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Changing the Look, Not the Brand

Thursday, July 5th, 2012

As seen on INC. 

Growing up we’re always told that it’s what’s on the inside that counts.  And while that’s certainly true with respect to personal integrity, I’ve learned that when it comes to beverages, if your label doesn’t catch peoples’ attention, they may not get the chance to taste what’s inside.  (Unless of course you have a sampling team in the store, which is still our primary marketing strategy.)

One of my favorite ways to test the effectiveness of our labels is walking into a store and seeing if I can spot our brand in a cooler in the back.  Our glass bottles definitely pass this test, and that’s one of the reasons we have no immediate plans to redesign their look.  But I often found that our PET bottles didn’t really stand out.  While we generally rely on our instincts, we recognized that it would be helpful to do more research before making such an important change.  So in 2008 we conducted a series of focus groups with both current and potential customers, so we could understand how consumers responded to our bottles alongside the competition.  The sessions, along with some other studies we conducted, reinforced the fact that the labels on our plastic bottles needed to more effectively communicate our authentic ingredients and taste appeal.

Read More: http://www.inc.com/seth-goldman/working-title.html

The Devil is in the Details

Thursday, July 5th, 2012

As seen on INC. 

Last month, I had the chance to speak to a room full of entrepreneurs and angel investors at the Bethesda Green Business Incubator about the dos and don’ts of raising money from “angel investors.” Here are a few highlights from my remarks.Many service-oriented businesses can be started with minimal start-up capital. But for companies selling a product, the money for inventory needs to come from somewhere. When we launched Honest Tea back in 1998, we got our first order for 15,000 bottles from the local Whole Foods region. We had a customer, but we didn’t have the cash on hand to buy the bottles, the tea, or pay the co-packer to make the finished product. So we raised about $500,000 from the only people who couldn’t say no – ourselves, our parents, my sister, and my co-founder Barry’s college friends. (Barry is 8 years older than I am, so his classmates had accumulated more wealth.)I’m not a lawyer, and you should consult one before raising investment funds, but it’s important to remember that there is a legal definition of an accredited investor, and any stock purchase agreement should take that definition into account.Once we got our product on the market and started selling, we needed more cash to expand our sales team and our inventory.

So, we started to raise money from people we didn’t know. We were approached by consumers who liked our products and wanted to invest. We also received numerous inquiries from prospective investors in response to media coverage. If there is a story, don’t forget to mention that you are raising money. Other investments were more creative. A PR/Design firm took their retainer in stock for a certain amount of time. I did speak to a few angel investment clubs, but they were not an effective use of my time.

So what are the main benefits of angel investors?

  • Cash. You need cash to grow your business and angel investors have it. It sounds obvious, but don’t take money from angels or investors unless you plan on giving it back.
  • Control. The terms are less demanding.  Angel investors are looking to have less control over your company than venture capitals or institutional investors regarding shareholder rights, governance, and decision making. They are around for the ride. Because Honest Tea raised funds from angels, our cofounder, Barry, and I were able to protect Honest Tea’s mission.
  • Angels can offer advice, experience, and support.
  • They have great networks, can serve as local cheerleaders for your product or service, and can help get you connected.

But there are tradeoffs: 

  • Angel investors take more time. Over the ten years that we raised close to $10 million in angel funding from 100+ investors, I easily had over 500 conversations with potential investors. Our time might have been better used raising that same amount from ten strong institutional prospects.
  • Angels may have less expertise in your industry. We were fortunate to tap into the local real estate network, but they didn’t have any beverage experience. They were a great source of cash, not beverage expertise. As the principals looked to diversify their portfolios, they didn’t have many contacts in the beverage industry.
  • When times get tough, there’s no guarantee that angels will pitch in to keep the lights on.
  • They can get cold feet – personal situations do change, divorces do happen…

Here are the Honest Dos and Don’ts:

Do’s

  • Clearly define expectations. Be very specific about shareholders rights, expected timeframes, and exit strategies. Know your industry so you set realistic goals. It’s always safer to be conservative and under promise.
  • Communicate frequently with investors. We sent quarterly updates on the good and the bad as well as industry-wide news.
  • Demonstrate your own commitment. Put skin in the game.

