VC-funded coffee shops are creating a dangerous myth: Infinite growth

  • Blank Street has raised over $30 million in investments from venture capital firms, bringing its total value to almost $100 million
  • The success of venture capital in the coffee sector has been mixed
  • Venture capital firms have high growth expectations – something coffee businesses can’t always deliver on

GLOBAL COFFEE consumption is through the roof – and venture capitalists want a slice of the action.

The global specialty coffee market is expected to surpass $50 billion by 2030 if it maintains projected year-on-year growth at around 11%. It’s no wonder that venture capitalists are taking a vested interest.

But this isn’t a new trend. Venture capital has played a role in specialty coffee since the mid-2010s. For instance, Blue Bottle secured $117 million through 6 funding rounds, while robot coffee chain CafeX raised over $14.5 million from private equity funds and investors.

More recently, specialty coffee chain Blank Street reached a valuation of $98 million, raising over $31 million in seed investment and first-round funding from VC firms. The founders claim to have “cracked the code” on how to attract VC funding and are currently seeking a valuation of more than $200 million from their investors.

The success of companies like Blue Bottle has encouraged further investment in the coffee industry. However, there are cases that indicate venture capital may leave some businesses in a vulnerable position.

For instance, having reached a peak valuation of $13 billion in 2019, Chinese chain Luckin Coffee was caught inflating sales figures and defrauding investors. This led to a sharp decline in its stock value and resulted in regulatory investigations and being delisted from Nasdaq.

In Colombia, the effects of the pandemic saw the country’s largest coffee chain, Tostao Café y Pan, owe more than $33 million to creditors – denting its public reputation and enforcing the company to reorganise its debts.

VC-funded coffee shops can be left in a vulnerable position

Unrealistic growth expectations

Coffee is already a deeply ingrained part of daily life in many countries, and it’s becoming more prominent in many more. As such, the prospect of capital investment into a well-established existing industry segment is understandably promising for investors.

For some coffee businesses, however, meeting the growth expectations of VC firms has been challenging. Consumers can only drink so much coffee, after all.

“The reality is that even in really saturated coffee markets where whole cultures exist around the consumption of coffee – Nordic countries, Ethiopia, Turkey, and many others – it is still fairly uncommon that people drink more than three cups of coffee a day,” says Stuart Ritson, the director of UK and European sales at Osito Coffee.

The growth of the coffee industry has been strong over the last two decades, which is primarily why VC firms have taken such a keen interest. And while large capital investments may create the perception of future growth, coffee companies can only do so much to increase their sales.

As such, unrealistic growth expectations have become difficult to manage for many businesses and has led to unsustainable growth patterns. 

As well as Luckin Coffee and Tostao Café y Pan, Bulletproof Coffee and Sudden Coffee are two companies that received venture capital funding that didn’t go to plan; the former filed for bankruptcy protection in 2018, and the latter ultimately ceased its operations in 2019.

“Coffee has a bit of a reputation among industry outsiders as being a gold mine, but that just isn’t the case,” Stuart says.

“Unless investors are willing to put money into long-term projects, knowing they may only see returns many years down the line, this could create pressures to grow unsustainably or make profits by cutting corners.”

Furthermore, the push for venture capital funding was driven by cheaper credit, which meant that investing was more attractive to many. However, interest rates are now much higher, which means credit has become more expensive. As such, many companies that borrowed money when it was cheap now find themselves in a more difficult situation.

“Credit was cheap, meaning that people were more accepting of taking a bit more money than they actually needed,” Stuart says. “But, if any of those loans were at variable interest rates, companies are likely now feeling the pinch with higher costs across the board and loans with higher rates.” 

VC-funded coffee shops struggle to meet expectations of their investors

Striking the balance

The increase in venture capital-funded coffee shops has also sparked concerns about a lack of brand diversity within the industry. Popular and “cool” third wave coffee brands often become more of a mainstream presence after acquisition or heavy investment – in turn driving a more homogenous experience which could push previous customers away.

“Venture capitalists want to see a return on their investment,” Stuart says. “With this in mind, they may [now] be tempted to go with tried and tested ideas rather than more innovative and possibly riskier options.”

If coffee businesses continue to be supported by venture capital, their success may depend on balancing the demands of their investors with establishing a meaningful connection to what makes them unique in the industry – otherwise, they could risk facing the same fate as others who have failed in the past.

Having said this, the success of venture capital funding in the coffee sector has been mixed, and it’s difficult to make a definitive judgement on its overall impact. As Stuart says, the outcome may largely depend on the specific investors and their objectives:

“That said, much of the tech world has been funded by venture capital that is interested in disrupting existing industries – so the appetite for change is more dependent on the type of investor rather than the style of investment itself.”

At the same time, VC-funded coffee businesses can afford to be more aggressive and competitive. The resources at their disposal mean they can often afford to pay their staff higher salaries and purchase higher-scoring coffees, which in turn gives them a competitive edge over companies without similar backing.

While some view venture capital as a threat to the identity of the specialty coffee sector, others argue it provides an opportunity to bring better-quality coffee to more people.

“If you are a fan of specialty coffee, then you can just as easily dislike a brand for diluting what you see as a ‘purer’ version of the third, fourth or fifth wave of coffee,” says Stuart. “These cafes, however, are often serving specialty grade coffee, bought at elevated prices, so this is actually something to be championed.”

Considering that demand for coffee remains strong, VC funding is likely to maintain its presence in the industry. What remains to be seen, however, is how successful this strategy will be over a longer timeframe — just how many of these VC-backed coffee shops will retain their integrity and uphold the values of the specialty coffee industry.