How does a professor create a multimillion dollar tea company?
Barry Nalebuff is the cofounder of Honest Tea, which makes delicious, healthy, organic beverages.
The company was launched in 1998. A decade later Coca-Cola bought a 40% stake in the company and owned the whole thing in 2011.
He tells the story of building the company in his book, Mission in a Bottle, the Honest Guide to Doing Business Differently — and Succeeding.
Barry Nalebuff, Honest Tea
Barry Nalebuff is the cofounder of Honest Tea, which makes delicious, healthy, organic beverages.
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It’s also sponsored by Grasshopper. Do you need a phone number where your customers can dial in, press “1” to go to sales, press “2” to go to customer service, etc.? And maybe even all those numbers actually lead to your cell phone but it makes you look big? Do you need that kind of feature and so many others? Go to grasshopper.com. All right, let’s get started.
Hey there, freedom fighters. My name is Andrew Warner and I am the founder of Mixergy, home of the ambitious upstart and home to over 800 proven entrepreneurs who have come here and spent an hour talking about how they built their business, really breaking down their stories. And in this interview, I want to find out, how did a professor create a multi-million dollar tea company?
Barry Nalebuff is the co-founder is Honest Tea, which makes delicious, healthy, organic beverages. The company was launched in 1998. A decade later, Coca-Cola bought 40 percent of the business and in 2012, owned the whole thing. He tells the story of building the company in this great book “Mission in a Bottle: The Honest Guide to Doing Business Differently and Succeeding.” Barry, it’s great to have you on here.
Barry: Great to be here. Cheers.
Andrew: What did you tell, there it is. There’s the drink, the glass bottle. What did you sell the business behind that bottle for?
Barry: It’s confidential. But life is good.
Andrew: $40 million for the first piece of the business, do I have that right?
Barry: $43 million.
Andrew: $43 million, excuse me. $43 million. Do you remember the day when you signed that agreement and the money was wired into you?
Barry: I do.
Andrew: What was that like?
Barry: I had been up until 2:00 in the morning the previous night negotiating the deal. I remember more sort of the agreeing, the wiring part was less what I remember so much as the day we reached the agreement. Because that’s when it was real.
Andrew: And what do you feel when that goes through after all these ups and downs that we’ll talk about?
Barry: Well, we were literally, 2:00, 3:00 in the morning. It was an incredibly long negotiating session. We finally reached an agreement. And I had to teach my class the next morning. So, I head back to New Haven. I have three hours of sleep. Show up at class and it just so happens, one day I year, I teach the case in Honest Tea.
And that happened to be the day that I was doing it. And so, we had a discussion with the students about what it is that Honest Tea should do next. What was the next phase and what we thought the valuation of the company would be? And basically, students were in the 0 to $10 million. $10 million to $20 million. $20 million to $30 million.
I don’t think anybody was above $40 million in terms of the valuation.
Andrew: The whole company?
Barry: For the whole company, yes. And so, obviously, $43 million to 40 percent was a valuation above $100 million. But that was really only the starting point. So, to me, that was an extra-fun part of having a real-life case study with the students that you only dream about.
Andrew: I want to get back to the students because that’s an important part of your life in the story. But when your publisher told me that I could have a copy of this book before it was published, I said “Yes, please, I want it.” And then I said, “Not only that, I’ve got to interview Barry. Seth is a great guy, but I’ve got to interview Barry” and I’ll tell you why.
Years ago, I read your book “Why Not”? And in the end of the book, am I right about this? I can’t find the book at home because it’s in storage. At the end of the book, you say “We’re using all these ideas, a student of mine and I, to launch a business.” And you talked about your idea for the business.
Barry: 10 years ago, we wrote the book “Why Not”?
Andrew: And it was such a good book. And I remember for years afterwards, whenever I saw Honest Tea, I felt like, “Yes, you all think it’s your tea company. But for me, it feels like it’s my story to keep following.” And it’s so good to see that you’re not just putting ideas out there, you’re saying “I’m going to use these ideas. I’m not just going to tell everyone else how to live their lives. I’m going to try some of these ideas and see what happens.”
Andrew: So, it’s been so much fun to watch you build the business from the outside. Now, I want to get more of an inside view. You say in your book, “Mission in a Bottle”, that you talk to your class about where there was a hole in the beverage market and your class came up with what?
Barry: We talked about every possible flavor. There are no holes there. There is lemon lime, root beer, ginger, colas, uncolas, celery, you name it. There is every size. There is every carbonation level. There is every level of caffeine.
Andrew: You would think with the (?)market, everything that could be thought of would be thought of.
Barry: Exactly. To the extent that there is a hole in the market, you might think you do not want to fall into that hole. It is there for a reason.
Andrew: I see.
But I take the view that there was a giant hole in terms of levels of sweetness. You could either get things that were super sweet, 110, 120 calories, or you get zero calories and boring like water or diet, which was zero calories and very sweet. There was nothing that I would consider to be what I call a “normal” beverage. By “normal” I mean 20 to 30 calories. When you watch people go into a restaurant and they order iced tea, I have never seen someone put in 12 teaspoons of sugar into their ice tea. Zero, one, two are all what I think is the normal range,and so why is it that products that you buy in bottles were not at all like the products you would make for yourself?
Andrew: So I went to the store and I got this today. This is what you saw. This is the liter, right?
Barry: Yes. 16 ounces.
Andrew: Here is the diet version. What is the problem then with the diet version? It has fewer calories. There are 10 calories in this entire bottle.
Andrew: What is the problem and what is to keep them if, well, and then I will ask you…
Barry: To me, there are two issues with diet beverages. First, diet beverages are crazy sweet. So I don’t have a sweet tooth, whether it is an artificial sweetener or not, I do not like the taste. I like a little bit of sweetness, but I want tea that tastes like tea, not something that tastes like candy.