Don’ts

  • Never let an angel investor dictate terms. Listen to their feedback but don’t offer special status or authorize special shares. We only issued common stock to all investors for the first ten years.
  • Do not make sudden cash calls. If you know you’re going to need money, work on it ahead of time. No one wants to feel like they’re helping a sinking ship stay afloat.
  • Never get on a plane to meet an angel investorYou need money, but you are not desperate. If you put too much time into raising money from investors, you are probably not focused on the business.
  • Insist on meeting the principals, eventually. You need to know who is writing the check.
  • Don’t expect too much help with the business, aside from cash.
  • Angels can be distracting.  Don’t invest all of your time managing your relationship with angels instead of doing your job.

One of my favorite quotes from one of my favorite Honest Tea angel investors is:

“Lack of money is no obstacle. Lack of an idea is an obstacle.” – Ken Hakuta

It’s a reminder that while a CEO always needs to make sure the enterprise has enough money to keep the lights on, the best way to make sure there’s money is to sell your product or service.

Want to hear more? Check out this highlight video from the event:http://www.youtube.com/watch?v=MUn6IpiTe9o

The Last of the Tea Pluckers

Tuesday, June 5th, 2012

As seen on Huffington Post 

What’s the difference between an illiterate tea plucker and a Microsoft engineer? One generation. And Fair Trade funds.

This spring as I traveled through tea gardens in Southern India and Sri Lanka, I encountered what could be the last generation of tea pluckers. For centuries, tea leaves have been harvested by women who manually snap off the top two leaves and a bud at the top of tea bushes. The work is tiring, repetitive and doesn’t require a high school degree. All the tea pluckers I spoke with had left school by sixth grade or earlier, just like their parents, grandparents and great-grandparents before them.

But change is in the tea leaves.

After last year’s split between Fair Trade USA and their European parent, Fair Trade Labeling Organization (FLO), I decided to visit some of our suppliers so I could see first-hand the role that Fair Trade funds play in the communities we source from.

While India’s tea gardens have historically offered their workers relatively better employment conditions than those endured by surrounding subsistence farmers, Fair Trade tea gardens are raising the bar. In addition to providing working conditions that meet International Labor Organization standards, Fair Trade gardens allocate an additional royalty paid by brand owners (like Honest Tea) that puts the children of tea pluckers on a path away from the tea garden. Today Fair Trade certified tea represents less than one percent of global tea purchases, but in the U.S. it has been growing 38% annually for the past ten years, far outpacing single digit growth for the tea category.

In the Fair Trade gardens I visited, the children were required to stay in school through high school graduation. Fair Trade royalties subsidized the purchase of computers, books and even chemistry lab materials. Though the classrooms are crowded (40-45 students per room), the children have access to materials and facilities that would put many American schools to shame. Their economic motivation is clear. The daily wage for tea pluckers (mandated and enforced by state governments) varies from $1.75 per day in Northern India to $5.00 per day in Sri Lanka. By contrast, the starting salary for a computer engineer in Southern India is close to $150 per day.I asked dozens of high school students about their career aspirations. While engineer, doctor, astronaut and teacher frequently made the list, “tea plucker” did not. In fact, not a single student expressed an interest in staying on the garden, even as a manager.

I asked the owners of several tea gardens whether they were worried about educating themselves out of a workforce. They were confident there would still be tens of millions of people from poorer Northern India who would migrate to receive the relatively high wages and on-site health care. There are still several generations of agricultural workers to come, which is one of the reasons Honest Tea has decided to endorse Fair Trade USA’s Fair Trade for All campaign, with its commitment to expand the reach and impact of Fair Trade by expanding the kinds of growers who can be certified, without weakening the standards for working conditions or sales premiums.

Will the world of premium tea survive? While mechanical harvesters cannot operate on the steep hills where tea is grown, in many tea gardens the women are now using shears, a metal device that clips the top of the tea bush and collects the leaves, increasing their daily yield. Most processing facilities now have sorters and sensors that are able to separate and clip off the stems and twigs, tedious work that used to be done by hand. And tea buyers like me still end up with quality tea leaves

So as Fair Trade tea continues to grow, don’t shed a tear for the fading days of hand-picked leaves. But feel free to lose sleep over India’s next challenge — creating enough good-paying jobs to satisfy the rising expectations of millions of sons and daughters from the nation’s largest sector as they move off the fields and into the white collar workforce.

8 characteristics of Green Insurgents

Friday, April 27th, 2012

As seen on FORTUNE

Don’t be afraid to challenge the status quo — sometimes it works.

