Honest Tea: Seth Goldman (2017)

Hey, really quick before we start, just wanted to share some really exciting news with you. We are taking How I Built This live to Chicago. On Wednesday, july eighteenth, I'll be interviewing live on stage Peter Rayhall, the founder of RX Bar. The event is sponsored by American Express, and to get your tickets, go to nprpresents.org and hope to see you in Chicago. And one more thing, it seems like you can walk into any store these days and choose from, you know, dozens of bottles of artisanal water or organic juices, but before any of that

Seth Goldman was trying to convince the beverage industry that yes, people will buy a bottled drink. That is not loaded with sugar. And as you will hear, it took a lot of convincing. This story first ran last January. But it's worth hearing again.

Hope you enjoy it. Um So in two thousand three, we had a delivery of glass that was Falty. And so we ended up with some

product in the marketplace that had broken glass inside the bottle. In fact it were two different whole food stores. And Whole Foods has a rule, three strikes and you're out. We knew we couldn't afford as a business to lose our largest customer. So we voluntarily withdrew all product from the market. Every st every store. Yes. Everywhere. Not just Whole Foods. Everywhere. How much did that cost you? Uh it totally stopped our sales.

It was just painful. For I'm NPR, it's how I built this, a show about innovators, entrepreneurs, idealists, and the stories behind the movements they built. Guy Raz, and on today's show, the story of how Seth Goldman Barry Nailbuff took honest tea from a kitchen sink in suburban Maryland. to the shelves of virtually every grocery and convenience store in America.

So the year is nineteen ninety seven. Seth Goldman is living in Bethesda, Maryland, with his wife and three young kids. He's 32. He just graduated from the Yale School of Management. He's got this great job at an investment firm. But Seth. He's he's got an itch. He he feels like he wants to start something and it keeps nagging at him day after day. So he starts thinking about different ideas, maybe a web-based system that would raise money for public schools by tapping into alumni networks.

He came up with an idea to simplify diagnostics for urinary tract infections. There were a bunch of other ideas that would pop into his head, but nothing really got him excited. Until one afternoon. When he finished a long run and walked into a convenience store. Hot and sweaty. And I I went to a beverage cooler and I said there's nothing here. N nothing seemed appealing. Yeah. And it was all a hundred calories per eight ounces. And the so the difference was fizz or no fizz, color, you know, different names, different bottles, they were almost uniform in their taste profile, their sweetness profile, which was, you know, six or seven teaspoons of sugar per eight ounces, or none.

Why isn't anyone making a drink with one or two teaspoons? Just like a little bit sweet. Yeah, just uh to add sweep. So so so how did you go from that to to like thinking about starting a tea company? So uh when I felt that thirst, I reached out to my professor from business school. And when I had Barry Nailboff, when I had been his student, we had done a case study of the beverage industry and we had agreed there was a m uh a gap. There was that space. A sweetness gap. A sweet gap. Huh. So I reached out to Barry, I said, I think I'm ready to do something about this. I'm not a tea expert. No, not a tea expert. And and more importantly, not a beverage industry expert at all. No knowledge of that. And that was where

having zero knowledge of the beverage industry in the beginning was actually a competitive advantage because we went in without any of the assumptions. Um one of the things that happened literally The same month that I went for that run in in New York City. was that um an investment my dad had made in nineteen seventy seven, so more than eighteen years ago. at the time, um, came to fruition. And I was presented with a check for fifty thousand dollars.

And That was kinda the risk capital. Yeah. And it was enough for me to say, Okay, well, look, I'm gonna put this This is if if we lose this, we lose it, but uh this is what I'll bet. But at the beginning, I mean you were thinking I'm going in into into this with two feet. I'm gonna quit my job, but I mean you were still young enough where you could always like go back into finance. Yeah, uh that's right. So so you have a fifty thousand dollar check from your dad. Yeah and then and did was Barry able to put in a little bit of seed money? Oh yeah, Barry had been on the board of a company that got in public so he put'cause he kept his day job. And Yale. He's still a professor at Yale. What was funny was that before I went to submit my resignation at Calvert, I I kinda called Barry for one last boost of confidence. I said, I'm I'm gonna go in there. You know, we've just had our third son, but I'm gonna step down and

And there's this long pause. He says, Well I bet if you went to Calvert and asked to go on a sabbatical, I bet you they let you do that. And I said, Well n that's not I was hoping for the boost of confidence. You know, I I knew I had to to take the plunge. You couldn't get investors to invest or employees or buyers to commit without, you know, me being committed. Can I just do a uh quick uh check? Sure. You are a uh a father of three kids with with a good job at Calvert Investments. And you tell your wife you're gonna quit to start a tea company.

