Why we invested in Ume Tea, a fruit-based bubble tea chain
“Bubble tea? What is it?”
“Investing in bubble tea? Why? Why not AIGC?”
“Bubble tea shop? How can it scale to be a VC-fundable business?”
I loved it when my friends got curious about why we invested in Ume Tea, a bubble tea chain based in the San Francisco Bay Area.
At iFly.vc, we are passionate about technology innovation such as the latest trend in AI, but we are very selective when it comes to where and how we invest. Seeking value in non-obviousness is the hard yet rewarding part of venture investing. Bubble tea does not carry the level of buzz as AI but it is where we see a tremendous opportunity in the US for both entrepreneurs and investors.
In this post, I would like to share iFly.vc’s thoughts on our investment in Ume Tea.
Part 1. F&B service (Food and beverage services) [1] has a lot of room for innovation and growth
The American consumer base for F&B service has rapidly evolved.
Cross-culturally and ethnically inspired food and beverage recipes have become an important growth driver. While restaurant chains like Panda Express and Chipotle have achieved tremendous success, many new businesses have been on the rise in recent years. Chinese Xiao Long Bao, Japanese Ramen, and Korean BBQ have become increasingly popular among American consumers.
Gen Z has become a key driver for innovation in product and marketing.
Representing 21% of consumers in the United States, Gen Z enjoy embracing new products and sharing their experiences on social media such as Instagram and TikTok. This has enabled rising businesses to effectively connect with customers outside the traditional physical or digital venues.
Social media has brought new implications for the choice of location.
“Location, Location, Location!” The choice of location has always mattered a lot to brick-and-mortar businesses. The best location certainly brings in lots of foot traffic, however, one should bear in mind that such a location also means a high rent or fixed cost for the operation. In recent years, we have seen evidence that social media can bring in foot traffic to locations traditionally with less visibility.
The high failure rate of F&B service and population migration have opened room for next-generation entrepreneurs
According to the latest data from the National Restaurant Association, only 20% of F&B services can succeed and last. The rest struggle and close, due to the downward pressure on the economy, the phaseout of individual underperformers, the retirement of aging owners and operators without succession, and so on.
Meanwhile, many Americans have relocated from top metropolitan areas like New York and the San Francisco Bay Area to other fast-growing hubs such as Austin, Denver, Salt Lake, Atlanta, Miami, and so on. The population growth in these cities has created the demand for more F&B services.
The above change has created physical room for the next-generation entrepreneurs to test the market and expand.
More and more tech-savvy founders have entered the market and deployed tech-enabled tools to improve operation efficiency
Some of the founders in the F&B service space were previously engineers. Whether built in-house or sourced off the shelf from SaaS vendors, various tech-enabled tools have been adopted by these founders to streamline the end-to-end operation process and constantly improve efficiency.
The bubble tea market has grown fast
We estimated that the annual US bubble tea sales have already exceeded $3 billion. The import value of boba, a key ingredient, from Taiwan grew 3x in two years. [2]
Bubble tea’s customer base spans a broad range of demographics in every metropolitan area, thanks to multiple noteworthy growth drivers described above, including 1) Gen Z’s growing demand for new and innovative consumer products and experiences, 2) consumer’s overall preferences for innovative food and beverage, 3) growing cross-cultural influence that infuses Asian elements in North America, 4) growth in the cross-border supply chain, and 5) social media as an influential information dissemination channel.
Part 2. Ume Tea
Ume Tea (http://www.umeteaca.com/, https://www.instagram.com/umetea/)is a fruit-based bubble tea chain founded in the San Francisco Bay Area.
High-quality and delicious fruit-based bubble tea
Rather than sell old-fashioned tapioca milk tea overloaded with sugar, Ume Tea’s popular menu has a variety of fruit-based recipes. The team is advised by product experts from top players in Asia and has created innovative and delicious recipes for American taste buds.
Gen Z-oriented brand image boosting both customer excitement and sales traction
Ume is very popular among Gen Z customers. The company’s brand has generated significant online excitement on Instagram and TikTok, which led to very effective in-store conversion. The branded merchandise has also gained lots of popularity and sales traction.
