Starbucks Is the Microsoft of Coffee. Is This the Apple?

What happens when industries collide?
March 24 2014 12:02 PM

Genius Barista

Tech investors think they’ve found the Apple of coffee.

(Continued from Page 1)

Venture capital was not meant to fund coffee shops. The VC concept emerged from Silicon Valley in the 1960s and ’70s as a way to get semiconductor companies through the expensive research-and-development phase so that they could one day realize immense profits by revolutionizing computing. Over the decades, VC firms have widened their interests to include all sorts of companies that rely on technology or the Internet to grow more rapidly than would be possible for a traditional brick-and-mortar enterprise. But it’s only in the past few years that a few have begun to venture into the realms of retail, restaurants, and beverage companies. And those investments remain controversial.

Andrew Parker, a partner at the Boston-based VC firm Spark Capital, told me his firm has invested in the eyeglass-maker Warby Parker because it “was born online and uses retail stores more as a showroom marketing experience than as an essential distribution channel.” But he can’t imagine putting tech investors’ money into a venture like Blue Bottle, no matter how tasty its coffee. That said, Parker added, “Every good VC firm knows how to break the rules when appropriate.”

For Conrad and True Ventures, Blue Bottle was worth breaking rules for. Never mind that its business is not Internet-driven (so far). As an investor, Conrad found Freeman’s sensibility irresistible. “When I closed my eyes and thought about the things that were important to James, they were not dissimilar to what I’ve learned to recognize in what I’ll call ‘founders of movements,’” Conrad said. “James had a vision every bit in the same way that [WordPress co-founder] Matt Mullenweg had a vision for democratizing people’s voice. Caterina Fake at Flickr, Kevin Systrom at Instagram—they’re rare, but when you run into them, you know it.”

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In October 2012, True Ventures joined Meehan and others to lead a $20 million funding round that also included a starry roster of social-media stars, including Systrom, Fake, Path’s Dave Morin, and Twitter’s Ev Williams and Biz Stone. By January 2014, Blue Bottle was raising a second round to the tune of $26 million that included Google Ventures, Morgan Stanley, and skateboarder Tony Hawk.

The tech community’s embrace of Blue Bottle has raised some eyebrows. “Blue Bottle is getting $25 million because it is pretty good coffee that happens to be located next door to tech companies,” snarked business writer Kevin Roose. Certainly the company’s proximity to Sand Hill Road hasn’t hurt. Yet third-wave rivals like Stumptown and Intelligentsia have also taken on big investments, albeit from more traditional sources. Meanwhile, food chains like Sweetgreen, Potbelly, and Pinkberry have taken the VC route, the latter two with backing from a Seattle-based firm called Maveron—whose co-founder just happens to be Starbucks CEO Howard Schultz.

The deeper business story here may be that concepts like startups and venture capital are no longer the exclusive province of the high-technology industry. As an ever-growing pool of VC money chases the hot new thing, open-minded investors are beginning to realize that the smartest money may no longer be on ad-supported social media companies, let alone semiconductors. “We’re never going to get a WhatsApp outcome with Blue Bottle,” Conrad admits. “But we’re also not going to get the 40- to 80-percent chance of a flameout that you see in tech investments.”

Investors are also recognizing that tech itself is no longer as clear-cut a category as it once was. We call Amazon a tech company, but is it really? When every company is on the Internet, how do we decide which are Internet companies? Blue Bottle’s expansion so far has focused on brick-and-mortar cafés, but it’s entirely possible that its greatest future growth will come from selling coffee online, via the slick website that it redesigned with the help of Google Ventures. Meanwhile, it has begun selling portable versions of its New Orleans–style iced coffee via Whole Foods.

Blue Bottle coffee
Blue Bottle's goal is to keep improving the quality of the coffee.

Courtesy of Clay McLachlan/Claypix.com

Meehan and Freeman will tell you that their top priority is to ensure that Blue Bottle doesn’t expand so fast that it loses what made it beloved in the first place. “The question I keep getting is, ‘How are you not going to screw this up?’” Freeman says, laughing. “And the answer is, ‘I don’t know!’” But in fact, Freeman insists, his goal is not to keep quality constant—it’s to keep improving it, even if that means growing more slowly than he could otherwise. Meehan says he and his fellow investors are on board with that. So far Blue Bottle has used its cash carefully, expanding to a few cities, like Los Angeles and New York, while hiring more coffee buyers and roasters to improve the product. Taking a cue from Starbucks, it’s also raising its baristas’ pay and giving some employees stock options.* “If Intelligentsia comes along and opens 25 stores in Chicago and becomes the clear market leader, we’re not going to worry about that,” Meehan says. “We’re not going to change the process of how we make our coffee in any way.”

That commitment, which appears to entail long wait times at peak hours, may mean that Blue Bottle will never get as big or as ubiquitous as Starbucks, never surpass it the way Apple eclipsed Microsoft. Then again, Starbucks never set out to get as big as Starbucks either.

*Correction, March 24, 2014: This article originally stated that Blue Bottle has given stock options to its baristas. Some administrators and managers have received stock options, but the company’s baristas so far have not. (Return.)

Will Oremus is Slate's senior technology writer.

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