'Capitalism on Steroids': Private Equity and the Future of Specialty Coffee

It’s hard to shake the feeling that all the money that has flowed into specialty coffee over the past decade or so is warping the industry in ways that we haven’t yet begun to grasp.

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The coffee industry has come a long way since the days of Folgers and Maxwell House. Specialty coffee is now big business, and the industry is awash with cash.

Large companies have bought up many seminal third wave brands over the past decade, from Blue Bottle and La Colombe to Stumptown and Intelligentsia. Despite claims that they would keep their independence, the reality is that the lines are already beginning to blur.

Blue Bottle and fellow Nestlé subsidiary Nespresso have teamed up for a line of coffee pods, La Colombe followed suit with a Keurig collaboration, and Alaska Airlines is now serving Stumptown. What started out as a few plucky entrepreneurs fighting back against corporate dominance and mediocre coffee has become everything it once opposed.

And it’s not just the glamorous, high-profile companies—venture capital and private equity money has poured into small roasters, cold brew companies, and mini-chains around the United States, the UK, and Europe. It has got to the point that, unless you come from wealth or have some other easy source of money, investors in the form of venture capital are one of the few ways to build a coffee brand.

Which is not to say investment is bad. Businesses need money to start, and money to grow—it’s the type of investment, and what it wants in return, that can cause problems.

It’s hard to shake the feeling that all the venture capital and private equity money that has flowed into specialty coffee over the past decade or so is warping the industry in ways that we haven’t yet begun to grasp.

How Big Can We Make It?

People have been investing in companies since the dawn of capitalism, paying for a sliver of what they hope will grow to give them a bigger slice. Private equity (PE) and its offshoot, venture capital (VC), takes that idea and supercharges it to the point of abstraction. Venture capital usually comes first, and involves investments in startups with scope (or at least ambition) to grow quickly. When you read about a coffee company raising Series A, B, or C funding, that’s venture capital.

“In general the whole modus of a VC is to say, Okay, we have proof of concept. Now, can we prove revenue growth? You have a business—how big can we make it?” says Sarah Kluth, Corporate Controller at LeaseCrunch who previously worked in specialty coffee at Intelligentsia, Revelator Coffee, Swiss Water Decaf, and Royal Cup. “What is venture capital not as concerned about? Bottom line. That's not the primary concern—the primary concern is: can we grow? Can we expand? Can we show that this has traction?”

Once VC-backed companies have grown to a certain point, they begin to look attractive to private equity. PE firms tend to be much bigger, and are looking to invest in more mature companies that have either proven they can grow or that are struggling and look ripe for—euphemism alert—restructuring. “Typically the first rule book of PE is to tighten up operations, tighten up costs,” Kluth explains. “A really classic example would be: PE buys a VC company and then they do a round of layoffs, because that's the easiest way to cut your costs: you just get rid of some of the extra humans.”

We’ve seen this recently in the coffee industry with the likes of Cometeer and Oatly, which both took on a lot of investment before laying off workers when things started to go south.  “PE is capitalism on steroids,” says Ludovic Phalippou, Professor of Financial Economics at Saïd Business School, University of Oxford. “Thus [it] can bring amazing efficient gains but also be brutal with stakeholders if that means they can make more money this way.”

“The primary motivation for getting into VC, it's an extraction thing,” notes Peter Roberts, Professor of Organization and Management at Emory University. “Nobody should look at VC and think of it as a benign force. It's indicative of a series of structural issues, but they're also protagonists. At the end of the day it starts with this idea of, what are the return aspirations of the individuals who invested in your fund?”

A Moon Shot

Tony Konecny founded Tonx Coffee in 2011 as a mail-order subscription service with a focus on the home coffee drinker. “I felt like I wanted to do coffee for people at home and build a business that wasn't predicated on wholesale and repairing espresso machines and training and having a bathroom key tied to a spatula,” Konecny tells me. But the reality of starting a business without savings or rich parents soon set in, and having some contacts in the tech industry meant access to potential backers.

Together with his business partner, Konecny put together a presentation and started pitching to investors. “But the people that are investing in us are looking for 5x or 10x returns, they're not looking to build a little mom and pop like, open a roastery and get some business and get off the ground. They're looking to leave everything on the road. It's a moon shot, you know?”

Just three years later, Blue Bottle, newly flush with cash after a $25 million investment of its own, acquired Tonx along with fellow LA-based Handsome Coffee. The way Konecny tells it, the more investors Tonx brought on the less control the founders had, and selling to Blue Bottle was the best option. “I think we had a very good run with Tonx Coffee and while I would’ve preferred not to sell out, it seemed better at the time than taking more money on unfavorable terms from the wrong people,” Konecny says.

