.

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47:29So if you're trying to turn AI ambition into real business outcomes and make it work safely, securely at scale, go check out servicenow.com slash acquired and tell them that Ben and David sent you. All right, should we dive into tech names? Yeah, yeah, let's do it.

47:45Let's do it. And one, here's one that I don't know if it's actually applicable, but I've been thinking more and more about. And I think what I'm gonna do here is walk myself and do a corner where I say, actually, this is not a tech theme for this episode, but the return of brick and mortar in a different way than it was used before is really interesting to me, where...

48:04you know, the story of the decade or the last two decades is Amazon making, you know, taking 97% of retail growth, Walmart growing a little bit and everyone else shrinking and especially big box store shrinking. And this return of kind of boutique retail where even the online companies, Warby Parker, Benobos, 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 almost like a marketing expense, like a brand awareness expense, 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 blue bottle, but it is sort of part of this boutique-ification of retail away from the man.

49:02uh invoked ventops in 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 you are going to or be parker for one specific thing you're going to blue bottle for one specific thing um you're going to an apple store for a one specific thing like there there aren't thousands of skews just lying around on the floor. And so as a result, you can have a much better pure 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.

49:49if 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 physical world, and I think this has also been what you were talking about in the beginning of the episode, like, blue bottle has been valued. Like, it is an internet company, but it's not. Like, they need to have a store everywhere to do that.

50:18and 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 cost, especially not businesses like Apple that make hardware, but like internet companies.

50:40As you sort of look around at those businesses, they tend to be winner-take-all. Facebook is a winner-take-all business, and Amazon will be a winner-take-all business, and Amazon doesn't quite fit, but maybe Amazon as the third-party seller group kind of fits. The interesting thing here is coffee stores are not actually winner-take-all. 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, just bits because it's in the real, real world. But, you know, Starbucks, while

51:30expanding to a global market fairly quickly in 24,000 stores. It turns out there actually are segments. And it's not something the 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? 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, I don't know what some trivial example like 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

52:25Well, that works on a product perspective, but doesn't work in a physical experience perspective. Yeah, exactly. 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 travel aggregator. Like I don't want to be seen around all that craft. 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 or the theme I'm going with here is like some things are uncraminable into these

53:15business models that are massive and winter 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, you couldn't, a holiday in was very different from a Ritz Carlton, right?

53:44there were segments there for sure. But both of those experiences and both below a holiday in and above a Ritz Carlton exist on Airbnb. A platform like that actually can address, if not the whole market, many, many segments. Part of it's tied to maybe it's just the nature of the coffee market, but I think it is also tied to this physical nature of these businesses.

54:13Do 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 BlueBottle move down market at some point and open Starbucks competitors and like, there's BlueBottle classics and then there's like BlueBottle something new. What's interesting.

54:37Starbucks is doing this, right, with the restries. They're moving. They're going up market. Yep. And like, can Starbucks actually win over the coffee snobs? I mean, that's a, that's a tougher battle than, like, suddenly, they're being a $4 latte that's available from BlueBottle 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 package coffee. I'd go through the home instead. Yeah. Interesting. I mean, who knows what direction they'll go, but I'll put the flag in the ground and say, 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.

55:32I 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. But I mean, 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 limited. Yeah, good point. I'd say we may be nearing No, I'm not gonna go there like the push back of the one size fits all but in some ways Well, okay. Well, baby Amazon can pray like who wouldn't buy from Amazon? Because it's on the environmentalists hmm environmentalists maybe yep, I mean I'm looking for corner cases in some ways, but 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

56:33But I think you're on to 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, you know, whatever high-end equivalent of Walmart, you want to pick that doesn't exist anymore. Tarsay. Tarsay. Well, Tarsay is sort of more, I think more midmark, maybe slightly upmarket.

57:02Certainly from Walmart, but I don't think it's like, you know, the, the Neiman artists of, you know, big box stores, just about every demographic, unless, 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 DAC or your $500 iPhone DAC there. Yep. They're getting there anyway. Yep. All right. You want to grade? Let's do it. All right. Uh, you start because I don't know.

57:33Well, 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 certainly seems happy. I mean, they're leaving a ton of skin in the game, so they must be bullish on the future. Nestle is getting potentially, well, they're getting a growing brand and a new business line.

58:02to add, but they're also potentially getting something that could really be valuable to them in terms of rebranding their Nespresso, a single shot market. And that's a very big market. But there are 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.

