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John Sylvan couldn’t shake the regret.
He is the savvy inventor of the Keurig® instant coffee system. I suspect most of us are familiar with it:
These Keurig coffee makers run hot water through plastic pods filled with coffee. They call the pods “K-cups.”
There’s no need to grind beans and measure scoops. Just turn on the machine so it warms up for a few minutes, pop in a K-cup®, press the button… and your coffee is ready another minute later.
Sylvan invented the system back in the 1990s — and he knew it would be a hit with consumers. It’s simple, easy to use, and saves time.
Sylvan founded the business in his college dorm room in 1992. He took on just over $1 million in venture capital (VC) funding in 1994 to continue improving the machine. Then he made his first sale in 1998… and its adoption gradually grew over the next six years.
Then it took off.
By 2004, Keurig reached mass adoption. Sales exploded higher — prompting Green Mountain Coffee Roasters to acquire the company for $104.3 million in 2006. A decade later, beverage conglomerate JAB Holding acquired the combined Keurig Green Mountain company for $13.9 billion.
So the little coffee company that Sylvan started in his dorm room became a multi-billion behemoth. Talk about a successful venture.
At the time Sylvan invented the system, Sylvan was myopically focused on inventing a coffee-making system that was cheap and saved time. He hadn’t at all considered the future negative ramifications for how he did it. That’s the reason for his regret.
Here’s what he said in an interview with The Atlantic in March 2015:
“I feel bad sometimes that I ever did it… No matter what they say about recycling, those things will never be recyclable. The plastic is a specialized plastic made of four different layers.”
“Those things” were the K-cup®s — the plastic containers that held the ground coffee. Despite the success of Keurig, the K-cup®s have been a disaster for the environment.
And the problem only kept getting worse.
Keurig became so popular that it has been selling billions of plastic K-cup®s a year for many years now. And most of these little pods end up in landfills.
It’s now estimated that the total amount of K-cup®s produced could wrap around the Earth over 500 times. That’s astounding.
And that’s why Sylvan expressed regret in his interview with The Atlantic. (Well, that and he sold his stake in the business early on for $50,000.)
Today, we have the opportunity to invest in an early stage coffee company that has developed proprietary technology to disrupt Keurig and set the new standard for single serving coffee.
The formula is simple — much better coffee with no environmentally unfriendly waste. It’s following a similar business model as Keurig… but with two major differences.
First, this company innovated a superior method of delivering single-serve coffee that doesn’t require a brewing machine or plastic pods. And it doesn’t even require a coffee pot. It’s a simple “just add hot water” solution.
What’s more, this coffee’s packaging is compostable and made using plant-based materials. It won’t fill up our landfills like Keurig’s K-cup®s (or the machines required to make them).
In addition, this company’s coffee tastes far better than anything coming out of a Keurig machine (known for moldy buildup). Instead, it tastes and smells like you’re walking into a coffee shop whenever you brew a cup at home (or at work, or on an adventure). The secret to this, not surprisingly, is technology.
And, perhaps most importantly for investors, this company is addressing a much larger market than Keurig — because there’s no machine for consumers to buy. All a consumer needs is a cup and hot water. There’s no barrier to entry.
And given the strategic moves made in 2023, this company is now on the exact same growth path as Keurig… except five years earlier.
It’s time to invest in Steeped Coffee.
Steeped’s coffee comes in what we can think of as a high-tech tea bag that’s precisely packaged and nitro-sealed to preserve freshness.
To enjoy it, consumers simply heat up water, pour it over a bag in their cup, give it a dip and dunk, and let it brew.
The coffee actually blooms in the bag and gets stronger the longer the bag is left in the cup. That’s it. No expensive brewing machine or plastic pods are necessary.
I know that some of us might be surprised at putting coffee in a bag and brewing like we do for a cup of tea. I can say from personal experience, it’s fantastic… and I’m the kind of coffee drinker that usually grinds my coffee each morning.
And yet, I use Steeped’s single-serving bags all the time, at home, and especially when I’m traveling.
This is an elegant solution. Suddenly coffee enthusiasts can travel and enjoy fantastic quality from anywhere they have access to hot water… which is basically everywhere. And it smells like walking into a great coffee shop whenever you open up a Steeped Coffee packet.
So Steeped is clearly differentiated from Keurig from both a quality and a convenience standpoint. And unlike Keurig, it is completely environmentally friendly.
And Steeped Coffee’s addressable market is the entire world’s population of coffee drinkers.