Barry: The second issue is that you might think that aspertame is perfectly safe, and certainly we have done a lot of experiments in terms of people drinking tons of it, but I would rather have my products be organic, so I would rather have fewer chemicals in me.
Andrew: So if you have this great idea then, what is to keep the company from saying, “We have Snapple. We have diet Snapple. We are going to have organic Snapple.”
Barry: Yes. The reality is that I think about a year or two ago, they did come up with a less sweet Snapple. I think they now have Snapples with 60 calories, something they had not done previously. So what you have is really the central second question: one, why you will succeed and two, why other people are going to copy you. So if this is such a good idea, why hasn’t Snapple already done it? It is a good thing we have some time because it is a complicated answer. Let us go through about six different reasons.
Andrew: Okay. This is not a trivial question. This is one of the key things that you want others to think about.
Barry: This is a central question because you might think you are brilliant. You might think you are the first person who has ever thought of this idea, but you are wrong. God knows how many people have thought about it and once you do it, everybody will know about it. For years before doing Honest Tea, I was interested in mixing orange juice and club soda. I still think that is a great drink. I make it for myself all the time, but I figured if we did that, we would be test marketing for Tropicana and my goal in life was not to be a bitter person who said, “Tropicana stole my idea. See how brilliant I was?”
Andrew: That is an easy thing to do. Just mix club soda and orange juice. We all do it at home. That means that Tropicana could do it just as easily as Barry’s business could.
Barry: Right, and if I went and did it, you would not be interviewing me today because I would be some bitter guy claiming my idea got ripped off. You would be interviewing some brilliant guy from Tropicana who revolutionized things. They have better orange juice, better distribution, lower costs, and fine club soda.
Andrew: I want to talk to you about distribution, as well, about the travails you guys had there and the solutions.
Barry: You have to think about why it is that you are not just going to be test marketing for some big company and the reality is that one: when they do their blind taste tests, they give people one or two ounces, basically a small taste. For a small taste, it turns out the sweetest beverage typically wins. The second thing that they do is try to go after the teen market. They figure if you get somebody as a teenager, you get them for life. Our view is that peoples’ tastes change over time. Adults have different taste buds than kids, and what you might have liked as a 16-year- old is not necessarily what’s going to appeal to you when you are in your 30s. A third issue that arises is that when you do a blind taste test, all that people care about is how the product tastes, but in fact, we almost can do the opposite.
We can do a blind mouth test. That is, somebody doesn’t taste the product, but they read the label. They might care then about what the calories are. So, the ideal product doesn’t just maximize taste, it maximizes the trade- off between taste and calories, so a blind taste test makes things too sweet because you don’t really care about the calories. Our ideal product is one that people say, “You know, I might like it a little bit sweeter, but for 30 calories this thing tastes amazing.” Then, the last reason that I think is critical is that it’s very hard to sell two products which are in contradiction to each other. In particular, a way in which we marketed Honest Tea was as the anti-Snapple.
If we’re going to refer to the drinks that Snapple makes as liquid candy, it’s hard to be selling liquid candy, have that be your sugar daddy, if you’d like, the source of all your profits, and then have some other division of the company say, “Wait a second, why are the drinks so crazy sweet?” That ability to really differentiate yourself and say, “Look, we’re not about having sweet drinks,” is a real challenge, and if the Snapple drinker expects all the products to be sweet, they’re going to be confused by these other products that really aren’t designed to appeal to the mainstream Snapple drinker.
Andrew: I see. So that gives you some room to grow without having competition, especially from these big guys. So, I see the idea. How did you know that other people were like you and me and don’t want liquid candy? Sometimes I feel like what seems normal to me is only normal to me and a few other people, and the rest of the world wants their greasy food and unhealthy drinks.
Barry: So, there are two points there. One is what I’ll call the princess and the pea effect. I don’t know if as a kid you read that story. There’s the princess and she’s got ten mattresses, and below it all is a pea, and I think the moral of that story is supposed to be don’t be like the princess, because she is kind of a whiner, and just get used to the pea. And my view is when you see a pea, that’s a business opportunity. What are these things that really annoy people?
Fact is that, one, I would ask my students what fraction of them mix orange juice and club soda, cranberry juice and club soda, and two, you go to restaurants and you see that people aren’t putting ten teaspoons of sugar in their iced tea. So, I know that this is how people normally drink their beverages. Therefore, I wasn’t trying to get them to do something different, I was just trying to get them to drink something in a bottle that was different from what they were already drinking.
Andrew: You know what, that is true. When I go to restaurants, I do prefer the unsweetened iced tea. It feels healthier, and I’m not craving the sweetness there.
Barry: Or even if you put in some sugar. Again, I’ve never seen people put in 10 packs of sugar.
Barry: So, why do they have this dichotomy between the way they make tea themselves and what they call tea when they bought it in a bottle?
Andrew: Now you have this idea. You have a former student who you can partner with, Seth. You also had recently come back from a trip where you were doing a case study on tea, so you understood the quality of tea leaves and the impact that it has on flavor. How do you make the first batch? Do you just do it in your kitchen?
Barry: One of the things I really believe in, it’s a lean start-up approach, is to do things quickly and inexpensively. So we went from idea to first sale in 26 days, which I’m quite proud about, and all we had day 1 was a name and the idea that we’d be selling tea. So what do we do? We hired a local graphic artist, a recent Yale graduate, and explained to him that we wanted something that looked like a wine bottle. Something that had evoked the romance and authenticity of tea. Some had the high-class aspect of wine, and so we got this notion of the border with a keyhole and the art inside the keyhole, little bits of specs that you could get a sense of the, there we go, a tea crate.
We, for recipes, we essentially stole them. We said that in Morocco, people drink green tea with mint and honey, in India they drink it with cardamon and pepper and call it chai, so why reinvent the wheel. Take something that people already love and we bought the teas, really, almost for retail, because it didn’t necessarily matter how much we were paying, we weren’t making that much of it.