By Seth Goldman

FORTUNE — Last week I participated in a panel on Green Insurgents at Fortune’s Brainstorm Green conference in Laguna Niguel, California. My fellow panelists were Adam Lowry, co-founder and Greenskeeper of Method and Jason Graham-Nye, dad/co-CEO of gDiapers.

The discussion helped illuminate what it means to be a Green Insurgent, beyond of course the obligatory funky job titles, (according to this TeaEO). Clearly, it starts with offering products thatchallenge mainstream offerings. Method hijacked the stale category of soaps and cleansers by combining fashion and style with high-performing, eco-friendly products. gDiapers changed the waste stream of diapers by offering a flushable alternative to a category that is the third largest contributor to landfills around the world. And my company rose to prominence by offering lower-sugar organic drinks first for adults with Honest Tea, then to the broader population, with Honest Ade and Honest Kids.

Once our products were launched, we each grew primarily through grassroots marketing. While it might be quaint to think this was a strategic decision, none of us had the budget for a real advertising campaign. As a result, we grew through word-of-mouth. Consumers adopted us as their own and became advocates for us – forcing our products on their friends, and occasionally harassing store personnel who failed to restock our products.

We’ve each taken the special relationships with our consumers beyond just the transactional relationship of selling and buying product. For gDiapers an office open house turned into a slumber party, with moms and babies, flying into Portland, OR from all over the country to celebrate their shared commitment to a lighter environmental footprint. For Method, it means a daily dialogue with thousands of their most passionate advocates, the People Against Dirty. Recently, one advocate decided the perfect place to propose to his girlfriend would be in Method’s offices in San Francisco, in front of the whole company (he did, and she said yes!).  For Honest Tea, our Great Recycle in Times Square on April 30 (complete with 30 foot high recycling bin) will engage thousands of consumers in NYC and around the country as we seek to boost recycling rates.

Not coincidentally, we were all supported by angel investors during our start-up phases. This kind of patient, non-invasive capital helped give us the confidence to go out further on limbs, whereas the general trend of institutional investors is to steer management toward more conventional paths to growth. Honest Tea would have grown faster if we had created sweeter and cheaper recipes, but because we stuck to low-sugar, organic formulations, we developed a meaningful point of differentiation on congested beverage shelves.

We have all served as unofficial R&D units for our competitors. Method has seen a wave of conventional cleaning companies enter the green space, and the entire laundry detergent category has now concentrated to a greener format in part due to method’s innovation. gDiapers started the idea of designer nappies (as the Aussies call them), and saw Pampers and others follow its lead. And CapriSun lowered its average calorie count from 100 to 75, and supported drink pouch collection brigades, once our innovations started to gain traction. We all agreed that mimicry is not only a form of flattery, but consistent with our broader goals of steering our industries toward a more sustainable path.

So that raises the question, if the larger companies copy or (in Honest Tea’s case) acquire us, can we still be considered insurgents?  Yes, as long as we keep innovating. A few years after Honest Tea became the first brand to launch an organic bottled tea, other large companies started including organic ingredients in their drinks. Rather than wring our hands, we were expanding our portfolio to include Fair Trade ingredients. This year we are raising the profile of new ingredients, such as tulsi, known as India as holy basil, which makes an amazing tea.

We often see large companies dip a toe in the water to explore what we’re doing, but they often give up when the going gets tough… insurgents don’t bow out so easily, partially because we don’t have a conventional business to fall back on, but mostly because we share a passion – we’re not just out to capture a market opportunity, we actually believe that we are changing the world in our own modest (or not so modest) way. Each of us has stared business bankruptcy (closely tied to personal bankruptcy) in the face, but were unwilling to let our dream die, and managed to scrounge up enough capital to keep the lights on.

Finally, insurgents still bring a by (almost) any means necessary mindset to make things happen, and our entrepreneurial roots run deep. Although the conference was held at the beautiful Ritz-Carlton overlooking the surfers on Laguna Beach ($347 per night), I opted for the Econo Lodge down the road ($83 per night). Honest Tea may be part of Coca-Cola (KO), but I still run the enterprise like I’m spending my own money.

Seth Goldman is President and TeaEO of Honest Tea, the company he co-founded in 1998.

After You Close a Deal

Thursday, June 30th, 2011

As seen on INC. 