It’s kind of amazing that Keurig’s massive success came… even though 75% of coffee drinkers do not own a Keurig machine. So Keurig only sells to 25% of the market. Yet, they still manage to sell tens of billions of pods every year. That’s amazing.
The beauty of Steeped’s approach is that consumers don’t need any special machines at all. They don’t even need a coffee pot. All they need is hot water.
Whenever I look at companies that are attacking large existing markets, I pay close attention to both the benefits of the product, and the go-to-market strategy.
In other words, how is the company differentiating itself from existing solutions. How is it better? And how will the go-to-market strategy accelerate adoption?
Steeped Coffee actually doesn’t need to compete with Keurig’s existing users, although once a Keurig owner tastes Steeped Coffee, they’ll likely change too.
Steeped is going after the rest of the market — the 75% of the market that Keurig doesn’t have plus future market growth.
Steeped estimates the coffee market size to be about $80 billion annually in just the U.S. alone. Meanwhile, the company’s research shows tea’s annual market size to be about $14 billion.
Yet, if we look at the grocery store shelf, the tea space is three- or four-times greater than the coffee space. Why is that?
It all comes down to simplicity.
If we look at the tea shelf, it’s primarily single-serve options in tea bags. Anyone can buy tea and make it at home without any special equipment. It’s so easy, right?
The coffee shelf is the opposite. There’s ground coffee, which requires a coffee pot. There’s whole-bean coffee, which requires a grinder and scale, and either a coffee pot or French Press/Pour Over-like devices. Then there are the Keurig-style options requiring pods or capsules, which require those specific machines.
Simply put, tea caters to all consumers. Coffee currently caters only to those with certain equipment — in a range of varying formats. Having an all-in-one, universal, single-serve method is why tea gets more space on the shelf.
Steeped Coffee is changing this.
I think something Steeped founder Josh Wilbur said sums it up best:
“Steeped is the only coffee that I can send to any home in the world and know that anyone in the house can enjoy it. All they need to do is add water.”
If you’re a past reader of my investment research, you may have read my previous work on Steeped Coffee, and I know that almost 6,000 of my subscribers invested in Steeped Coffee back in the summer of 2022… when Steeped held its Reg CF raise on the Republic crowdfunding platform.
It was one of the most successful crowdfunding raises in history. And we’re lucky to have a second opportunity, the last opportunity actually, to invest in this exciting, tech-enabled high growth consumer products company.
I’ve known the CEO of Steeped since January of 2022, and I have kept in regular contact with the company since the incredible Reg CF back in 2022… as I do with all of the companies that I endorse.
I offer my time as a sounding board and informal advisor because I want these companies to be successful. I do not receive any compensation for doing so — no stock, no options, and no cash compensation whatsoever. I just want these companies to be successful for my subscribers.
And because I keep in touch, I’m able to track closely the progress that each company is making. 2023 was a pivotal year for Steeped Coffee and I’d like to share an update below.
The biggest development at Steeped last year was its strategic move to outsource its manufacturing. This creates a hybrid business model that significantly reduced Steeped’s overhead, dramatically improved gross margins, and will enable the company to scale production rapidly going forward.
This transition to outsourcing production was always part of the plan. I remember this from my very first meeting with the CEO back in January 2022.
Previously, Steeped was doing all its own manufacturing in its California facility.
As a small, early stage company at that time, this was a necessity. It had to both master its technology related to sealing and packaging while the initial production volumes were low. And once Steeped’s volumes became large enough, it enabled the switch to outsourced production.
The advantage of outsourcing production is a radical improvement in gross margins. Back in 2022, when production was smaller and in house, gross margins were actually slightly negative.
With this switch to outsourcing, they have jumped to almost 40%. And as production scales, its gross margins will improve even further.
Another major development was expanding Steeped’s own distribution channels. And to that end, Steeped made two big moves to increase its distribution reach — which will ultimately drive sales growth.
For starters, Whole Foods is now selling Steeped Coffee directly in its stores under its own brand. I was very excited to see this happening, and in fact I travelled to a few Whole Food stores in my area to confirm the products were on the shelf.
Here’s what it looks like:
The Whole Foods brand is “Steeped Coffee,” because it literally becomes steeped coffee when it is used.
And if we look at the back of one of the single-serving packages, we can see a Steeped logo on the bottom of the package.