Passionate founding team with an engineering mindset and deep consumer insights
Jiachun (“Summer”) Li, a mother, and Ume’s CEO, quit her mechanical engineering job in San Francisco to focus on building Ume, and was followed by the other three co-founders. Together, they have built their core competencies in product development, cross-border and domestic supply chain, social marketing, in-store management, data analytics, and so on. The engineering mindset has equipped the team with SOPs and tech-enabled solutions to scale. Their deep insights have also allowed them to connect with their customers very well.
Profitable growth since Year One
Needless to say, we were impressed by the Ume team’s execution. Summer invested her savings in Ume’s first store in 2019. Since then, the bootstrapped business has used its profit to grow to multiple locations. The latest store opening just before iFly.vc’s investment took 3 months to reach the payback.
iFly’s value-add earned us an exclusive opportunity to invest
A year ago, the Ume team set out to raise its first round of financing to accelerate growth with the help of a true partner. Multiple referrals pointed the team to iFly.vc. Since the very first meeting at the beginning of 2023, the iFly.vc team has proved to be a value-add partner and proudly became the first and only VC investor of Ume Tea. In Q2, iFly.vc and Ume closed the company’s first-ever financing round. Since then, Ume Tea has recruited new talents, opened new stores, upgraded various tools, and continued to stay profitable.
Part 3. Additional thoughts on VC investing in the F&B service space
F&B service may appear daunting to entrepreneurs and investors who have been used to working on the Internet and mobile devices in the past two decades. Therefore, we have noticed a few misperceptions and would like to address them here.
Misperception #1. F&B service has no barrier to entry
The barrier to entry appears to be relatively low. I am bold enough to say that any reader of this newsletter and I can work together and launch a new restaurant or bubble tea shop. However, it would be very hard to make it profitable and scalable at a reasonable growth rate.
In reality, a winning team must develop a holistic management skillset that covers recipe, production, supply chain, in-store experience, tech stack, and last but not least, people management.
Misperception #2. F&B service is hard to scale
In reality, many restaurants and coffee shops have successfully scaled to become enormous chains and household brands. The question is not about whether F&B service can scale but rather about how it can scale.
A tasty recipe alone is never enough. Scaling an F&B service requires the standardization of end-to-end production so that the product quality and customer experience do not depend on individual service providers. This is one of the common topics among founders who aspire to build the next F&B service chain, which we fully agree with.
From our perspective, the human factor is the most critical but often underappreciated in the effort of scaling any F&B service. What is common among successful F&B service chains is how the founders have grown themselves as business leaders (beyond their original passion as foodies, chefs, or baristas) and how they have grown their team members.
Misperception #3. F&B service investment is hard to exit
Many F&B service companies have gone public or been acquired by PE funds or holding companies. The path to exit is clear, as long as the business is solid.
Even though the IPO market in 2023 has reached its low, CAVA, the Mediterranean fast-casual restaurant chain, had a successful IPO in June (NYSE: CAVA) and reached a market cap of $4.7 billion as of the writing of this post.
The mid-market M&A is also a viable path to exit for F&B service businesses. When I worked at Formation 8, I worked on a potential investment in Blue Bottle Coffee in 2014–2015. There were many reasons I felt excited about the company. As the company was at its growth stage and also well received by other investors, the valuation reached a level that would not work with my investment return model. My colleagues and I decided not to outbid the valuation and walked away. When Blue Bottle Coffee was acquired by Nestlé for a deal size of $700 million (Source: Pitchbook) in September 2017, it generated an outsized return for its early investor True Ventures and the lead partner Tony Conrad who made the first investment in October 2012.
Part 4. Onward to 2024 and beyond
The Gen Z love for bubble tea remains strong, and Ume Tea finds itself well-positioned for continued growth. The team continues to receive positive feedback from customers, marked by long lines extending around the block during every opening, frequent purchases of loyal customers, and strong operation and financial metrics. Looking ahead to next year, they are eager to leverage key learnings to grow to the next level. At iFly.vc, we are excited about embracing the shared journey with the Ume team in the years to come.
[1] Food and beverage services or F&B service is a professional industry that includes restaurants, bars, cafeterias, canteens, food courts, and other food- and beverage-based hospitality businesses, which is classified as 72251 according to the North American Industry Classification System (NAICS).
[2] Source: Bloomberg, US International Trade Commission, UN Comtrade database.