In March we closed our transaction with Coca-Cola.  I can’t say that I expected any of this to happen and so occasionally I felt as if I were watching things transpire, then I would realize that they were actually happening to me.  It’s been an exciting, intense and occasionally surreal time—and that’s not even including my son’s participation in the Maryland State Wrestling Tournament, which was a source of additional stimulating moments. Here are some of the interesting experiences I had post-transaction:

The Media Announcement.  We held a press conference at our office to announce the transaction.  I was joined by my co-founder, Barry Nalebuff, Mike Ohmstede from Coke’s Venturing & Emerging Brands unit, and Montgomery County Executive Ike Leggett.  We also invited representatives from our community partners, such as Bethesda Green, Bethesda-Chevy Chase High School, the Boys & Girls Club of Montgomery County, and City Year, Washington, D.C.

I noted that while the event was an important day for our shareholders, who are getting a nice return on their investment, it was also an important day for our stakeholders—community and national nonprofit partners, who we will continue to invest in through our continued presence in the community.  It was also exciting to unveil the design for our new PET bottle, which will feature the words “Est. Bethesda, MD 1998″ on the bottom.

At the conclusion of the press conference, we unveiled a big, red, environmentally-efficient, co-branded vending machine half-filled with Coke drinks and half-filled with Honest Tea products.  Despite the fact that we’ve been working with Coke since 2008, when I pushed the buttons to order a drink, it was the first time I’d seen an Honest Tea bottle come out of a Coke machine.  As the bottle emerged from the machine with that characteristic thud, I recalled all of thousands of Coke machines I’ve spotted around the world, and at that moment the scale—of what we are doing, and what we can achieve—really hit home.

My Final Investor Call.  Immediately after the press conference, we convened a teleconference for shareholders. We announced the transaction to them, explained the timing, shared calculations for the return on their investment, and then opened up the floor for comments and questions. After some questions around logistics of the transaction, we heard from shareholders who not only shared their thanks, but reminisced about the early days with Honest Tea, and how proud they were to be part of the experience. We’ve been holding annual calls with our investors ever since we started, so it was bittersweet to realize that this was the last official conversation we would have with them. We thanked them for their confidence and their capital, and I was proud (and relieved) to have been able to deliver a return on both. One of our longest-standing investors noted that he invested a portion of his kids’ college money in Honest Tea eleven years ago, and his kids are all now in college, so the timing was perfect for him.

The Celebration.  That night we had a celebration at Redwood, a restaurant down the street from our office. We welcomed investors, employees and several folks from Coke who helped close the deal. At the party we gave toasts, thanked the employees and investors who made it happen, and showed a video that captured many of the highlights and of course some of the low points of the past thirteen years. Barry noted that at a time when there are contentious changes of leadership going on around the world, he was stepping down as chairman without protest because he was confident that Honest Tea is in good hands.

I was delighted that my parents could join the rest of my family at the celebration. Along with Barry’s parents and my sister, they have been some of the company’s most reliable investors, so it was very meaningful for me to be able to celebrate the moment with them. Three years ago when I had talked with my Dad about taking on an investment which might eventually mean losing control of the company, he was concerned because he said, “I see how happy and fulfilled you are building this thing and I’d hate for you to lose that.”  So it was especially nice for him to know that I am still excited about leading the enterprise.

The Corporate Visit.  The next morning we got up early to fly to Atlanta to introduce Honest Tea to all of the employees at Coke headquarters.  When I walked out of the airport I was met by Patrick and Matt, our two field marketing geniuses, who had arrived in Atlanta the night before. I was surprised to see them driving an Honest Tea vehicle, since they had left the closing celebration in Bethesda the night before, heading for the airport.  It turns out they had stayed a bit too long at the party, were likely to miss their plane, so they drove overnight (8 hours) to Atlanta! Though I was concerned for their safety, or at least their sanity, it was good to know that their passion and commitment to the brand was just as strong the day after the transaction.

The front entrance to Coke’s headquarters feels a bit like one of Washington, D.C.’s national monuments—a big marble atrium, with flags around the perimeter.  It was surreal to walk in and see Honest Tea’s flag displayed front and center. Shortly after I walked in, I was escorted into a meeting with the senior management of Coca-Cola North America.  Sandy Douglas, the president welcomed me, “Here’s our TeaEO” and I received a very warm ovation.