58:29But 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. You know, I don't disagree. It does, it does feel like the, my biggest takeaway is with the real, the successful acquisitions we've seen, when you really dig in, you start to see like the one real reason this deal got done. And, you know, with Instagram, it's like, oh my god, they can, Facebook can, Unlock even more supply like even more ad inventory and push all of their advertisers into you know a crap ton more ad slots not to mention Facebook that's what that deal is about and they had an existential threat in losing mobile Well, he was very clear what it was about Right And you know there's 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 that there's a there's

59:25their business is turning super valuable IP into dollars in 11 different forms and boy are they firing on all cylinders 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 for Nestle to own I can paint a story where the rebrand of the Nispresso makes lots of sense. I can paint a story where 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 do open lots more stores very rapidly because they've all got 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.

1:00:17I mean, I think the only dark horse being the Nispresso, I mean, that may just be a huge business and they needed a way to invigorate it. Yeah, thank you to the Quora commenter who suggested that. It's pretty interesting. So I'll go B minus, you know, maybe C plus, but again, I think I've rated things that were way worse than this C's. So I'll go B minus. Carve out.

1:00:45Carbout so I was on a flight to to Ohio this weekend and had lots of free time was clearing out my insta paper and The this really interesting thing I first heard about it like two years ago the the tulip mania story There was a Dutch tulip bubble where people were going insane 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 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 theoretically like

1:01:30crashed the Dutch economy and it was incredible to spare 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 this story pop up in more places, especially in the technocrats fear 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 something like this month.

1:01:55And 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, of course, there was over speculation here, and people, a lot of 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 a tailspin.

1:02:37And 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 totally fascinating of analysis of why we wanted to believe that this maniac created even more devastation than it actually did. Interesting.

1:03:06relevant to 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 want to check it out. Cool. My carve out today is actually...

1:03:27random 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, so for the last three years, I've been a plus model. I got the 6 plus and then I got the 7 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. It's the future, it's amazing, but I was like, I'm not ready just yet because AR isn't like really 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, it'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,

1:04:24had lunch or dinner 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 sold it on eBay and I got an iPhone SE 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.

1:04:48This just in venture capitalists decides not to partake in new high-tech technology and rolls back to the stone ages. That's me. That is me. No, it's so much. I'm always like, oh my whole life, I've been up leading edge adopter, but you know, the form factor, I just kind of realize again, maybe I'll probably change in a couple of years from I was like, it's just nice to be back to, you know, being able to have my phone in my pocket. I'm envious.

1:05:18Man, yes, you're so right on that. I think we're it not for these cameras and Sometimes when I want to handed use of a larger keyboard I miss the crap out of that form factor swipe glide typing though on the the G board the Google keyboard is pretty good You know, 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 gonna enjoy my you know one or two years probably one year with a phone in my pocket Well, David enjoy your non-bionic phone No, I'm gonna miss the bionic Are you are you are you going for a 10? I mean if I can get one I'm gonna I'm gonna I'm gonna do a wheeled I have my

1:06:13My 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 I bet I'm into Q4 if not early Q1 next year. Well, but this is the only thing about Apple products, right? Like if you are an iOS person, like there is so like The secondary market is so liquid. Yeah, you have to pay some transaction costs, but it's crazy. It's really not much. And they keep their value incredible. They keep their value, not like you can swap out like for really not much money in terms of economic impact. It's kind of crazy. It is. It is. All right, listeners. Now is a great time to talk about one of our

1:07:02favorite companies, Statsig. Yes. There is a reason why the best product teams rely on Statsig, whether they are iterating on their core product features or shipping AI-powered experiences at scale. Yep. In the crazy speed of today's AI world, shipping fast is just table stakes now. It's basically trivial to build and deploy your app constantly. The real advantage is how quickly you learn what changes actually created value for customers, and how fast you can use that signal to guide what you shipped next. This is where Statsig comes in. It brings experimentation, feature flags, and product analytics into one unified system so teams can ship safely, test rigorously, and directly link what they changed to how users actually behaved. So if you want to make learning your competitive advantage, whether you're building new AI experiences, or just evolving your existing core product, go to Statsig.com slash acquired to get started.

1:07:58Well, I think that's all I've got. Do you mind anything else? That's all I got. All right, listeners, if you aren't subscribed and want to hear more, you can subscribe from your favorite podcast client. If you feel so inclined, we would love a review on iTunes. Other than that, join us at acquire.fm. You can join the Slack, and that's all we've got. Have a great day. See you guys soon.