The story of Blue Bottle Coffee and how a broke clarinet player used $15,000 in credit card debt to start a 0 million business.

For as long as he can remember, James Freeman's two true passions in life have been playing the clarinet and barista-ing.

Today, Freeman is best known as the founder of Blue Bottle Coffee, the premium coffee chain with the simple, yet stylish, blue logo that adorns more than 75 upscale cafes around the world where you can buy a roughly $5 drip coffee made from high-quality single-origin, freshly roasted artisanal beans Blue Bottle was valued at over 0 million when Swiss food conglomerate Nestle purchased a majority stake in the company from Freeman in 2017.

But before he started the company that will eventually roast over 2 His hobby of roasting fresh coffee beans has turned into a business that will generate million this year while he is still a struggling classical musician.

For a long time, Freeman had been "fascinated" by coffee, and he would drink nothing but the newest brew. He believed that most commercial coffee chains over-roasted their beans, so he began roasting beans himself. This entailed purchasing raw, green coffee beans and heating them at around 500 degrees Fahrenheit.

In 2002, Freeman was eking out a living playing the clarinet in regional orchestras across Northern California, making just enough money to cover his expenses. In his spare time, he roasted raw coffee beans in the oven of his Oakland, California, apartment to satisfy his craving for freshly brewed coffee. Freeman started to consider the possibility that he, as a dedicated coffee snob, could find success by marketing and selling his idea of the ideal cup of coffee to other caffeine addicts. Friends warned him the coffee market was saturated, but Freeman saw that few Bay Area coffee shops advertised how fresh their beans were.

The author recalls a time when "one could literally go nowhere in San Francisco to get a bag of coffee with a roast date stamped on the back."

Freeman started ramping up his homegrown roasting operation by renting (for 0 a month) a 186-square-foot potting shed located near his apartment in Oakland's Temescal district where he could roast beans in 7-pound batches using an old Diedrich roaster he'd driven to Idaho to buy directly from the manufacturer He gave up on music to become a barista, and now he can be found at farmers' markets in and around San Francisco and Oakland selling freshly roasted beans and brewed coffee of his own roasting.

The Oakland potting shed where coffee was first commercially roasted by James Freeman.

Authorization: Blue Bottle

"There were moments of satisfaction in my career as a clarinetist, but they tended to be few and far between; so I saw coffee as a place, a little refuge, where I could work out the things I'm interested in, but also this opportunity to not play clarinet anymore." For example, "something that might pay my bills so I don't have to go to gigs," Freeman tells CNBC Make It.

Freeman was able to get by for a few years with his basic equipment and business plan, but he still had to pay for things like the coffee roaster, the potting shed, and a spot at farmer's markets to sell his coffee from the coffee cart. The price of the raw beans and the services of a local artist to create the brand's minimalist blue logo would add up quickly. Freeman claims he invested his entire life savings in the company. I put in everything I had, plus a couple credit cards, because clarinetists don't get rich. "

In all, that amounted to around $20,000, the majority of which was owed on two credit cards totaling up to $15,000.

How Blue Bottle Coffee went from a single coffee cart to a 0 million valuation

Freeman recalls the moment "very intensely and specifically" when he realized that word had gotten around about his new business. A large number of people were waiting to buy coffee from his Blue Bottle cart on a weekend in January of 2004.

The most devoted customers had been raving about it. He normally doesn't mind waiting in lines, but on this day "it was like a pretty crushing line, 30 [to] 40 people in line." Even though this was before the advent of social media platforms like Twitter, word eventually spread, and [I] remember thinking to myself, "Whoa, something happened. '"

To Freeman, this was a sign that he could be building something much bigger. About a year later, in what Freeman has called "a pee-smelling dead-end alleyway" in the heart of San Francisco, Blue Bottle opened its first permanent brick-and-mortar location in a small, converted garage. While Twitter has moved its headquarters a few blocks to the east, that location has remained open (and former Twitter CEO Evan Williams is rumored to be among the tech industry fans of Blue Bottle's coffee; he also invested in the company in 2014).

