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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, podcast about technology, acquisitions and IPOs. I'm Ben Gilbert. I'm David Rosenpill. 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 BlueBottle. So... Shock waves 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 islandish one? Fills. Fills. Fourth wave of coffee. Fourth wave. We'll get into it. We will. Our presenting sponsor for this episode is not a sponsor, but another podcast that we love and want to recommend called the Founders podcast. We have seen dozens of tweets that say something like my favorite podcast is acquired and founder. So we knew there's a natural fit. We know the host of founders. Well, David Senra. Hi, David. Hey, Ben. Hey, David. Thank you for joining us. Thank you for having me. I like how they group us together and then they say it's like the best curriculum for founders and executives. And really, as we use your show for research a lot, I listen to your episode of the story of Achaomarita before we did our Sony episodes this incredible primer. You know, he's actually a good example of why people listen to founders and to acquired because all of history's greatest entrepreneurs and investors. They had deep historical knowledge about the work that came before them. So like the founder of Sony, who did he influence? Steve Jobs talked about him over and over again if you do the research to him. But I think this is one of the reasons why people love both of our shows and there's such good. Complement is on acquired. We focus on company histories. You tell the histories of the individual people. You're the people version of acquired and where the company version of founders listeners. The other fun thing to note is David will hit a topic from a bunch of different angles. So I just listened to an episode on Edwin Land from a biography that David did. David, it was the third, fourth time you've done Polaroid. I've read five biographies of Edwin Land and I think I've made eight episodes of them. Because in my opinion, the greatest entrepreneur to ever do it, my favorite entrepreneur personally is Steve Jobs. And if you go back and listen to like a 20 year old Steve Jobs, he's talking about Edwin Land's my hero. So the reason I did that is because I want to find out like I have my heroes. Who were their heroes? And the beauty of this is the people may die, but the ideas never do. And so Edwin Land had passed away way before the apex of Apple. But Steve was still able to use those ideas and now he's gone and we can use those ideas. And so I think what requires doing what a founder trying to do as well is find the best ideas in history and push them down the generations. Make sure they're not lost history. I love that. Well, listeners, go check out the founders podcast after this episode. You can search for it in any podcast player. Lots of companies that David covers that we have yet to dive into here on acquired. So for more indulgence on companies and founders, go check it out. All right. Well, David, that's all I've got for for pre show. All right. Well, before we dive in, I was thinking about this episode and it was kind of funny. We've got these series of like mini series here on acquired. We've done we did the Disney trifecta and then the fourth, of course, with with BAM tech. 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. Well, this is a primarily Seattle dominant podcast. So we do have to do multiple coffee episodes. Next, we'll have to do the see hox next. Yeah. Yeah. 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. 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 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, hate on it because it's, it's systematized. But it is definitely, definitely a reaction to the mass market success of Starbucks. Yeah. And so third wave places like a counter culture was one of the first in Durham, Durham, North Carolina, Stumptown in, in Down in Portland, which is now owned by Peats interestingly. Or Intelligencio, which I think started in Chicago is also now majority owned by Peats. Cafe Vita and Seattle, all these folks, they really focus on the drink itself and and probably arguably nobody focused more on the drink than blue bottle. So let's dive into to 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 they're worked together as an analogy for his whole talk and then he goes on to quote, start and then proust very philosophical. Honestly, one of my favorite things about this show is learning about the insane and talented and driven people that start these companies. Like, 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'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 until his mid-30s. And then he kind of woke up one day and he realized, you know, I'm never going to 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 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 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. 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. He 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 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. Truly, truly. And hilariously, you know that 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 to different sector. Yep. So he's sort of the company is back to its origins now with that acquisition later. But 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. Yeah, exactly. And and Freeman sort of similar to the Starbucks story where it wasn't the Starbucks founders who 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 we 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 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 an actually instead of just selling beans sell coffee there. James is excited about this and he's sort of approached a 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 to blue bottle is very very Japanese centric and 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 ETL talk at Stanford that part of his inspiration is this coffee shop in 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. And the barista here 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 blue bottle. And if 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 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 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 these are ceramic you know to stay cups. They don't like doing to go cups. Of course. That are the cups are perfectly sized. They're not perfectly round. But they are sized exactly for the size drink that you get at blue bottle. There no sizes. You just get 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. It's like the Steve Jobs one outfit reduced cognitive load thing. Exactly. Exactly. 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 barrier chain. I should say like blue bottles freaking amazingly good. Like I. The coffee is really good. I'll rip on it for like this whole episode but you know it's it's an unbelievable product. It really is. I mean 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. 