Our team conducted a sampling event for Coke employees—we gave out 7,000 bottles of our Half Tea and Half Lemonade, hosted a tea-brewing session, and I gave some brief remarks.  I highlighted our entrepreneurial roots, our organic ingredients, the passion of our employees and the growth opportunity that we are excited to share with Coke as we spread organic and low-sugar drinks across the country. We closed the brief ceremony by ringing a gong to officially finalize the transaction.

TV Interviews and a Trade Show.  The next week was highlighted by a media tour in New York and the Natural Product Expo in Anaheim. I did an interview with Pimm Fox on Bloomberg TV, and got to meet (the real) Erin Brockovich, who was scheduled to be interviewed just after me. I talked with her about the importance of organics, and her new book.

Our booth at Anaheim was as busy as ever, or perhaps even busier, as we introduced the first brewed cocoa drink of its kind, Honest CocoaNova.  It was gratifying to see the excitement from our team about the new product line and to see the overall high level of energy and dynamism at the show, which is my single-best way to assess the health of the natural foods industry.

So now we’re back to work in Bethesda.  In terms of economic structure, our enterprise has changed, but on a day-to-day basis, it doesn’t feel any different.  Although I didn’t realize it until a few days after the deal closed, for the first time in at least nine years, the company didn’t hold any loans that were personally guaranteed by me.  When we first took out those loans, which were in excess of my net worth, I used to lose sleep over the risk I was exposing my family to.  But over time I stopped worrying, not because the risk had gone away but because I had so many other things to worry about.

I’m not sleeping any better than I was before the transaction but, then again, I’ve always felt that sleep is overrated.

IPOs Aren’t the Only Way to Access Capital

Friday, June 24th, 2011

As seen on INC.

I participated in a conference held at the Treasury Department on access to capital. The session, which was convened by Treasury Secretary Timothy Geithner, and Karen Mills, head of the Small Business Administration, explored what the government can do to make it easier for entrepreneurs to access growth capital.

I participated on a panel that explored the environment for initial public offerings or IPOs.  As someone who raised money from alternatives sources, I had a different take than the other panelists.  Here is a summary of the statement I gave:

Imagine we were back in the year 2000 and I presented the following IPO opportunity to you.

I’m offering you the chance to invest in a lottery, also known as the beverage industry, where according to Beverage Marketing Corp, more than 20,000 new products were launched since the year 2000, but only 35 of them grew to more than $100 million in sales.  That’s a success rate of less than 2 in 1000.

Now the typical public beverage company trades at 12-15 times EBITDA, but my company will have no earnings, in fact, my company will have negative earnings for the next ten years, that’s forty quarters of losses!

But wait there’s more—in addition to losing money for 40 quarters in a row, my company will commit to seeking out organic ingredients, which are more costly, harder to find, and more subject to price fluctuations because of the limited supply.

And just to sweeten the deal, my company will commit to purchasing Fair Trade certified teas, which means we will further shrink our margins so that we can pay a premium to tea pickers in India and China.

And finally, in case I didn’t scare you off yet, my company will only sell drinks with 17-30 calories per 8 ounce serving, even though the typical calorie profile of the competition is 80-100 calories.

For obvious reasons, this is an investment opportunity that I wouldn’t dare offer in the public markets.  But despite its scary fundamentals, Honest Tea proved to be a very rewarding investment.   From 1998 to 2007 we raised $21 million in angel and private equity before we sold to Coca-Cola this month for more than $100 million.

Mission-driven enterprises like Honest Tea and Stonyfield Farm yogurt avoid the IPO route to financing because they need investors who aren’t focused on quarterly earnings, and understand that long-term decision-making will be in the best interests of the brand as well as the planet.  But the public markets don’t just have their limits on the fundraising side, it’s on the exit as well.  Whereas the public markets wouldn’t know how to properly value our long-term decision-making, acquisitions by strategic partners, especially those that can help expand distribution, such as Group Danone for Stonyfield or Coca-Cola for Honest Tea, have delivered healthy returns to our investors, and healthy brands to the American public.

Mission-driven (or socially responsible) enterprises are really just companies that embrace long-term thinking, with a broader understanding of who their stakeholders are.  If the government wants to support enterprises with a longer-term vision, it should explore providing capital gains tax breaks to investors who buy and hold their investments for at least five years.