Although the company does not reveal its financials, Freeman points out that Blue Bottle's retail locations have consistently turned a profit since their inception. Freeman claims that he was cautious about expanding Blue Bottle because he lacked business experience, and that he made sure there was "money left in the bank account" at the end of every month. "

When asked how he came to this realization, Freeman tells CNBC Make It: So, if you don't know much about business, the fact that you assume you must generate revenue to cover expenses is a plus. "

A total of 18 Blue Bottle Cafes can now be found throughout the Bay Area, and in 2010, the chain finally made its way to New York City. Blue Bottle then opened its first cafe in Los Angeles in 2014 before expanding internationally a year later with a location in Tokyo (there are now 14 Blue Bottle cafes in Japan and the company opened its first South Korean outpost in April)

A total of $117 million was raised from various investors, including the previous CEO of Twitter, Google Ventures, Instagram's Kevin Systrom and Bono of U2, and financial institutions Morgan Stanley and Fidelity Management. Bryan Meehan, an Irish businessman, invested in Blue Bottle in 2012 and eventually became its CEO, paving the way for the company's global expansion and a subsequent majority stake sale to Nestle.

The rise of premium coffee options over the past decade has helped newcomers like Blue Bottle challenge established brands like Starbucks, and this has been a major factor in the company's meteoric rise from a farmers market coffee cart to an international coffee chain. You can get your caffeine fix at places like Peet's Coffee and even Dunkin' Donuts.

According to IBISWorld analyst Rachel Hyland, "third-wave coffee" roasters are comprised largely of smaller brands like Blue Bottle and other premium coffee chains like Intelligentsia, Stumptown, and La Colombe.

In an effort to make better coffee, a new movement has emerged known as "third-wave coffee. Contrary to "commodity" foods like apples or beef, "it's considered an artisanal food, like wine or craft beer," says Hyland.

Hyland tells CNBC Make It that when Blue Bottle opens a cafe in a new city, the company also invests in a nearby roastery, which is "environmentally friendly" and "helps the quality and the freshness of their coffee."

It's a subset of the retail coffee chain industry as a whole, which Hyland estimates to be worth over $50 billion in the United States alone. S 2019) a market that has expanded rapidly over the past decade as a result of rising demand for specialty coffee and the accompanying increase in consumer disposable income

Hyland, however, points out that Blue Bottle has found the most success to date in larger cities, where people may be more willing to pay more for a cup of premium coffee, than in smaller markets where companies like Starbucks and Dunkin' Donuts have long-established footholds. Two Miami locations were closed in February, just over a year after opening, with the company saying they wanted to "invest back in other regions." But some critics have pointed out that not every city or town has enough locals willing to shell out $5 for a cup of coffee, making it difficult for high-end coffee shops like Blue Bottle to expand into new locations.

Of course, most of Blue Bottle's premium coffee rivals are also charging bigger bucks per cup and younger consumers in particular are willing to dig deeper in their wallets for a truly high-quality cup of Joe (though, more than a few financial experts argue that buying expensive coffee is a waste of money) But according to Hyland, coffee consumption increases only when the economy is doing well. It's important to remember that it was only in the last ten years, after the U.S. S After the financial crisis of 2008, the economy began to recover.

That means Blue Bottle will eventually need to demonstrate it can cater to coffee drinkers beyond its core customer base. Freeman may view Starbucks and the other coffee giants as competitors, but he doesn't consider them to be Blue Bottle's main threat. To the contrary, he is more likely to view Starbucks as a role model for how it has paved the way for other coffee shops, such as Blue Bottle, to expand their reach and offer better quality coffee to more consumers around the world.

To paraphrase what Freeman says about Starbucks: "I think we have a lot to thank Starbucks for in terms of creating a market where people want to go out to coffee and feel like that is a fun and acceptable thing to do."

However, Freeman admits that the original inspiration for Blue Bottle was to provide a product that was different from the mainstream offerings at coffee giants like Starbucks and Peet's. Freeman claims those large corporations largely dictated the business models of coffee shops across the country when he first opened Blue Bottle.

Freeman says, "I wanted to do something different because..." "And I was advised by many people with many opinions that those differences were going to make me unsuccessful, when actually people were quite drawn to those differences—the difference in making coffee one cup at a time, the difference in not roasting things super dark." the difference that comes from steaming milk drinks on demand "

According to Freeman, "that made it slightly more labor-intensive, a little bit harder, a little bit more expensive." "[But] it was precisely those distinctions that drew people in." "

— With help from Beatriz Bajuelos for additional reporting.

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