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 and the sort of inspiration for all of it. And so their stores and 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 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 five million dollars 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. Unfreak and believable the nose on Chris Saka to 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 more a bunch more of Twitter that he could on the second market. So $5 million round from Colberg and and lowercase in 2008. Then a few years later in 2012 there is a 20 million dollar round 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 is 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. We're literally selling drugs. Yeah. Oh my god. I was doing some one of my favorite things to do research for this 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 is a great point and you know things that 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 I think I think is worth bringing up now from from Daniel James on Cora in this 20 million dollar round the question was something around like you know why is blue bottle getting all this investment what you see 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 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 dog who's got to use that it was the same thing that is like what are these these 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 blue by the way no this is a 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 like reduce cogs and like lower variable costs like nope nope none of that no this is a coffee company. And people are like why are these these investing in this turns out they did well in particularly that round did very well will come back to all that it is worth pointing out like this super interesting 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 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 sight glass that was a couple of 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 bottle as a product and as a lifestyle and put money into it I mean it is like they they they just one over the most valuable segment as customers and then brought them on as investors. Yeah and this is 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 L.A. you know you're not kind of in the ecosystem it's easy to forget 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 was in mint plaza and mint plaza is like two blocks away from the Twitter building. So like we know where do all the Twitter and you know employees go when they want copy 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 attention you know even even outside of typical channels like if you aren't right next to the Twitter building but you're interested in doing you know attracting Twitter people. You know could you could you target them all over the place digitally as well as having a physical location there because I feel like while blue bottle sort of pioneered that I feel like that's no longer novel to you know put something right outside of a company that anyway to put a physical location. Yeah just think that growth growth hacking tactic doesn't work anymore could you could you be digitally close 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 I have Williams was I don't think you know Jack was obviously an investor in in Cycglas competitor but but it it worked so 2014 they then raise another 25 million dollars and then in 2015 there is 75 million dollars 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 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 buys out a majority stake in the company for reported 425 million dollars we don't know the exact number but it's been pretty widely reported that they paid about 425 million and that's not going to be a big deal. 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. I wonder the first thing comes to mind is that the founders keep all their shares was there a little bit of secondary there where they took money off the table they had 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 whether Nestle paid out anything to any of the any of the employees. Yeah well I will say you know as I for lots and lots of reasons believe that full acquisitions are better than these sort of majority buyouts particularly for start ups like this I mean there are 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. There's sort of an interesting thing of like it has to stay a separate company like think about this how if you're those founders do you think about how your shares get valued now like there's there's not really a competitive market to do the next round it's not going to you know like there's not a market to value your company and 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 nestly 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 is it did is you know I have to wonder I don't know anybody blue bottle you know personally but Freeman and Brian me and who's the CEO he came in and took over a CEO a number of years ago but Freeman still very very involved they both were very vocal about saying they never wanted to go public they didn't think being public. I think being public made sense for blue bottles company and it also just was something they weren't interested in and yet the company continued to grow but but at the same time did raised all this money and in particular in some of these later rounds you know bringing folks like fidelity like fidelity isn't mutual fund there a public company investor like they you know 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 they want to be able to do that. I 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 then what it sounds like James and the team did. Yeah 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 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 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 there's 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. Yeah 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 going to 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 and all these companies many many others. Certainly could be public companies and 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. 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 bottles goal is to be about the cup of coffee and what is actually in the cup does it make sense to be. 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 for the location coffee shop. I'm actually very curious to they also have this 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 online subscription business is smaller but. Interesting to think about that to because that then you start to think about it still not an internet company like I'm really sick of the fact that like 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 then you know all the brick and mortar stuff that exists today. We've posed some questions here and I think James Freeman and the blue bottle team were 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. But 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 eerily similar and apple is maintaining. What an old 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. Well 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 your hands and 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 you know 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 you want to dive into that now. Yeah let's do it. Alright 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 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 you know using their supply chain to. 