The Honest Tea Story and the Next Chapter With Coca-Cola

Tuesday, March 1st, 2011

Sixteen years ago when I graduated from the Yale School of Management, I was eager to continue my career path as a non-profit activist.  If a fortune teller could have looked into my future and told me I would end up running a mission-driven organization that 1) Helps eliminate billions of empty calories from the America diet; 2) Protects thousands of acres of agricultural land and surrounding ecosystems from chemical toxins and; 3) Creates economic opportunity in the developing world, I would have asked, “What’s the non-profit creating all this exciting change.

The surprising answer is that the enterprise helping to make all this happen isn’t a non-profit, but is in fact a beverage company, quite an unexpected twist for me since my only prior beverage experience was a lemonade stand in elementary school.  And yet the story of Honest Tea’s evolution as well as the next chapter in its growth, which starts next month, provides a window into how change happens in corporate America.

Back in 1998 it didn’t take focus groups to understand that consumers were buying sweet drinks.  Yet my co-founder Barry Nalebuff and I were thirsty for something different, and we suspected that despite the millions being spent on market research, the big corporations were missing the opportunity for a less-sweet alternative.  We brewed five thermoses of tea in my kitchen and brought them, along with a repurposed Snapple bottle with a label pasted on it to the local Whole Foods office near my Bethesda, MD home.  The buyer placed an order for 15,000 bottles, and we were in business — provided we could figure out how to make that much tea!

Our less-sweet taste profile made it more challenging for us to grow.  We received more than our share of rejections from distributors and retail buyers who didn’t think we were peddling what the public wanted.  So instead of getting to stores via beverage trucks, we had to arrange/beg for our drinks to be delivered through own alternative distribution channels – natural food distributors to the natural channel, cheese distributors to gourmet stores, corned beef distributors to delis, and charcoal distributors to reach supermarkets.  Our patchwork distribution network certainly made for a slower path to growth, but it meant that when we did finally gain some traction, we had a clear point of difference on the beverage shelf.

We started to gain some momentum just around the time the rest of the population was beginning to pay attention to what they were putting in their bodies.  Though the low-carb craze started to fade in 2000 – even an all-bacon diet eventually loses its appeal — it helped train consumers to read nutrition panels.  In addition to our lower-calorie profile, our commitment to organics also resonated with consumers increasingly interested in products that emit fewer toxins into the ecosystem, not to mention into their bodies.  So we kept growing through the dot-com bust and even the Great Recession, sustaining an average annual compound growth rate of 60%.

But even with our aggressive pace of growth, we kept losing money.  Our margins were thin because our buying power was weak compared to the big brands, and we needed to hire more people to keep building the brand up and down the street.  In order to stretch our limited funds, we’ve always been very frugal – we share hotel rooms when we travel and cram quite a few people into a big office space filled with used desks.  Our ability to survive on fumes was critical because there were more than a dozen bottled tea brands that came and went during our first five years, many of them well-funded, including Coke’s own Mad River, a brand they bought in 2001 and discontinued a few years later.

But more importantly, we were fortunate to develop a group of angel investors who helped us stay in business by continuing to support us financially with equity and debt investments.  Why did those investors keep writing us checks, even though we were bleeding cash?  Some did it because they liked our drinks and wanted to keep their fridges stocked with our organic, lower-calorie drinks.  Most supported us because they believed there was a good long-term investment opportunity in making and marketing healthier beverages as Americans became more health conscious and environmentally aware.

The only way we were able to stay in business was because our investors believed they would gain a return for their investment.  Given our margins, dividends wasn’t going to be an option, so an exit would have to come either via acquisition or IPO.  For a few months in 2007, it seemed like going public was a viable path for an emerging beverage company.  Jones Soda Company, which had sales of $40 million had a market capitalization of more than $700 million.  But the 2008 market correction brought that notion, and several companies, including Jones, back down to earth.  There are a handful of beverage companies, such as Arizona (private) or Hansens (public) that have managed to stay independent while gaining national scale.  But their offerings are modeled after the prevailing sugary drinks that predominate the beverage shelves, rather than challenging them.

Ultimately, distribution is the key to winning in the beverage industry, and Jones struggled to grow with a patchwork of independent distributors, which made it challenging to gain and keep grocery chain accounts.  So when Honest Tea was approached by the Coca-Cola Company in 2007 as a prospective investor, and possible acquirer, we knew this was a partner worth talking to.