Andrew: So you’re saying you got the tea leaves, you brewed the tea leaves at home, you put in a bottle, and that’s essentially it?
Barry: We took an old Snapple bottle, washed off the label, took the design that our graphic artist had done, printed off a laser printer, put it on with rubber cement, spray-painted the cap black. You can sort of see the black caps here to make it look again, like a bit of a wine bottle, and Seth brought the results to Whole Foods. It looked like it was a real product. It wasn’t, like I said, it was made in our kitchen, but as long as Seth opened the bottle and not anybody else, you wouldn’t miss pop. [laughter] But if we couldn’t sell that product, then we knew we would have been off-base. We would’ve misunderstood the market.
Andrew: As I understand it, Whole Foods is open to locally produced products, and they’re much more open than the average supermarket to talking to an entrepreneur.
Barry: I think that’s true. And we also have the advantage of the time that they weren’t really selling any products they could be proud of in terms of the beverage space. So if you looked there, they had, and in fact we showed them a chart, which was the stuff they were selling, and literally it all had 90 to 110 calories, and that was inconsistent with their perspective, their motto, what they were trying to provide. And so they had done a lot to improve, whether it be cereals, or granola bars, or yogurts, but the beverage aisle was something they were weak in. Fortunately, although we pointed that out, they weren’t defensive. They understood the weakness, and were happy to help us.
Andrew: So this is one of your bottles. I don’t if you can see it here, here is another one. There’s something floating on the bottom.
Andrew: What is that?
Barry: We call them floaties.
Barry: So those are tea leaves, is the answer. And this is one of those things where you take a problem, and you turn it into a feature, so one of the things that we wrote on the label is that our tea, like fine wine, has sediment at the bottom. So those are just tea leaves, or as our kids say, don’t mind the floaties.
Andrew: And that was intentional because, you couldn’t avoid it because you were brewing with real tea leaves as opposed what? What do other people do?
Barry: Syrup costrate powder. But actually, we could’ve avoided if we had better filtering.
Andrew: Oh really?
Barry: But we couldn’t quite figure how to get the filtering better. By the way, now there may be just a little bit at the bottom. When we started out there was probably inches of sediment.
Andrew: Really? This is a plastic bottle, but if it was a glass, we’re talking about to right here maybe.
Barry: I would say that sometimes the sediment would go, well, I can probably go, and I think I have some of our early bottles up on my shelf right over there. I could probably show you what it looks like.
Andrew: You know, would you grab one? I’d love to see it.
Barry: Sure, let’s see. [pause] So here. How come I’m not seeing, there it is. I don’t know if there is enough light or not to get a sense of how much translucent it is. Up here it’s translucent at the top.
Andrew: I see, so we’re talking about something you really have to address, and you couldn’t filter it out of the the time, and so you said all right, let’s is go with it.
Barry: It wasn’t for lack of trying, I promise you.
Andrew: And you’re making the tea at home, right?
Barry: No, this is the real production product.
Andrew: OK. And even the production product have that?
Barry: Yeah. Basically we threw in tons of tea into the giant vats, and then we tried to filter them out with laundry bags, and with paper filters, but I didn’t know we would work. And then, it also depends a little bit on where in the batch the bottle came. Was it near the end of the batch? Then there’d be more tea leaves.
Andrew: Well, that’s amazing. All right. So, Whole Foods said “Yes.”
Barry: I’ll tell you one funny thing there. One of our investors, the cartoonist who makes (?) who does Opus, accused us of adding extra sediment to make it look like it was real.
Andrew: I say that’s amazing. I don’t want to sound like I’m just being overly fawning. The reason I say it’s amazing is because how many entrepreneurs have you and I’ve seen who try to launch a product that doesn’t look like it did in their dreams and their visions of what a perfect product should look like? And then they stop and they give up. Or they obsess about this one thing and they never launch.
Barry: Thank you. I’d say one of the things we always understood is we’d be getting better and we’d be improving over time. Another reason why the Cokes and the Pepsis and the Snapples didn’t necessarily copy us is because they want their products to be consistent. They want it to taste the same whether it’s in Mexico or Canada or in Texas or in Rhode Island.
And our products really were happily inconsistent. September was a great batch. And our view is that it didn’t matter if they tasted different, provided they always tasted good.
Andrew: And they taste the difference because…
Barry: Because the tea leaves came from a different estate. As we change our suppliers because sometimes, the water would be different sources. We’re ranking at different facilities. So, as we were learning how to do it, we went from cloth bags to wire bags to all sorts of different ways of brewing. And again, it had to taste great, even if it didn’t always taste the same as the previous batch.
Andrew: So, here’s what I got that I think we should talk about. We should talk about how you got customers. How you got distribution. I’m writing this down to make sure I’m holding myself accountable. How you got distribution, how you raised money and how you created the product. All of those areas gave you some trouble until you figured them out.
Barry: When people say “What’s the hardest thing”? And the answer is, “Everything was hard.”
Andrew: Why don’t we start with customers?
Andrew: So, Whole Foods said “Yes” at first?
Barry: They did.
Andrew: And then, how did you do at Whole Foods?
Barry: Seth is just amazing in terms of his energy, his stamina. He did sampling at every single Whole Foods store in the mid-Atlantic; 17 of them.
Andrew: He was personally standing in the store?
Barry: Literally standing in the store, charming people. More coercing them to try the product. And the thing about Honest Tea is that once you try it, you get it. And you either like it or you don’t like it. If you don’t like it, that’s fine; there are a lot of products for you. If you do like it, we’ve got you. Because we’re the only one like it. And people’s reaction was, “Where have you been all our life”?
Andrew: Mostly I interview tech entrepreneurs, but everyone who I interviewed who creates healthy foods that are sold in stores does what Seth did. Goes to the store and does samples. So, I always figured if you do that, then you’re going to win. But I see people in stores all the time with their products. And no one tries them and their products don’t go anywhere. What are they doing wrong? Are they not being as open as Seth was? Are they not being promotional?
