Nikhil Arora and Alejandro (Alex) Velez are two recent UC Berkeley grads who grow mushrooms. Go ahead and snicker. Indeed, when they first experimented with growing mushrooms in recycled coffee grounds, plenty of naysayers might have thought they were, well, hallucinating.

But the success of their three-year-old company, Back to the Roots, is no illusion. More than 1,000 retailers nationwide carry their grow-your-own mushroom kits—pearl oyster mushroom spore packed in recycled coffee grounds from the ubiquitous West Coast coffee house Peets Coffee and Tea.

"They're gourmet, and they're by far the easiest and fastest to grow," says Arora. He says that the company is on track for $5.4 million in revenue this year, with distribution in Whole Foods, Safeway, and Home Depot, among other retailers.

Arora and Velez got the idea in class, when a professor started taking about how agricultural waste streams, like coffee grounds, could be used to grow mushrooms. They teamed up and decided to give it a go. With grounds collected from campus coffee shops, 10 paint buckets from an Ace Hardware store, and mushroom spore donated by a mushroom guru whose TED talk they found online, the partners started their experiment. Nine of the buckets were duds, but the 10th miraculously sprouted a full crop.

Chez Panisse Says "Yum."

Arora and Valez took their harvest to the best restaurant in town: Alice Waters' Chez Panisse. A thumbs-up from the celebrity chef and a $5,000 grant from Berkeley gave them the courage and the working capital to approach Whole Foods. By early 2010, Back to the Roots was producing 500 pounds of mushrooms a week. "We were in Whole Foods and in farmers markets," says Arora, "and along the way, we heard from our community that they'd like to grow the mushrooms themselves."

That's when Arora and Velez made a crucial pivot: Instead of just growing mushrooms, they'd make a mushroom growing kit. The shift opened the way for more visible branding, and new market opportunities. The company's kits recently landed on the shelves of Home Depot, and they're also being sold through school fundraisers and on Home Shopping Network. "Now, we're getting set to launch our new packaging redesign," says Arora. "We're embedding vegetable seeds directly into the corrugated packaging." Peets, which actually pays Back to the Roots to collect its coffee grinds, puts a $2 coupon in every kit.

..Oh, and It's Urban Revitalization, Too

The company now employs 28 people at its urban mushroom farm in West Oakland. And more green products are in the works. "Our own waste, the leftover coffee grounds mixed with mushroom roots, turns into a premium soil amendment that we sell to local nurseries," says Arora. "The business model allows us to make revenue off collecting the waste, growing the mushroom, and then selling our own waste."