Given our small size and prospects for continued fast growth, we weren’t interested in exploring an acquisition with Coke.  Instead we negotiated for them to make a minority investment with an option to buy the rest of the company three years later.  As we were preparing to announce the Honest Tea-Coke transaction back in 2008, some suggested that perhaps we wouldn’t want to disclose the relationship – there was a concern that the Honest brand might suffer a backlash from loyal fans who loved our mission-driven approach, but would boycott a brand connected to a large multi-national not known for its commitment to organics.  But I argued that if we genuinely believe in our mission of democratizing healthier and more sustainable drinks, then we are obligated to find a way to take it to scale and Coke is the best partner to help make our drinks are available wherever beverages are sold.

The only way Honest Tea could operate as a non-profit, both in terms of mission, and in terms of financial performance was because there was a partner out there who would make the investment opportunity worthwhile to our investors. And now that we’ve reached national scale, Honest Tea has the potential to deliver meaningful margins to Coke, while continuing to expand our impact.

I have already heard from some of our hardcore loyalists (there are people out there with Honest Tea tattoos) who threaten to stop supporting Honest Tea if Coke does purchase the rest of the company. I would hate to lose those consumers because we wouldn’t have been able to build our company without them.  But I’d like to pose two challenges to them – if we are still selling a lower-calorie, organic, Fair Trade beverage, don’t we deserve your support? And second, to the extent you are concerned about the role that big food companies play in our society, isn’t it better to have them investing in solutions like Honest Tea?

There is a Chinese proverb printed underneath our bottle caps that also appears as both a greeting, and a warning, on the front wall of our office.  It speaks to the skeptics who thought we’d never make it as well as to those who argue there is no way a mission-driven company will survive inside the walls of a publicly-traded company judged quarterly on its ability to extract profits.  It reads, “Those who say it cannot be done should not interrupt the people doing it.”

Ownership Matters

Tuesday, February 22nd, 2011

Read Seth’s latest blog,  “Ownership Matters” on Inc.com

Beware the (Un)conscious Consumer

Wednesday, January 26th, 2011

Last week the Federal Trade Commission gave the green light for Coca-Cola to proceed with the purchase of Honest Tea.  Acquisitions that exceed $63 million in value require government clearance to make sure the transaction isn’t anticompetitive – if a really big company buys another really big company, there is the potential for consumer choices to be limited and prices increased.

A Reuters news item (http://www.reuters.com/article/idUSN1923602420110119)  shed some light on why the approval went through so quickly:

Coca-Cola Co (KO) took a step toward buying tiny bottled tea and juice maker Honest Tea, as the Federal Trade Commission announced antitrust approval for the transaction.

Tiny?  That’s kind of insulting.  Obviously in comparison to Coke’s 2010 sales of 1.6 billion servings per day (across all products), Honest Tea’s 274,000 servings per day is tiny — about 2/1000th the size of Coke.  But it sure feels like we’re bigger than we were when we started out of my house in 1998.  Back then our annual sales were $250,000, or about 360,000 bottles.  In 2010 we sold more than 100 million bottles and Honest Tea is now carried in natural food stores across the country. But the fact that we’re still considered tiny by mainstream beverage standards highlights how much work we have yet to do.

As we seek to grow from tiny to small by joining the Coca-Cola family, there are bound to be other challenges ahead.  Just last week we received the following voicemail:

‘This is Ray.  The tea is good but I need to know who owns the company.  I want to know who owns the company.  If it’s Coca-Cola, I’m not buying it anymore.”

Ray’s message highlights a different kind of challenge for us.  We have always believed that the conscious consumer who thinks about the social and environmental impact of what he or she puts in her body is the ideal consumer for our products.  But Ray sounds like the “unconscious” conscious consumer – someone who unthinkingly judges a product or brand because of its association without considering the actual merits of the product itself.  Back when we partnered with Ford to promote the launch of the Escape Hybrid there were some who criticized us for associating ourselves with a company that markets gas-guzzling SUV’s.  My response to that anti-Ford consumer was similar to what I told Ray.  If you are concerned about what a large corporation is selling, why would you object to that company’s efforts to sell a more sustainable or healthier product?