Barry: Give me one more second, I’m going to try and do one more.
Andrew: I see that. I felt like you’re doing something with the mic.
Barry: I am.
Andrew: What are they doing wrong?
Barry: So, I’d say the answer is that our product is probably easier to sample than a lot of things. Ice cream is sort of, it’s pretty expensive. You get one little taste. It doesn’t take a big commitment to try two ounces of our product when it comes right down to it.
Andrew: I see.
Barry: And the other thing that’s true is that it’s not a “Me, too.” So, if you have 17 calories and the other guy has 120, there’s a radical difference in terms of what these things taste like. So, just because you’re sampling it, just because people like it, doesn’t mean they really care about it.
So, I’ve tried tomato sauces and some of these tomato sauces are terrific. But they’re not so terrific that I would cross the street for or insist and go to the store manager and say “You’ve really got to carry this.”
Andrew: I see.
Barry: I’ve had great biscotti. But again, not something that changes my life. Whereas when I’m sitting there saying “I can’t believe it. I’m thirsty. And there’s nothing out there that really is doing it for me.” And I get, people really get emotional and they have strong convictions.
Andrew: Here’s the other thing you guys did to get customers, I guess the both of you went to a fancy food show.
Andrew: And did you have a booth there? Were you promoting from there?
Barry: Well the first year, we started the company in February. We didn’t really have product that was in but we got our first sale at the end of February but it took us three months to go and figure out how to make it.
Barry: And the fancy food show was in July so we didn’t have a booth. So we went around the fancy food show with our product in the back pack with ice in the back pack and the cups. And basically used other people’s booths. And that’s how we met Melody, who was our first wonderful salesperson.
Andrew: So, you walked to other booths to sell to people at the booths to tell them about your drink?
Barry: Exactly and it sort of [??]. And let me say, that actually happens more than you might expect at a fancy food show because all the people who want to sell to a company, they’re there and they can’t run away. And so, in particular, we approached distributors who were at the fancy food show.
Andrew: And they didn’t have booths? Did they? They were walking around?
Barry: They did, yes, because their sub-distributors are showing the products they’re distributing.
Andrew: I see. Alright, I see. Don’t you feel a little bit awkward doing that? Here you are…
Barry: I have no shame.
Andrew: No shame at all?
Barry: No shame, no shame, no shame at all.
Andrew: What kind of things do you do with this no shame personality? I thought, I guess because I read your book, because I saw your photo. Except for you being on a skateboard in the back photo of the book, I felt like this guy is a pretty serious person.
Barry: I am, but that doesn’t mean you have pride in this regard.
Andrew: So, no shame? You just walk up to anyone and it just comes naturally to you?
Barry: Look, you will get rejected. You will get rejected many times but if you believe that what you’re selling will make people’s lives better and is something that makes a difference; then it’s easy to go and make sure you are spreading the word.
Andrew: Was there ever a time where you walked up to someone and said “Hey try this,” and they said “Who are you? What are you doing here? You don’t have a ticket to the show. I didn’t come here to be sold to,”
Barry: Well, my lady Melody told us that.
Andrew: She did?
Barry: Yes, absolutely.
Barry: And our response was “Fine, how can we get product to you?” And she gave us her address in Fairfax, Virginia and we sent products to her and then we met there.
Andrew: I see. And then she took you up on…
Barry: I’ll take “No,” eventually. I mean I’ll…
Andrew: And then she took you to Whole Foods?
Barry: She took us to Whole Foods. Yeah.
Andrew: You are at fine…
Barry: No, actually she us to Giant Eagle.
Andrew: I see, OK. Alright, so now you’ve got some customers. It’s time to make the product. How do you do it? I wouldn’t even know where to go.
Barry: This was a case where Seth and I both were a little bit lost in this regard. We hired a fellow named George Gaff, who had some experience in this area. Seth and George went around to all the different plants that made everything from apple juice, to apple cider to teas. The traditional plants that were making beverages didn’t really know what to do with us because we weren’t coming with concentrates and powder and syrup.
We wanted to use organic honey and agave and maple syrup. No high fructose syrup. We wanted two sided labels, not one wrap around label. My favorite line from one of the guys he said “And I assume you want a pack in 25 packs, 25 bottles to the case?” I said, “No, no. A standard 24 is fine, why do you ask?” And his response was “Well, you do everything else differently!”
Andrew: And they literally drove to these places?
Andrew: Was there, in person looking, trying to make those deals. George, George was helpful. Where do you get the money to hire someone who has experience in this area?
Barry: Well, it wasn’t that expensive to hire somebody and it raised $500,000 so that allowed us to do it. This was mostly money from my classmates, my family, myself, Seth and Seth’s parents.
Andrew: I see. And actually there was time when you guys were running out of money, you lent money to the business. I saw you coming in a lot with money and I thought “This Professor must be doing really well,” but how could you do so well as a Professor that you can bankroll a company?
Barry: Well, I had done a lot of years in consulting. I had been part of another company that had done an IPO and so that provided a good amount of the seed. I served on some boards of some other companies, and at that I did well. That also introduced me to some people that were very well off and many of my consulting clients were very happy to invest in this business.
Andrew: So, you had a lot going for you. Why Seth, of all the students who talked to you about their ideas, of all the students who you could have partnered up with, why Seth?
Barry: Seth is amazing. Seth has infinite integrity, infinite energy, infinite optimism.
Andrew: Give me an example. An example maybe of when he was your student.
Barry: Sure. Well, the starting point is, OK, well he was plenty smart, there are a lot of plenty smart kids out there.
Andrew: Especially at your school.