Whole Foods has attached its own name, image, and likeness to Steeped’s coffee packaging, and it is doing so with Steeped’s name co-branded right there on the label. This is great for Steeped’s distribution, as Whole Foods is a name and brand that its customers trust.
This allows Steeped to piggyback on the trust and goodwill that Whole Foods has spent decades building with its customer base.
And Whole Foods isn’t the only big name that Steeped inked a partnership with last year. The company is now working with Hilton Supply Management (HSM), as well.
HSM is the company that handles logistics for the Hilton chain of hotels. In other words, this is the group that negotiates group pricing on behalf of the entire ecosystem to help streamline their decisions, like deciding what coffee gets placed on the counter in each and every hotel room across Hilton’s massive ecosystem.
Per the deal, over 11,000 Hilton-related hotels and properties will have the option to put Steeped Coffee in their rooms at pre-approved special group pricing. This could be a huge source of recurring revenue for the company.
Steeped has also made huge progress in its hospitality vertical already, with an impressive portfolio of properties. Here are a few of those the brands they are already servicing:
And that means the next time you stay at one of these hotels in the image above, or in at a Hilton-related property in the future, keep an eye out, you very well may find Steeped Coffee in the room waiting for you. Talk about a milestone.
That said, Steeped’s distribution doesn’t rely exclusively on third parties like Hilton or Whole Foods. Far from it.
Steeped’s e-commerce outlet enables direct-to-consumer sales in a streamlined and secure way. Consumers can go to steepedcoffee.com, place an order, and have any of Steeped’s incredible in-house or marketplace roasts delivered right to their door.
The e-commerce site allows people to set up recurring orders on a subscription basis as well — so that nobody ever runs out of their favorite morning coffee.
What’s more, Steeped has transformed its e-commerce operation — from a site that sells the in-house Steeped Coffee brand… into a wide-reaching platform that features top-tier coffee brands utilizing Steeped’s proprietary packaging and brewing method.
In other words, Steeped is transforming into a true marketplace for coffee enthusiasts around the world. It doesn’t just sell its own coffee. The platform features a wide range of partners who utilize Steeped’s method for their own coffee.
This image gives us just a snapshot of the different roasters partnering with Steeped:
This is a great strategy. It’s all about making Steeped Coffee the one-stop shop for coffee enthusiasts by offering a much broader product range — but all featuring Steeped’s single-serve brew method.
Steeped is bringing more and more of their top Licensed Roaster-brands that they package for, directly to their marketplace as well as into other verticals.
In addition, operating the e-commerce business as a platform reduces direct competition, lowers costs, and provides exciting promotional opportunities throughout the year.
And that’s not all. Steeped also has the ability to do private label packaging with larger corporate companies, as well. Here is an example of a private label pack done for the Celebrity Chef, Curtis Stone, who is one of the top sellers on the HSN:
Just like we saw with Whole Foods, producing private-label coffee like this allows Steeped to tap into existing brand awareness and consumer trust, which would otherwise take years to build.
Put it all together, and many pieces of the puzzle fell into place for Steeped Coffee in 2023.
The company is set up to execute its growth model going forward.
It might sound odd, but I like to think of Steeped Coffee as a technology platform for superior single serving coffee.
This is why it’s intellectual property portfolio is so relevant to the overall investment thesis for Steeped.
Consider this:
Steeped’s filter and packaging technology, combined with its process for manufacturing, are the reason that its coffee tastes so great. So it’s no surprise that Steeped has been strategic in establishing its patent portfolio.
Steeped’s patents in the U.S. are still pending, but the important part is that it has a 2017 patent priority date. It has 4 international patents already out of 45 filed patents.
Steeped’s intellectual property (IP) is a big part of its strategy. After all, if it owns the patents that make fantastic single serving coffee, competitors will be forced to license the technology from Steeped, or acquire the company outright.
And in 2023, arguably its most important hire was the former general counsel for Keurig Dr. Pepper. I can’t imagine a better fit for someone to oversee and leverage Steeped’s IP portfolio.
The last Steeped Coffee round in July of 2022 was at a pre-money valuation cap of $33 million.
Steeped is currently gearing up for an institutional round with venture capital firms in the second half of this year. So this is the last chance that us normal investors will have to invest in Steeped.
Steeped Coffee is currently conducting a Regulation Crowdfunding (Reg CF) round to raise up to $5 million in growth capital. We can think of this round as a bridge to a much larger institutional round — probably about a $10 million raise later this year.