“Hindsight is always brutal, but we tried to do right by our investors and team and most everyone saw it as a big success. I wish we’d felt like we had more options, but to a large degree that’s what came with being venture backed from the jump.”

Post-Punk Coffee

Okay so there are a lot of negatives, but could there be an upside to all this investment money?

Specialty coffee prides itself on doing things differently. The whole point of the third wave was to distinguish Stumptown, Intelligentsia, Blue Bottle et al from the companies that came before. Certain brands—Stumptown is a good example—even gained a reputation as being distinctly anti-establishment. “Punk is in the bones of Portland’s Stumptown Coffee,” wrote Sprudge in 2019.

Specialty coffee, to generalize somewhat, is an industry of small businesses paying minimal staff minimum wage and without much in the way of HR or healthcare (or perhaps that’s just my experience). Investment, in theory, could change that. Professor Phalippou points out that, aside from cash, PE firms can offer small companies an injection of professionalism. Kluth agrees, noting that the picture is usually more complex than it may first appear.

“I see that it can feel impersonal, I can see that it can feel very sterile, like all you’re worried about is money and nothing else,” Kluth says. “On the other hand, though, I can think of it as scale, especially with certain types of businesses, like now we can offer employee benefits. Now we can offer 401ks. Oh, does your tooth hurt? Guess what, you're not paying out of pocket anymore.”

For Kluth, who has worked both in specialty coffee and in finance, the important thing is the makeup of the company that’s doing the investing. “PE firms can be really large, or they can be really small, and so that does determine the approach as well,” she says. “And not all of them are completely Machiavellian, right? There's certain VC and PE out there that are savvy enough to understand these boutique brands, and understand that there's a culture there and the smart ones will want to preserve that.”

A Lot of Questions

So is VC and PE money the future of specialty coffee, or its death knell?

The positive position: with increased investment comes increased scale, allowing companies to buy more coffee from farmers and pay them more for it. More employment means more money going into the local economy: a rising tide (or trickle-down economics). Opening new cafes lets a company reach new customers, bringing more acolytes into the specialty fold.

On the doomer side: more money equals more strings, more investors to keep happy and more people asking questions like, “Do we really need to be spending so much on green coffee?” which eventually results in downward pressure on green prices. Expansion stratifies a business, disconnecting workers from the company’s core ideals and watering down the brand.

One thing is for sure—investment and the associated supercharged growth are becoming normalized in specialty coffee. Nobody bats an eye when Origin Coffee receives a multi-million-pound investment, or when a private equity firm buys Seattle Coffee Gear. It’s just the cost of doing business if you want to grow to compete with Starbucks, Caffe Nero, or even Stumptown and Intelligentsia. 

But is that good? Does growing unsustainably fast benefit anyone aside from the founder and shareholders? 

“When was the last time that something ended up at the tail end of an obscene growth process, and [was] better than it's ever been?” asks Professor Roberts. “I'm not sure that at the end of the day, any singular experience with Blue Bottle will be made better because of the arrival of Nestlé.”

The dream of specialty coffee, of third wave as a concept, was built on doing things differently to the big brands—higher quality, more care, better ethics. But today the third wave trailblazers are mostly owned by big brands themselves, so what now? Was it worth it?

Ethics, Resilience, and a Whole Lot of Luck

A few years after selling Tonx, Tony Konecny founded Yes Plz Coffee with fellow industry veteran Sumi Ali. Also a subscription service, Yes Plz was mostly built without the venture funding that characterized the early days of Tonx. However, he remains ambivalent about which approach is better.

“Having the perspective of running both a venture backed and bootstrapped business I can see the grass isn’t particularly greener on either side of the fence,” he tells me. “It’s a competitive industry and there’s no such thing as a fair fight. You’re always going to be up against businesses that have more resources or are willing to take insane risks. In the end your ethics, your resilience, and a whole lot of luck are what’s going to determine survival and success.”

In an era of hypercapitalism, with big brands entering the specialty industry and the market becoming saturated with startup coffee companies, it makes sense that venture capital and private equity investment would be appealing. If everyone else is taking the money, how can you compete without also accepting a few cheques—and the strings that come along with them?

What happens to the concept of specialty coffee when everyone is venture-backed, every cafe looks the same, and behemoths own many of the most famous brands? What happens to coffee farmers when shareholders demand perpetually higher profit margins and larger dividends?

There will doubtless always be small coffee companies looking to grow sustainably and approach coffee with nuance and humility and a focus on quality. But when the latest multi-million-dollar investment round, the smiling startup CEO waxing lyrical about growth, and near-constant mergers and acquisitions dominate the headlines, it seems a long way from the anti-establishment ideals upon which specialty coffee was founded.