Barry: Especially at my school. He, early on, had won a businessman competition to make urinary tract infection test indicators inside diapers. And this was great (?) [00:37] diaper to a medical device, it allow help you to discover whether or not your cat had a UTI. You could put this in the kitty litter. So people were throwing money at him, he could’ve started a company to do it, and he basically said he you know, it was fun doing this, I understand why it would be a profitable business, my heart’s not really in it. And no thank you.
And to me, that was a critical value that I wanted somebody who wasn’t just going to make, start a company because there’d be a market for it, but that he would really have a passion for doing it, and he did have a passion for this. Also, Seth, more than anybody I know, is able to have a balance between his work life and his professional life. It’s kind of crazy but as an entrepreneur…
Andrew: His work life and its non-work life?
Barry: Yes, sorry.
Andrew: Because I have a balance between my work life and my professional life, I need some help with the other part of my life.
Barry: He coached his kids’ Little League teams, he was active in his local synagogue, worked in the community, and managed to work out, so it’s everything from OK, I get some exercise by bicycling to work, and I’ll just get up earlier in the morning. But how he managed to do it all is an inspiration to me.
Andrew: Can you tell the audience how you got into Yale? There was a problem getting distribution in Yale, and then there was a clever solution that you came up with.
Barry: Well, one of the things that I find quite annoying in life is that these big companies, these Cokes and Pepsis of the world go and buy an exclusive contract. And when they do that, the buyer on the other side, the person who’s doing procurement for Yale, doesn’t really think about the consequences of an exclusive contracts, because they’re essentially shutting out companies that haven’t yet been born.
So it’s one thing for Snapple or for Pepsi to say no Yale, don’t do this agreement because we’d like to be there, but the Honest Teas of the world aren’t even there to go and say excuse me, timeout, before you sign up, think about what you’re doing to us in terms of locking us out. And so Yale was negotiating an exclusive contract with Coca-Cola at the time, and we were going to be shut out of it, and that was not so important in terms of our overall sales in the world, but kind of annoying on your home turf to be left out.
And it just so happens that the person who was negotiating the contract for Yale was my wife, and so she put in the contract an exception to the exclusivity for products that had been developed at Yale, and I think the person negotiating on the other side didn’t quite know what that meant, but basically decided to let it go. That was a very helpful little exclusion we had there.
Andrew: All right. The other thing you did for distribution was, you couldn’t get the regular drink distributors to distribute Honest Tea. I’m trying to think of how to tea up this question, frankly.
Barry: How to tea up the question?
Andrew: Talk about the charcoal distributors. How did you end up with them?
Barry: Well it started off with Seth driving a U-Haul, and there are many things Seth does well in life, but driving a U-Haul is not. He once drove it into a 9 foot parking garage, it was a 10 foot U-Haul, and that doesn’t work so well. But we would go to the various ordegas, convenience stores, that wanted to carry our product and say OK, we don’t have a beverage distributor, but who else brings stuff to you?
And in some case it was a charcoal distributor, and other cases it was a corned beef distributor, whoever it was that they were getting their product from, we would go to those folks and say would you put our product on your truck, and it didn’t have to be refrigerated, it was just one more thing for them to put in and make some money with, so not a great long-term solution, and sometimes we had trouble collecting money, but it got us on the shelves and allowed us to get a track record. The biggest problem, and something I didn’t really appreciate when we started out was that it might be that you are a customer. But the person we have to sell to is the distributor, who then sells to the guy stocking the shelves. Neither of them are our customer. The guy who runs the truck and distributor is a Snapple Arizona-kind of drinker. And the guy who’s stocking the shelves is a Snapple Arizona-kind of drinker.
And so, you’ve got somebody who doesn’t like their product, selling to somebody else who doesn’t like their product, so that you can buy it. And that’s a bit of a challenge. The only way to convince them is for them to see that the product is actually selling.
Andrew: And how do you get the product to sell when you don’t have the television ads, you don’t have the…
Barry: Well, once it’s on the shelves, we have a hope. But we first have to get it on the shelves. And so, that’s why we had to go around the normal distributors, to the charcoal, corned beef and the like. And then, the other key aspect is you want to show people, you want to use your product as a way of doing the advertisement. And so, our products are incredibly heavy in terms of the text on the back.
Andrew: This, usually, I didn’t open it.
Barry: So, it took us a while to figure this out. But of course, we can save more stuff on the back of the labels, too. And so, essentially, we are explaining to people why they bought our product, what it’s all about. And we have to trust, the good thing is that our customer types are label readers.
Andrew: So, you know what? Should I be doing that, too? Should I be telling and reminding people why they came to Mixergy? Why their value is here. Should all business-people be considering doing that?
Barry: Absolutely. It’s, we’ll take a quick pause here and you can explain it to them.
Andrew: The reason that they should be doing this is because I watch CNBC and other programs and I love them, other business shows. But they never get deep into the mechanics of how a business is built. And so, I feel like “Yay, hooray for the guy who they’re interviewing. He did so well and we’re all celebrating him, but what I am left with? What do I do at the end of that program”?
The reason that we’re doing this interview is, and other interviews on Mixergy, is because I want to understand the details of how you get a distributor. I want to understand what happens when a distributor says “Go shove it.” I want to understand the insecurities that entrepreneurs sometimes feel about promoting themselves and the value of doing it.
Barry: There’s a great “New Yorker” cartoon where there’s a physicist on a blackboard. And there’s a law of equations and there’s another equation in- between that says “And then, a miracle happens.” And, I feel that that’s how most business books are written. Which is, here’s the challenge I faced and then, here’s how successful I was.
And you never really get a chance to understand how they did it. And that’s what we tried to do with (?) in a bottle is really go into great detail about all the different issues that you’re likely to face.
Andrew: And you know what? You did that, the details. And I didn’t believe that you would, frankly. Because, look at this, guys. This is the way the book is laid out. It looks like a comic book. And I thought, how much depth are they really going to get into in here? This is going to be just promotional. But it wasn’t. It’s really well-written. A lot of details. And you actually say things that most people will not.
