Honest Tea

Case Study: Honest Tea

The story of Honest Tea begins with the future founder, Seth Goldman, jogging through the park on a hot, muggy day. After completing his run, he decided to go into a local convenient store to purchase something to drink. After trying a few ice-tea and sports drinks, he realized that none of them actually quenched his thirst. It was then when Goldman realized that the beverage industry was missing something.

Goldman proceeded to contact his former professor at the Yale School of Management, Barry Nalebuff. Nalebuff and Goldman discussed various beverage ideas that could fill the need in the market before settling on the original idea for Honest Tea. The premise was that there was a space between super-sweet drinks and flavorless waters, in the ready-to-drink beverage market. After further discussing their solution, the two team members decided on the final product attributes. Their drink would be a healthy alternative drink that would provide genuine, natural taste, without using artificial sweeteners.

Honest Tea was officially founded in February 1998, by Goldman and Nalebuff, who both personally invested $300,000. The initial start-up funds were used to “prove the concept, define the product, and land distribution agreements.” An additional $217,500 was invested by family and friends shortly after the start-up of the company. Because no market for this type of drink existed, the pre-money valuation was assumed to be zero for all of the initial financing.

By late 1998, Honest Tea was in need of another round of financing. Money was needed to expanded production capabilities and “push distribution into several new channels.” While searching for other investors, Goldman discovered there were already satisfied customers, who were so pleased with the product, that they were willing to invest in the company. Through this round of financing, Goldman received $1.2 million from helpful customers. With the additional financing, healthy sales figures, and aggressive projections, Goldman placed a pre-money valuation of $4 million on Honest Tea.

The next round of financing started in late 2000, when Honest Tea began discussions with a venture group. The venture group wanted additional funding from existing investors before jumping into an investment with Goldman and Nalebuff. The team responded by raising $1 million at $8.5 pre-money valuation

Goldman forecasted that the team would need an additional investment of $2 million to begin making a profit. The resources needed and capital requirements will be discussed at greater length later in this study. The team emerged at a crossroads, where they were given two options. The options consisted of receiving funding from either a venture capital group or an angel investor group.

The venture capital group valued Honest Tea anywhere between $5 and $7 million; although, in 2000 the financing raised a pre-money valuation of $8.5 million. But, Angel investors would be the most appropriate course of action to secure the capital needed. Honest tea did not seem to have a problem raising the sufficient capital needed to attain their goal. During the initial search process for potential angels, Goldman returned to a pile of e-mails he had received from loyal customers. Customers who had tried the tea loved the product so much that they responded by sending e-mail to Goldman praising the cleaner refreshing taste of Honest Tea. Several satisfied customers even wrote that they would consider investing in the company should honestly need financing in the future. Goldman was pleasantly surprised to receive commitments for $1.2 million. That round placed a pre-money valuation of $4 million on the Company. Nalebuff's novel financing structure help to avoid contentious discussions about what the value of the company should be in that round. The financing structure allowed the owners to exercise warrants, and give a large fraction of the company to them if the company did not do well.

According to Honest Tea's mission statement they seek to provide bottled tea that tastes like tea- a world of flavor freshly brewed and barely sweetened. They seek to provide better-tasting, healthier teas the way nature and their cultures of origin intended them to be. They strive for relationships with customers, employees, suppliers and stakeholders which are as healthy and honest as the tea they brew. So they continued their successful venture.

Year three (2000) put Honest Tea into the tea bag business in addition to their bottled beverage business. They added another organic variety, Jakarta Ginger, in the summer months and launched eight varieties of tea bags (five organic). Honest Tea then became the fastest-growing bottled tea brand in natural food stores (SPINS) with sales weighed in at $1.9 million.

In 2003 they launched two new flavors, Peach Oo-la-long and Green Dragon Tea and reformulated Lori's Lemon to create a new line of "a tad sweet" teas. Peach Oo-la-long, the first Fair Trade certified bottled tea and Green Dragon Tea were the two most successful product introductions to date and the two most successful new beverages launched in the natural foods industry in 2003.

In 2004, they gained full USDA organic certification on all twelve varieties of bottled tea and eight tea bag varieties. With this certification, Honest Tea became the only tea company to offer an entire line of organic bottles and bags. They introduced a line of tea in PET-1 Bottles which was met with rave reviews and won several packaging awards. The tea bag line was re-designed to include individually overwrapped bags in response to requests from foodservice accounts. The company was again listed on the Inc. 500 list of fastest growing private companies.

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