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 they bought coolness. Yes I was going to 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 ends 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 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 free standing 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. Yeah yeah but you know on the 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 being done by Nestle right like they're keeping the team separate all the rhetoric is that you know they're going to 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 so that's a good thing. It's a good thing to do that is that 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. If that's the goal and you know 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. Yeah but I was really interested. 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 an independent company. 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 core post that's like it gives a good order of magnitude for what individual cafes sell and I feel like I should have gotten the Starbucks comp because that would have been better but this this says in Australia 60% of cafes sell between 200K and $2 million per year. So let's say that on the revenue side you know that's that's $2 million of revenue per store that that blue bottle generates like that's a lot of stores 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 two million of 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 that I thought was pretty interesting that said that basically Nestle 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 Curig and Tassimo and they've less than 5% penetration in the US on the 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 a huge missed opportunity if they have to forfeit the single serve coffee market in the US as it just sky rockets in popularity. Yeah interesting interesting so this is like the this is bad but like the the right way to do the the juice arrow. Yeah actually do I tried the other day just squeezing minus press O pod and they made amazing coffee on their own I don't know what I pay the 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 be the same division and they would just you know sort of sort of relabeled in this press O stuff. Well if Nespresso and I agree they really do make good single serve coffee much better than think carigs 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 you know how much of a say do the blue bottle folks have in that I mean presumably Nestle it makes a decisions now and has the controlling interest. Yeah but again remember like it's not a they don't own 100% like the blue bottle team still you know has a large stake like 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 happen to otherwise but you know I guess if if Nestle hadn't come in and acquired blue bottle or nobody else 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 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 you know Fidelity's are like we need to get out of this business like we've seen great growth but like my God we need to go away to get out of this you almost wonder did Fidelity you know T this whole thing up with Nestle. Well and not just Fidelity too I mean don't forget there been VCs you know on the cap table here since 2008. So almost 10 years and you know venture capital funds you know have a have a life cycle this is something that you know I think a lot of people don't really understand unless you're you know 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 you know whatever that data is and get typically 10 years. Like you're supposed to wind up the 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 happens today this is a good little VC 101 like what if L. P. say no and there's 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 XYZ VC say 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. And right now, you know, 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 a lot of time frames return hurdles it just turns into a nightmare and so then you could have you know 50 100 200 new entrance on your cap table. Yep yep and not just new entrance but new entrance with wildly divergent you know interest right right right and you know presumably at some point that starts to. 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 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 is Dave Goldberg Cheryl Sandberg's still 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 bought out the existing investors in 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 a 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 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 a 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 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 you know most VCs summer you know 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 you know they're not you know they're not in a position where they can just indefinitely go without liquidity either so it really it really and especially you know as a VC 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 divinending it out to you so you know whereas if you're a founder of a company you can do thing you can start to pay yourself a lot more you know if there is cash flow you can divin 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 for side tracking there with me all right should we dive into tech themes yeah yeah let's do it let's do it and one here's one I don't know if it's actually applicable but I've been thinking more and more about and I think what I'm going to 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 you 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 war be Parker Banobeau's 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 war be 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 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 you know boutique and a boutique occasion of retail away from the man to invoke bentobs 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 war be Parker for one specific thing you're going to blue bottle for one specific thing you're going to an Apple store for one specific thing like there there aren't thousands of skews just line 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 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 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 is also been what you're 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 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 is they super low if not