Like, you give names of people who copied you. You break down how you raise money, the process for structuring the deal. A lot of details in here for a graphic novel, especially.
Barry: We even tell the name of a guy who took our business plan and then copied it.
Andrew: I couldn’t believe it, yes.
Barry: It’s the advantage of having truth on your side.
Andrew: The raising money. You had an idea for how to structure the deal. Can you talk about that, can you explain that?
Barry: Yeah. I think the way most people go about valuing a new company is they literally pull a dollar figure out of the air. We don’t have any revenues, so you can’t do a multiple revenue, a multiple over earnings or anything like that. So, you write a business plan that says you’re going to get the $50 million in sales in five years or something. And so, the company’s going to be worth a couple hundred million. And therefore, we’ll sell it to you today at a valuation of $3 million or $5 million or $10 million.
Of course, that doesn’t make any sense. Because if you really thought the business was going to get to $100 million in sales or $50 million in sales, it’s going to be worth a whole lot more than that. And so, at one level, you’re saying it’s so valuable. Another level, you’re saying “But I’m going to take such a low valuation.”
That’s all weird. So, if we really believe that we were going to be successful, then how do we get people to buy in at a much higher valuation? And our solution was to do things completely differently from the way money is normally raised. So, there’s something called a pre-money value and a post-money value. And typically, let’s just say a company starts off with a pre-money value of $2,000,000.00, raises $1,000,000.00, so they are selling 1/3 of the company. So now after the money has come in, the company is worth $3,000,000.00, the investors have 1,000,000.00, and the founders, if you like, have 2/3.
Barry: We used a pre-money value of 0. So the investors put in a half million dollars and they had 100% of the company, which was very hard for them to argue with.
Andrew: Mm, mmm.
Barry: However, what we said is, “Here’s the deal. Once we double your money, we get to start taking some of the upside from there on and once we triple your money, we will take some more of the upside, and once we five times your money, and ten times your money, and fifteen times your money, we will get some of the incremental value that we created. So we essentially had warrants that were all out of the money, at two times, three times, five times, ten times, and fifteen times.
The old line, I guess, from the typical private equity firm is, “We want to make it ten times return.” That’s great, but now that you have done that, can we please share in some of the upside? How can you argue that the company is not worth this much and at the same time say, “Oh, but I think it is going to get a ten times return”? So we put the investors ahead of ourselves because until they doubled their money, we got nothing.
Andrew: What kind of problems did this cause you later on? It feels ingenious and it feels like a lot of the ideas that you had for how to brew the tea that were…
Barry: I think the reality was that one: nobody could really understand it. Let’s face it, it was kind of complicated. We had warranted two dollars, three dollars, five, ten, fifteen, and ultimately what we really needed people to do was to treat those warrants as if they were sufficiently out there that they did not count. Once they were in the money, we started counting them, but the ones that were out of the money, we acted as if they were irrelevant.
Andrew: To make it simple for them to understand?
Barry: To make it so that the valuation of the company did not look like it was crazy because those warrants would only be valuable if they ended up getting a good appreciation of their shares. By the way, we got a 23 return, 23x, so all the warrants were, in fact, quite valuable. We went from owning none of the company to about 40% of the company by the time we were all done.
Andrew: Were you and Seth 50/50?
Andrew: All right. One more thing about money before we go back to distributors and creating the product. What was I going to ask? Oh, yes. Talking to friends about money and asking friends for money, that seems like the easy win. You don’t know any venture capitalists. They do not trust you even if you could get a meeting with them. Your friends do know you, but it is kind of tough. It is weird to ask friends for money.
Barry: I think people go two ways on this and I am very strong on which way is the right way. Which is?
I will not invest in a company where the person has not gone to their family, their friends, their neighbors to go and raise money, too, because essentially if they are not willing to put their reputation on the line with their friends, I do not know why I should be the one who is taking that risk.
Andrew: I see.
Barry: They do not have to invite me to Thanksgiving if things do not turn out well, but I want them to feel that pain. I think it is also the case that what I am looking for with other investments, and what we provided, was really the sense that we want to put our investors ahead of ourselves. To give you another example of this, I invested in a different student’s company and I believe in the end he raised money. He raised $1,000,000. The pre was $3,000,000 and the post was $4,000,000, so he sold 1/4 of the company for $1,000,000 and then ultimately sold the company for $1,000,000.
Andrew: I see.
Barry: So in theory, he would have gotten 3/4 of $1, 000,000 and we, the investors, would have gotten $250,000. We would have lost 3/4 of our money and he would have done not what he expected, but not so poorly. In the end, what he did was he decided to make it preferred, so we got all our money before he did. He did not have to do that.
Andrew: He did that after the sale.
Barry: He did that as part of the sale.
Andrew: As part of the sale, I see. Okay.
Barry: So it was not a gift, but in effect it was a gift.
Andrew: I see.
Barry: That perspective of saying, “Look, I don’t want to succeed unless you are succeeding” is something that, to me, is an essential component of the type of entrepreneur I want to invest in. And, by the way, after that happened, I helped him get a job. And he is now working at the startup of his dreams. And basically, I think this guy gets it.
Andrew: Can you say his name?
Barry: Sure. This is Richard Dudlow [SP]. And he’s working with a fellow named Mix Mintella [SP] to help try and reform education. Max is another one of my students who built a company called aardvark.com and sold it to Google. So, and the company that Richard had built was something called academicearth.com. So, that view of having your friends and your family being part of your invest community really helps people think about making sure they’re treating their investors right.
Andrew: Creation of the product. I understand that you guys went out. You found people who can do it for you. But you also had an issue with it where, at some point, what is this? Why did you end up buying your own factory?
Barry: Oh. So…
Andrew: I’m usually very good at teeing up the questions. The problem is, Barry, when I get so caught up in a book, I want to talk about it. I don’t want to give you a chance to talk about it. I read it, I’m excited about it. And so, I’m trying to figure out how to let you talk about it without me telling your story.