Uh which is an industry you know nothing about, and nothing about that terrified you? More importantly, nothing about that terrified her. Yeah, I think it was I believe in myself probably a little bit of hubris, right? Like I think I can do this even though I don't know anything about it, right? But um I'm I'm ready to to try. So you you quit and then basically you and Barry, what did you start to do? Like how did you start to get w did you start to raise money? Was that your first thing? So it was a little bit of the chicken and egg. So so the first thing we did was I I did write a business plan. These days people really put together PowerPoints. They don't write business planes. But I wrote about a 20-page business plan that mostly showed the thinking behind the business. I think every every potential investor wants to understand there's actually some thought here about where this goes and what it how it becomes something. Um I managed to secure an appointment with Whole Foods.

That early? Even even before you had a private. So that was lucky because the the marketing director at Whole Foods, or this at that time it was called Fresh Fields Whole Foods, it was in mid Atlantic, he was a graduate of the Yale School of Management as well. So he helped me get an appointment with the buyer. Wow. Yeah. Seth. I just wanna pause here f for a sec because I

From what I've read about you, I understand that like in the midst of all this happening with Whole Foods and and all that excitement. Uh Your son, Ellie got Pretty sick. Well, it was the ultimate test in compartmentalizing because literally the day before the whole foods

our first presentation when we're gonna present the so it's probably the most important day in the company's history where we're gonna go present the tea. And Barry and I are in the kitchen and we've got mugs and and bowls that we were brewing the tea and it was not an o official looking lab. So the kitchen's full of all these things. My wife walks in with our our middle son and she's got this ashen look on her face and and I um I oh no, she's so upset we've made the kitchen such a mess and I said, We'll we'll clean this up And she says, That's not what I'm worried about. We just came back from the doctor and Ellie, our middle son, had a coartation of his aorta. He was gonna need major surgery within the month. Yeah.

And so um you know that's a pretty heavy news to get. How old was he at the time? He had just turned four. That was intense. And um Probably if that had happened a few weeks earlier, I probably wouldn't have left my job at Calvert because

you know, th whether it's the health insurance benefits or just the risk level, you know, I wouldn't couldn't do that, but I had already taken the plunge. I knew you can you can bet that when I was at the Whole Foods meeting I was selling with great intensity and we needed to succeed. And then um while Ellie was in the hospital, uh and I stayed with him that whole week, but I would go down at sort of after midnight, um we had someone working on formulas, uh blends, and he would come in and meet me in the lobby of children's hospital and we'd taste tea together and I'd go back up and and sleep by Ellie's bed. And I think um You know, life happens. It's it's It's part of the experience, it's part of the journey and and I'm so thankful and um to have Ellie still with us and and such a delight and such a

Um wonderful presence, you know, and uh for me and and for you know all the people he touches. Wow. Yeah, I'm thinking about it. you like pitching this product, you know, at Whole Foods in the midst of all this. Um and and what did you do? Did you like did you

Bring them samples that like the samples that you made in your kitchen, just put them in in in in like some random bottles or something? We we got an empty snapple bottle. Used empty snapple bottles? Yes, we have to snap. But what's really funny is that Barry had sent over some thermoses one day in the mail. And when I met with the buyer and I sh I we we Pour outre. Samples from the thermos, showed him my empty snap a bottle. And he had said Uh well look this sounds interesting. We'll give it a try. We'll take fifteen thousand bottles, which of course was both terrifying and thrilling.

How did you make that how did you make that much tea? So so we got this commitment from the buyer and then next thing we did is we basically went up and down the east coast um looking at bottling plants and we went to beer plants and soda plants apple juice plants um so we ended up at a plant in um Buffalo, New York that was making apple juice. Maybe it was a little down on its luck and had some had some line time available and They said, Why are you gonna brew the tea leaves? And so um we brought in these mesh bags, these large mesh bags that are actually can be used to like clean a pool, like a phone. Yeah. And so that was what we used. You just filled the tea in it and dunked it in boiling water. And every once in a while the bag would break and then the the the pipes would, you know, clog. It was it was not pretty. How did you know the tea was I mean that like the tea was gonna be good. Well, that was that was what was so funny. You know, when I talked to Barry, he just He he's very good at making things sound simple. And sometimes they are, sometimes it's a little more complicated. He's like, well look, you take a tea bag, you dunk that in water, if you multiply it times 15,000. So theoretically that works. What we found is that when you you know, especially in the beginning, too many tea leaves, you don't get the full infusion.