Size doesn’t seem to matter when it comes to making a difference, as we learned once again last week, when we were honored to be included in Planet Green’s list of the Seven Greenest Companies of 2010.

http://planetgreen.discovery.com/feature/planet-100/top-7-green-corporations-of-2010-video-news.html

So we need to challenge consumers like Ray with the following question, “If we met this kind of standard in 2010, how do you see us changing what we make or how we operate in 2011?”

Sometimes it seems the unconscious conscious consumer would rather curse the darkness than light a candle.  When large companies make genuine efforts to evolve, they deserve support.  Otherwise, how do we make substantive progress toward a different kind of economy?  Not a tiny question.

A New Generation at Seventh Generation?

Monday, January 10th, 2011

I was disappointed last Fall to see my friend Jeffrey Hollender, one of the early leaders of the green business movement, fired from his role as Chief Protagonist at Seventh Generation, the company he founded in 1988 and ran for more than 21 years.  When I was typing that last sentence, I was trying to think of a euphemism for “fired” but realized that while that word has a harsh sound, this is not a situation that calls for sugar-coating.

As a co-founder of my own green company, I realize I’m biased, but founding entrepreneurs bring something to their enterprise that cannot be replaced – their vision and passion help get the business off the ground and often envision the long-term in a way that most employees rarely do.

I’ve known more than a few beverage entrepreneurs who were ungraciously asked to leave earlier than they would have liked.  Usually the separation is due to (what is judged to be) poor performance or differences with the company’s board.  Given the nasty, brutish and short lifespan of most beverage companies, it’s often the case that the founders are shown the exit before shareholders realize an exit for their investment.

Because there are some legal issues involved with Jeffrey’s departure, neither he nor the Seventh Generation board are talking too much about the situation (though consumers certainly are).  My understanding is that Jeffrey came to have a difference of opinion with the board (which included some relatively new outside investors) and a new CEO that Jeffrey hired.  And perhaps some day we’ll learn the details, but from the outside there are at least two important lessons:

First — Staying private does not guarantee that the founding entrepreneur will always be in power.  Jeffrey was one of the skeptics when Honest Tea made its deal with Coke – he worried that our brand would lose its way once we partnered with a big multinational.  And while dilution of our brand continues to be a risk, it’s also clear from Jeffrey’s firing that the only way an entrepreneur can guarantee he won’t be forced out is to create a business that’s profitable and doesn’t need outside investors.  Since Seventh Generation is a private company, it’s difficult to know how the company was doing, but it’s safe to assume that Jeffrey’s choice to bring in new investors (who ultimately turned out to be unfriendly) was driven by a desire to improve sales or profits, or both.  I have dodged more than a few bullets myself from investors posing as “angels”.  One wealthy individual presented me with a term sheet that set aside hundreds of thousands of stock options to attract new management.  When I told the investor that I didn’t see a need for such a large option pool, he gave me a murky answer about various contingencies.  I later found out that he intended to use the proposed option pool to hire his own CEO.  Needless to say, I didn’t sign that term sheet!

Second- - succession selection is critical.  The CEO Jeffrey hired to replace himself was a former Pepsi executive who had no background in the causes and mission-related work in which Jeffrey has immersed himself for more than three decades.  Although there is an inspiring generation of new business leaders rising up through the ranks of American business, thanks in part to Net Impact, there are not yet enough socially conscious executives prepared to lead a $100 million+ company.  And just as it’s unrealistic to expect someone five years out of business school to lead a $100 million+ company, it’s equally unrealistic to expect someone who has worked in traditional companies and never been involved in green business or the non-profit sector to “get” how to lead a mission-driven enterprise.  It takes a lot more than good marketing skills – it involves an understanding of the issues, the players, and the way non-profits think.

Jeffrey’s firing is certainly a cautionary tale for me, and a reminder that there are no guarantees in business, even for founders.  I’m pleased to report that Jeffrey has already immersed himself in a new cause-driven organization, American Sustainable Business Council,where he will continue to be a wise and effective voice for more progressive business.  (His new website is www.jeffhollender.com).  In the meantime, those of us still in the trenches need to make sure we perform, keep an eye on our competitors, and keep an even closer eye on potential investors who claim to be supporters.

The Chinese military strategist Sun-Tzu said “Keep your friends close, and your enemies closer.”  But when it comes to investors, I find myself in disagreement with the General — if you believe you’ve got potential investors who are enemies, stay away from them.