Barry: We had this problem. The original plant we work with was in Buffalo, New York. And I love Buffalo. But it’s cold, it’s hard to get there in the winter. And in the fall, they shut down our access to it, because they were making apple cider. And the view that we would only have access to production nine months of the year was not something that was going to be a recipe for growth.
So, we needed another production place. We also weren’t really getting enough time at the factory to figure out how to get production better. And, so, there was a plant that was for sale in Pennsylvania, in Pittsburgh. And we thought it had $2 million worth of equipment and it was on sale for $500,000. It looked like it was a great deal. And we bought it with two other partners. There were some great things with it. One of the other partners was a Snapple distributor. And so, we got into our first big distribution house in Colorado which was very valuable.
We had a chance to experiment and really improve the way in which we made our product and that was fantastic. But, ultimately, the problem is that we didn’t have enough capacity to fill up the plant. And so, the plant didn’t really run efficiently. We lost a lot of money at the plant. We ended up making product for competitors that we never should have. And we lost well over $1 million running this plant.
So, the better solution would have been to go to the plant in Buffalo and say “Look, I know we’re a pain. We kind of try and do everything differently and we’re not making very much product and you’re not making much money from us. Here’s $50,000. Would you please now treat us like we’re 10 times our size? And that includes not kicking us out for three months during the year? Giving us a day to experiment in terms of how we make things”?
Andrew: And the reason that that would have been a better decision is because you want to focus on what you do best which is make (?).
Barry: We are not very good at operations in terms of literally running a plant. That is something that is kind of a Marine’s job. You want to do the same thing again and again. You had cost down, you get consistency. And frankly, we’re busy trying to figure out how to market tea. How to build a brand reputation, which is not the same thing as hiring workers to come in on the day shift or the night shift and run the plant at 120 bottles a minute, rather than 110 bottles a minute.
Andrew: It’s so hard to figure out what to focus on, though.
Barry: No it isn’t.
Andrew: Why not?
Barry: Because the skills to run a plant are just something that neither Seth nor I have a passion for.
Andrew: I see that. Well, let me you ask this, then. Teas in bags. Teabags. Selling teabags.
Barry: See right back there? Those are the teabags.
Andrew: How are they doing?
Barry: They haven’t been in the market for many years, now.
Andrew: So, see what I mean? It seems to make sense that when you’re focusing on tea, you can create tea in bottles and sell it in stores.
Barry: I’ll show you some of the problems. I think I can even do a little demo here for you. Let’s see. [inaudible]
Andrew: Got this all in the office.
Barry: Here we go. So.
Andrew: You’ve got all the evaluations it looks like.
Barry: Or at least a few of them, that’s for sure.
Barry: So I think here was our first iteration of the teabag and what’s nice is you can see the tea in the bottom of the bag. You can see the sort of clear label, it’s all transparent, it’s absolutely, I just think it’s a beautiful package.
The problem is that there was no little guide to rip these things so you just go crazy trying to pull these apart.
Barry: So that led us to instead of wrapping them in plastic, wrap them in paper.
Barry: But the problem now is when people ripped it sometimes they ripped right through the paper teabag and so that led us to make the over wraps a little bit bigger and I’m not sure I have those right here.
When we made the over wraps bigger, they no longer fit in the box. So that was a challenge. By the way, we tried to do with the boxes is give you a sense of what the tea looks like inside we cause an x-ray image of what the teabag is. It was actually just a Xerox of the teabag.
Some people thought this looked like a French horn or people like an IUD and so then we moved to putting them in canisters and so there’s no over wrap and that was kind of, oh we can’t, there aren’t any in here. Oh well, but anyway.
The question was then what we were going to do with re-cycling the canisters. You couldn’t easily take the teabags with you so ultimately we moved to a box like this which is sort of more of a conventional teabag.
We made a little hole down here so that you could pull teabags out from the box individually.
Barry: But that then made the boxes not structurally sound so when they stacked they initially didn’t work. This is the entrepreneur constantly trying to fiddle and get things right.
Andrew: Is that the right approach to keep fiddling like that?
Barry: Well I’d say, there’s only so many chances you get in life and if you want you know, sort of, one, two, two and a half with the bigger ones, three, you don’t kind of get five chances.
Andrew: I see.
Barry: And so some fiddling is OK, but we more than pressed our luck on that one.
Andrew: I see. I understand now what you mean that you’ve tried enough, that’s it’s not going to work out. Just give it up and focus on what you’re good at but I would have expected that would have worked out well but branching out into non-tea bottled drinks would have and yet that did really well for you.
Barry: I think one, we could have succeed with teabags if we had invested a little more time and energy into it. Maybe gone to China and found somebody who would make them a little bit more cost effectively and little bit higher quality for us but ultimately this was the mistake that we thought of ourselves as a tea company as opposed to an honest company.
And that our name on is tea we were emphasizing the tea part but ultimately as we started our conversation today, it was about making drinks that are more normal drinks, a lot less sweet and many fewer calories.
Then the questions is what other products can be made honest and the most obvious one is as Seth was putting Capri Sun in his kids lunch bag and looking and saying, “My God, there’s 110 calories in this, that is as sweet on a pronounced basis than soft drinks.”
Why am I going and selling healthy teas and providing essentially soda for my kids lunch. That doesn’t make any sense and we can make an honest kids product.
Andrew: And that became Honest Kids.
Barry: OK. Honest Kids and I think that’s now a third of the company’s revenue with just a really simple idea. It’s diluted fruit juice basically.
Andrew: So we started out this conversation saying that for Whole Foods, they had drinks at 90 to 100 calories, that was too much. That we wanted as drinkers 30 calorie drinks without much sweetness. But I’m holding up this bottle of Honest Tea and on the side it says 100 calories and underneath it says a tad sweet.
