23.5 Degrees: the world’s first Starbucks franchisee that crowdfunded to a 9x exit

Disclaimer: Unless noted otherwise, views and analysis expressed here are the author's own and based on public sources. The article is intended for informational and entertainment purposes only. This is not financial advice. Please consult a professional for investment decisions.

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Can you build generational wealth as a franchisee? Better yet, as a Quick Service Restaurant (QSR) franchisee? 

Until about a month ago, our knee-jerk reaction would have been…no way! Both the QSR and the franchising categories are frowned upon by the HoldCo community because, frankly, they are full of garbage businesses. 

But look closely. There is opportunity - particularly in the UK.

Wingstop’s UK franchisee exited for £400M+ ($540M+) - 6 years after opening its first outlet. Across the country, amateur landlords are ditching buy-to-lets in favour of McDonald's franchises.   

Today, we are bringing you the incredible story of 23.5 Degrees: the UK company that landed Starbucks’ first ever franchising gig in 2013. 

In the decade that followed, 23.5 Degrees led by its founders Anil Patil and Mark Hepburn (CEO), grew from 1 store to 113, and from 0 revenue to £100M / $130M+. Mark scaled fast by a) selectively M&A and b) going all-in on Drive Thru stores. Such stores are cheap to build and cheap to run, but with consistent footfall due to being located on major highways.     

23.5 Degrees was so successful that it ended up being acquired by Starbucks in 2024, for an estimated $180M. The clients of Connection Capital, the HNWI syndicate that backed 23.5 Degrees’ first institutional round, achieved 9x MOIC.

At this point, you are probably curious how much the management made. And why the mighty Starbucks needed a startup’s help to expand in a market as thirsty for takeout coffee as the UK. We have got all the answers! 

Read on to learn: 

1. How a British startup became the mighty Starbucks’ first ever franchisee

2. The playbook 23.5 Degrees used to scale from 0 to 100+ stores & £100M+ revenue

3. How much 23.5 Degrees’ shareholders and management made upon exit to Starbucks

1. How a British startup became the mighty Starbucks’ first ever franchisee

23.5 Degrees is the brainchild of Anil Patil, a lawyer-turned-franchising whiz. Previously, Anil and his wife Astrid had built and sold an 18-site Domino's Pizza franchise in the UK. For the coffee venture, in 2012 Anil teamed up with Mark Hepburn, a franchising pro with a 25-year track record of working with the likes of Burger King and KFC.

The timing was impeccable. According to Anil, initially Starbucks wasn't too keen on franchising, reflecting Howard Schulz’s belief that the “franchisees are middlemen who would stand between us and our customer”. 

Probably true, but… Sometimes even ingrained beliefs take a back seat when a compelling opportunity arises.   

Let’s travel back in time, to the early 2010s Britain. The economy was sputtering in the aftermath of the global financial crisis and the government imposed austerity. Unemployment was running at 8%. 

You couldn't tell this by looking at the red-hot coffee market though! 

Between 2008 and 2018, UK coffee consumption surged from 70M to 95M cups (source), a CAGR of 3%. The out-of-home segment grew even faster, as evidenced from the near-doubling in the number of coffee shops between 2009 and 2019 (source).   

The multinational coffee giant Starbucks was mesmerised by the opportunity - but grew increasingly frustrated by the incessant bashing from the British press and the parliamentarians over allegations of underpaid tax. There are two sides to each story though, as Starbucks’ parliamentary testimony from 2013 shows us:

Meanwhile, the British public everywhere - not just London and the major cities were longing for the Starbucks experience. 

And so, in 2013, the British startup 23.5 Degrees became Starbucks’ first franchisee ever. What got Starbucks over the line was a combination of:

• Anil’s and Mark’s credentials - and their willingness to take on risk

• The pressure from the Starbucks HQ to grow faster in their #1 EMEA market

• The success of the franchising model at Starbucks’ competitors Costa Coffee and Café Nero  

23.5 Degrees was  incorporated in 2012 and store #1 opened the following year in Hampshire in the south of England, where Mark and Anil both live. The initial investment was £2.5M equity, plus a £3.8M debt line from Santander.  The name was a nod to the Tropic of Cancer and Tropic of Capricorn, between which lies the “Coffee Belt” — the region around the equator where coffee is traditionally grown (between 23.5°N and 23.5°S latitude).

2. The playbook 23.5 Degrees used to scale from 0 to 100+ stores & £100M+ revenue

Encouraged by the early success of the Liphook site, in short order the Company set up shop in the nearby cities of Portsmouth, Bournemouth, Farnborough, Trowbridge and Southampton (Trivia: in 2021, Alex took an investor call at a Starbucks in Southampton when his family was visiting the nearby Peppa Pig World).   

By summer 2015 - 3 years into existence - the Company was operating 14 Starbucks stores across southern England. Sales were growing 100% YoY. Anil and Mark had another 16 stores in the pipeline. The only obstacle was capital. The answer was crowdfunding.   

According to the company’s advisor Meridian Capital, the raise was far from a walk in the park as some investors struggled with franchising as a business model. 

Enter Connection Capital - an investment syndicate for high-net-worth individuals. Within 6 days, Connection raised £5.6M from 75 investors: £5M in preferred equity and the rest in loan notes at 8%. On top of that, RBS (now NatWest) provided a £4.3M debt facility. 

23.5 Degrees used the funding to acquire 16 sites from Starbucks - doubling its network overnight, to 30. After that, it never bought a store again. Instead, it kept opening new ones. 10 to 15 per year, like clockwork.  

Now, remember Starbucks’ complaints about the competition and the high property costs? How did an upstart operator like 23.5 Degrees succeed in going from 0 to 100+ locations and £100M revenue given these formidable challenges? 

The answer is threefold. 

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