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Why high-flying tech investors are putting their money in a coffee shop

When Oakland-based coffee retailer Blue Bottle announced a $25.75 million investment round on Jan. 29 from some of Silicon Valley’s biggest investors, the jokes were easy:

But they also reveal a fairly commonplace assumption: That “venture capital” entails an investment in a tech company, or that only tech companies grow fast enough to be worth it. But the reality is that private equity is private equity, and when funds line up to put their money into a privately owned company, they’re just looking for the right return at the right risk.

“The reason that they invested is they are investors,” Blue Bottle CFO David Bowman tells Quartz. “Any of our traditionally tech-oriented investors, I don’t think they are under any confusion that it’s 100x money in a year and a half. In what we’re doing, if we’re growing a lot more than 40%, 50% maybe, year on year, we’re at risk of the wheels falling off and we’re just not executing.”

Bowman highlights the twin realities: Nothing has the growth and profit margin potential of a successful online company, where the raw materials are essentially time and people and the potential customer base is limitless. But that doesn’t mean a retailer can’t be a high-growth company. Working with physical objects complicates things and makes it harder to scale up fast, but that doesn’t make it impossible.

“A retail food business is super risky in the beginning when you pour money in the first store. But it gets easier as you add locations and replicate the model. It’s the opposite for tech, where it often gets riskier over time as there are more crucial and binary decisions as the product gets more complex,” writes Andrew Chau, the co-founder of San Francisco tea start-up Boba Guys—and whose day job is at LeapFrog, an online education company—in an email. “In practical terms, a food retail business that has three cafes/juice bars/bakeries already open, the projection of $2M revenue/20% EBITDA might look more attractive than a startup with no revenue streams, but 500K users (like many startups here in Silicon Valley).”

US burrito chain Chipotle is maybe the best example of this. When it looked for capital to expand beyond its first 16 stores in 1998, it got no love from venture funders, so McDonald’s financed its expansion to 500 locations. In 2006, Chipotle’s IPO netted the burger chain a $560 million profit. Today, Chipotle has 1,500 locations and it has a market capitalization of $17.24 billion.

Venture capitalists have taken notice of Chipotle’s success. Maveron, a consumer-focused venture fund, has found winners in frozen yogurt chain Pinkberry and sandwich provider Potbelly; in the past, venture funds have put their money behind Starbucks, Asian-food chain P.F. Chang’s, and Jamba Juice.

This also reflects changes in the venture capital world: As more and more money is ploughed into start-ups in the maturing tech sector—and now that a new law in the US lets start-ups also raise money via crowd-funding—the chances of getting into the next Facebook early are reducing. “Venture funds” originally intended for start-ups are now part of hundred-million-dollar financing rounds for existing companies, and the idea of “growth equity”—capital to accelerate a company’s expansion, whatever stage it’s at—is becoming increasingly popular.

Think of two other Silicon Valley firms that, like Blue Bottle, have won $25 million investments in recent memory: The apparently troubled payments start-up Clinkle, which raised a $25 million “seed round” (traditionally a much smaller funding stage) in June but has yet to release a product, and Medium, the blogging platform that no one can explain, which scored the same amount in its first outside funding this week. If your main line of work was taking gambles such as these, wouldn’t you want to diversify into a company with an actual product that could, if it matches Chipotle, grow 3,000% in a decade?

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