Andrew: There was a point in the story where you had it, where you grew it and you had an opportunity to go even bigger and your adviser said, “Make it sweeter.” I thought in the story you were going to say, “No way, we stood for 30 calories, not too sweet drinks, we’re going to stand by this.” You instead decided to go to this, why?
Barry: So first, just to understand that if you look at the other half and halves in lemonades in the market, that’s 50 calories a serving. Many of them are 100, 120.
Andrew: I see, okay. And then, this is the honey green tea. It has 70. Still more than 35.
Barry: And by the way, what you were saying there, just to be clear. That’s 70 per bottle.
Andrew: Per bottle.
Barry: And so, if you want to compare that to other products, those products on a per bottle basis, are going to often be 200 or 180 more like. And lemon is very sour, and so of all the things that need to have more sugar in them, making a lemonade is going to be one that’s going to push you to the top. So, 50 calories per serving, 100 calories per bottle is where we topped out. Having said that, our view is that we should provide a range for people. The Just Green is zero calories. When we started this product it was nine calories.
The [??] Kashmiri Dry was 17 calories. So, we have products that were sort of 0, 10, 20, 30, 40, 50 per serving, and why let somebody else in some sense, come in and approach you from below. What we’d like to do is own the whole space from 0 to 50 calories.
Andrew: 0 to 50 but also 0 to maybe 100?
Barry: No. The 50 to 100 per serving or per bottle – it could be 0 to 100 if you’d like.
Andrew: So then, how do you avoid the problem that we started out talking about, which is that if you say, “We are about this. We are against the people who have too sweet drinks. We are the unsweetened drink.” And then you create the sweetened drink?
Barry: No, but it’s not. It’s a tad sweet. So, if you like, we are zero one to two teaspoons per serving. And that’s what gets you from the 0 to 50 calories.
Andrew: I see. So, if we have an idea for a business and we just stick with it blindly, then we’re too stubborn to really make it big. If we adjust with the winds because people want energy drinks, then we’re not focused enough to stand for something. I want to figure out where am I as an entrepreneur, allowed to go? How do I know where my line is? How do we all know where our line is?
Barry: So, one of the things that happened is as I said to you earlier, the people who like our products were the customers, but not necessarily the distributors and the folks who stocked the shelves. Well, by going a little bit sweeter, those products now still didn’t appeal to the folks who stocked the shelves or the distributors. But they could at least imagine somebody else would like it.
Andrew: I see.
Barry: And so, if you want to [??] an apple drink, or offer something that’s 120 calories – and I’m talking about per serving, or 240 per bottle – providing them something which has 50 is going to be an easier transition, and then later on they can go to the 30 calories or the 20 calorie product.
Andrew: I see.
Barry: So, one view is that it is a huge jump to go from 120 to 17. And another is that some people want two or three teaspoons of sugar, and we might as well capture that whole part of the market that’s being less well served. Just think about all the flavors out there – lemon, lime, grape, raspberry, ginger. Why not have the zero, one, two and three teaspoon options as the [??] part to wheel on.
Andrew: As I was reading the book, I was looking to understand how you marketed honesty, and what I kept seeing was street distribution. How big a part of your marketing was that? People standing out and doing samples?
Barry: Huge. Again, as I said, once somebody’s tried the part, they get it. They understand what we’re about, and then they can go and re-order it. So, I could tell you about it until I’m blue in the face, but once you’ve tried it, you either like it or you don’t. And if you like it, you’ll come back.
Andrew: And so, how big was that marketing? How many people would you have out on the streets?
Barry: Dozens. And we would hire folks for events, and we’d hand out things where we thought they would be honesty drinkers, whether it be walkathons, marathons, folk music concerts, south by southwest kind of events, little league games. You name it.
Andrew: You did that too? You would do samplings? Let’s close this out with the story of how you got Oprah to hear about honesty?
Barry: So, I was at a yoga retreat in California, and there on the mat next to me on the right, was Oprah. Afterwards, I had some tea with me, and I sampled her, and she loved it. Next thing you know, we were featured in the O List. I told this to Seth. He said, “Well, how did you know Oprah was going to be there on the mat? How did you know to have samples with you? Did you know who was going to be there?”
My answer is, “No, I didn’t know she was going to be there. I always have samples with me.”
Barry: I have a fridge here, in my office. I typically have a bottle that’s going to be in my bag. If I ever meet an entrepreneur and they don’t have samples with them, that is, to me, a sign of something seriously wrong.
Andrew: I love that story. I love all the stories in the book. The book is called “Mission in a Bottle.” Again, let me just open up the book and show you guys what it looks like on the inside because this is unusual. I really enjoy the way you guys wrote this. I hate comics. I shouldn’t say that, because I know a lot of do. I hate comics.
Barry: Just hold it steady.
Andrew: I always wanted to get into graphic novels, but the topics just turn me off. Here, you put a business story into a graphic novel format. I love this.
Barry: Thank you. Well, it’s. . . There are many trips to and [s-room] classroom, and you see right now we have a little lessons learned section, which is more in the traditional format. It allows us to do the presentation first person, which is the way I speak, as we’re doing now. It forces you to be incredibly concise, because those bubbles limit you to 20 words. And so it allows the whole presentation to just move at a fast clip, but it’s every bit as serious as you’ll find in any other book.
Andrew: There it is. You grabbing something?
Barry: Yep. Here we go. No, I’m good.
Andrew: Oh, OK. All right. “Mission in a Bottle.” The drink is Honest Tea, and let me say this, finally, you guys have to also, as long as I’m telling you. . . as long as I’m giving you some recommendations, check out “Why Not” the book.
Andrew: Really great book on how to come up with ideas. Thank you so much for doing this interview.
Barry: Terrific. I appreciate all your enthusiasm, and I look forward to hearing many of your other interviews.
Andrew: You bet.
Barry: Great to meet you.
Andrew: Thank you all for being a part of it. Bye, guys.
Barry: Take care.
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