zero marginal cost you can have super high fixed cost but you know low marginal cost especially you know not 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 isn'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 at mass scale our ability to do single advertising campaigns at 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 expanding to a global market fairly quickly so it's 24,000 stores it turns out there actually are segments and it's 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 like and I think that's what Amazon that's why Amazon can be 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 stock rate 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 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 it 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 V C 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 theater 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 name I'm going with here the theme I'm going with here is like some things are uncraminable into these business models that are massive and winner take all and look super shiny from an investment perspective and I think coffee maybe 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 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 maybe a platform like that actually can you know address if not the whole market you know many many segments part of its time 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 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 use they're they're going to market yep well I and like can Starbucks actually win over the coffee snobs I mean that's a that's a tougher battle than like suddenly there being a $4 lot a it'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 package coffee go through the home instead yeah yeah interesting I mean home 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 you can do a winner take all business and create that that a product for everyone when you have to think about 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 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 your Instagram's too you know limited or good point I'd say we may be nearing no I'm not going to go there like the push back of the one size fits all but in some ways well okay well baby 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 I do I believe that Amazon will be able to solve the problem of shipping products to environmentalists yes like that that's a bad I'd make yeah but I think you're I think you're on to something like it only works because you don't have to go physically shop in 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 uh Tarsay right well Tarsay sort of more I think more midmark maybe slightly upmarket certainly from Walmart but I don't think it's like you know the the Neiman right this 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 four dollar iPhone DAC or your five hundred dollar iPhone DAC there yep they're getting there anyway yep all right you want to let's do it all right uh you star because 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 there 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 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 it made some different decisions along the way you know I don't disagree it does it does feel like 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 I 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's very clear what it was about right and you know 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 the 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 pump 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 you know I can paint a story where the rebrand of the Nispresso 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 like they actually really turn it on and are able to do you know open lots more stores very rapidly because they've all its capital but like do I see the like one thing where this fits perfectly in and and there's internal alignment within Nestle of how they're going to leverage this asset like I don't work there but probably not like I mean I think the only dark horse being 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 the Cora commenter who suggested that it's pretty interesting so I'll go B minus you know maybe C++ but again I think I've rated things that were way worse than this C's so I'll go B minus Carbap Carbap 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 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 bold 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 macro economic bubble that people cite and it's you know theoretically like crash the Dutch economy and and there 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 you know technocrats fear where people love to wax philosophically about it for a bubble or not there's even a movie coming out I think it's tulip Mania or tulip fever or something that that like this month and the Smithsonian magazine published a really interesting piece called there was never really a tulip fever I've heard about this it was super interesting like this thing that's gotten 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 you know this Dutch tulip bubble and it's like totally fascinating of analysis of why we wanted to believe that this this maniac created even more devastation than then it actually did. Interesting relevant 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 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 so I've for the last three years I've been a plus model guy I got the 6 plus and then I got the 7 plus and coming about it 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 7 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 gone out like I always put my phone on the table because I can 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 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 new high tech technology and rolls back to the stone ages that's me that is me no it's so much I'm like I'm always like 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 years from as like it's just nice to be back to 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 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 going to enjoy my you know one or two years probably one year with a phone in my pocket well David enjoy your non-biotic phone no I'm going to miss the biotic 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 do a wheeled 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 I bet I'm into Q4 if not or early Q1 next year well but 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 it's crazy it's really not much and they keep their value incredibly 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 well I think that's all I've got do you mean else it's all I got all right listeners if you aren't subscribed and want to hear more you can subscribe from your favorite podcast clients if you feel so inclined we would love a review on iTunes although that joined us at a lot of time you can join the slack and that's all we've got have a great day so you guys soon