Yeah, the the bag breaks then you really got a problem. So we just had to keep iterating It was a very Um makeshift operation. So once you had all the bottles, how I mean, how did it sell? Like did it do well right away? So what happened was, you know, obviously we went to the shelf, nobody knew what it was. And so

All that first summer, this was nineteen ninety eight now. All we did was give out like our marketing effort was me and two interns giving out samples. in whole food stores. And we gave out more um samples than we sold. But by the end of that summer, we were the best selling tea in the seventeen Freshfields Whole Food stores in the mid Atlantic. Wow. And so what was then happening was that the the consumers were starting to ask for the tea, which was really neat. And and it was so different. And and so what was nice is we have low switching. You know, some brands

uh maybe in the serial category. If one, you know, if raising brands on sale, someone will go buy post or whatever. That you switch back and forth, but with honest T If it's not there, you don't go back and buy Snapper, Arizona, because it's the taste is so different. Yeah. And so when we got somebody and and we were clearly not for everybody They they were very loyal.

What was like what was the thing that made E honesty different from like everything else that was on the market at the time. So two things. First of all, just much less sweet than everything else. But the other thing and the reason the name on his tea made sense is because what we learned is most of the bottled tea in the US at the time and still today is not brewed with r you know it's not brewed tea. It's it's a powder or a concentrate. It bears a relationship to the tea leaf like the fish filet bears a relationship to the fish. You know, somewhere along the way there was a fish. But um our tea we bring in the tea leaves to the plant and we brew them there. I mean so once you were in Whole Foods pretty quickly after you launched, I mean, it seems like you were sat like I I guess the impression of the average person would be Wow you're sat you're in Whole Foods you're now. So it was just a st it was a start. And so um but we had I guess proved the concept.

Yeah. And so then we were able to go back out to investors and say, We approved the concept. Now it's time to expand. So we got more investment money raised, and then we went to the other buyers and the buyers for the for the West Coast. And we went to buyers from other stores. You know, uh mom's my organic market here in the mid Atlantic was one of our earliest accounts, and they They it was working there and they started to to bring it to their other stores. So you're I mean, you know, it's it's I mean you're making lots of tea You're growing what w what were the challenges of at that point? Oh, there were so many'cause it was still um Well, first of all, cash is always a challenge. We were we were growing quickly, but Um, we were spending money to do it. We w had salespeople, we were doing marketing.

Um And then just probably getting the tea to sh stores, right? And distributors are they're the gatekeepers, they decide where your drinks go? Because this is unlike a you know, a a tech Company. Yeah. No matter how good our product is. We can't ship it through the mail.

Beverages are a high turnover product. And so as soon as a shelf empties of beverages something takes its place. And so you need a distributor to be there to to build keep the shelf space uh protected. And so um what happened was we were going to all the distributors of Snapple in Arizona. And they were saying when they returned our calls, they would just say it's not sweet enough. It's too expensive. Wow. It tastes like grass. It's not what we're used to, which of course it wasn't. And what they what where they were not effective was they

They were tasting it for their own palates. They weren't Thinking that's there's a whole population out there. That you know has a different Appetite.

Did you I mean, when when you pitch it to investors who invested in like these kinds of things, did w I mean Were they saying, Oh, this is awesome. I can't wait to jo jump in, or were they just saying were just saying, Did you get a lot of no's? We got a ton of no's. The main reason we got so many no's is this was rem now is sort of nineteen ninety nine, two thousand, this was during the whole dot com boom. Yeah. And we were very old economy. And so you know, people would much rather throw millions of dollars at You know, it's something dot com. than put a few maybe ten or twenty thousand dollars into a a beverage company.