The great thing about a Reg CF raise is that it is open to regular investors — regardless of accreditation status.
And that’s certainly the case with Steeped Coffee. Anyone investing in this Reg CF round can do so at a $38 million pre-money valuation, which is slightly higher than the July 2022 round. And the minimum investment size is just $100. If Steeped raises the full $5 million in this round, its post-money valuation will become $43 million ($38M + $5M = $43 M).
Investors can think of the pre-money valuation as their cost basis. For example, if we invest in Steeped at $38 million and the company gets acquired for $200 million, we’ll net a return on our investment of 426%.
Steeped is already in discussions with venture capital firms for a Series A round later this year. The firms are all strong names in the consumer product goods (CPG) venture capital space, and include the venture capital arms of major CPG companies in the coffee industry.
There are some useful metrics for us to use when we think about what an institutional round will mean for Steeped. Most VC’s like to take about 20% of the company on a Series A round. So if we assume a $10 million raise, that implies a $50 million pre-money valuation (and a $60 million post money).
We have no way of knowing… as each deal is different and will depend on Steeped’s growth trajectory through this year and forecasts for next year. But these general metrics can still be useful guides for us as investors.
Either way, that institutional round will lead to higher valuations for Steeped Coffee. And it will provide Steeped with the capital it needs to scale its sales and marketing staff to drive consumer awareness, adoption, and ultimately massive sales — just like Keurig did as a young company.
As we look at 2024, not only will Steeped have a record year in terms of revenue — currently forecast around $5 million — it will have a record year in terms of gross margins. And I expect that Steeped’s revenues will more than double in 2025 compared to 2024.
When I look at Steeped, I see a company that has already found its product market fit, mastered its production technology, protected that technology with patents, advanced to its outsourced manufacturing model, and is now ready for accelerated growth.
Steeped Coffee is at an inflection point and is about to breakout. It is having discussions with a large number of grocery chains, brand name boasters, hospitality companies, airlines and others.
The hospitality category is probably my favorite. It is the most obvious vertical for Steeped. I travel with Steeped Coffee bags because most hotel coffee is so bad in the mornings. Hotel chains will save money not needing a coffee maker in the room, and the quality of the coffee will dramatically improve.
And the great thing about hospitality or airlines is that it will expose consumers to Steeped Coffee. It’s like free marketing.
Below gives us an idea about how large the impact of just a single deal will be on Steeped’s business. Just imagine what will happen when Steeped signs up two or three of them…
One of the great things about investing in high-growth, consumer products companies that have strong differentiation is that they become very attractive acquisition targets once they reach scale.
Beverage companies tend to get acquired in the range of 18-20 enterprise value to EBITDA (EV/EBITDA). So let’s say in a few years’ time that Steeped Coffee is generating $10 million in EBITDA, it would probably be acquired for around $200 million.
An early acquisition like this would bring a fantastic return for investors in this round. Ideally, we’d like to see Steeped Coffee remain independent and continue to grow and wait for a much larger acquisition… or preferably become the giant in single-serving coffee. In that case, the returns would be extraordinary.
For example, if Steeped Coffee were acquired at a $1 billion valuation, that would deliver 26X returns for this round, and 30X returns for those that invested in the July 2022 Reg CF.
And for those investors who already invested in the July 2022 round, I do recommend adding to your position in this raise. It’s a strategy that I often use in my own private investments. If I invest in a pre-seed round and see that the company has made great progress and reduced risk, I often invest in the next round when possible.
When a company has made great progress, and reduced some more of the risk, and demonstrated their go to market strategy, my confidence increases in the team and the investment opportunity. That’s what I’m seeing with Steeped Coffee now.
Action to Take: Invest in Steeped Coffee’s Reg CF offering on Republic at the following link: https://rep.pub/steeped
And after that, I hope you can sit back, relax, and enjoy a great cup of Steeped Coffee.
Jeff Brown w/ Joe Withrow
[NOTE: Investing in early stage private companies has a high risk/high reward investment profile. Private investments are not liquid. It is important to never invest money that you can’t afford to lose in a single deal. Establishing a portfolio of high-quality private investments is recommended to improve overall portfolio performance for private investments.]
Disclaimer: This research shall not constitute an offer to sell or the solicitation of an offer to sell any securities. Brownridge Research is an independent publisher of investment research. Brownridge Research, Jeff Brown, or Joe Withrow do not receive any form of compensation for recommending Steeped Coffee as an investment.