Like you had investors come in and say, you know, you should follow our advice and do this. What what what were some of the things they told you to do? Everything everything. You know, so we yeah, we had these um fancy investors from Boston. They said, you know, well, you know, you could you you should be an energy drink,'cause that's really growing, or you should be a dot com. Um, you you know, if you made the product uh a cheaper, you could make better margins on it. I said it sounds like you're interested in uh in the opportunity, except Everything that we do. Like But we also knew to to really succeed in the long term, we had to be different than all the other big companies out there. And if we you know to create a sweet tea, there were tons of companies already doing that. But when you were in those early days when people are saying this doesn't taste great or pricing like add more sugar, did you ever think maybe they're right. Well, there's no question that would have led to faster growth. But it would have been a little bit more.

Diluted what we were building. This was about building something that we could always believe in that we would that would be meaningfully different and that, you know, if it to take people in a different direction, you have to Disrupt where they're going. Set Coleman.

In a moment, when we come back, Seth explains how honesty became an actual political issue in the 2008 presidential campaign. I'm Guy Raz, and you're listening to How I Built This? From MPR. It's how I built this from NPR. I'm Guy Raz.

So by the early two thousands, honest tea had become one of the highest selling beverages at whole food stores. And things were going pretty well. But then There was a hitch. At the time, the company had its own bottling plant near Pittsburgh.

And something happened there. That could have completely destroyed the company. So in two thousand three, um, we had a delivery of glass that was faulty. And um there were a lot of blisters in the in the glass, literally you could look at it and see little bubbles. And so we ran it on the production line. And the the way the line works is that if it ever sees a defect in the bottle, it's supposed to kick it out and it reject the bottom. Yeah. Uh but the line didn't do that. And so we ended up with some product in the marketplace that had broken glass inside the bottle. In fact it were two different whole food stores.

And Whole Foods has a rule, three strikes in your route. Fortunately no one got hurt or injured, but We did have bottles with pieces of broken glass in them, and we Uh Knew we couldn't afford as a business to lose our our largest customer. So we voluntarily withdrew all product from the market.

Every store. Every store. Yes. Everywhere. Not just Whole Foods. Everywhere. How much did that cost you? Oh, it was well, we were doing about three million, four million dollars in sales and uh it totally stopped our sales. So we lost several months of sales. So several hundred thousand dollars. I don't know that it cost a million, but but a huge You know, just momentum stopper. Here you are trying to build, you got your salespeople out trying to sell product instead, now they're trying to destroy it. We destroyed it all. And and and it was just painful. Um profitable until the eighth year or so. I mean it took a time. Now we kept things really lean, so it wasn't like we were you know went on the spending spreeze, we were sharing hotel rooms and cutting corners everywhere we could, not on the ingredients, but you know, just trying to

To to keep the lights on. So what were you like what were you paid as as CEO? My first year salary was that fifty thousand. And it was even it was tax inefficient because I invested in the company and then I paid myself. Um, I don't think I got over a hundred thousand and for probably not for the first five years. And then it you know, it grew. But um but but the stock obviously really grew. So so during this time, were there like lots of other companies that were offering to to buy you guys out? Yeah, we were approached by lots of companies along the way. I mean it was very Um partially'cause we were growing quickly.

Um, and partially'cause we were doing something others weren't doing. So really from from the first year we were every year or so we'd be approached by a major food or beverage company. That wanted to to buy us. And and and I read like one of those one of those companies was Tetley T. Tetley, yeah. And and and they you you they kind of threatened you, right? We're gonna go right, we're gonna do exactly what you're doing and just do it bigger and and um we were always that was another thing I could lose sleep about, which was that there was always competition. And you and Barry owned like what? Like like ninety percent of your company. Even though you had tons of investors. Right. How were you able to do that? Well, this was a one of the key um strategic elements that Barry brought to the company. And he is literally is a professor of game theory and so he

He said, You know, the problem with so many startups is the entrepreneurs give themselves all these penny stocks in the beginning. And as a result, they start with the just much more stock than everybody else. And then everybody else just kind of just comes along for the ride. He said, But what if instead you started the founders at the same place as the other investors? And only when the company grows in value Do the founders get more equity?

And that's was it was a reverse structure. And what that did was it helped As we grew and we raised more money, we didn't get diluted. And the other thing was we relied on angel investors. So a lot of entrepreneurs and the venture capital mode is Basically, um they're incentivized to to own more of the company. They're incentivized to exit quickly.

And we didn't take that kind of money, and I'm very glad we didn't. I yeah, I think that was a key piece that let us keep control. When when did you when did you start to realize that? you know, like honesty was becoming part of like the cultural zone We had some funny moments. There was a moment in two thousand eight, President Obama had become an honesty drinker. I guess the campaign for two thousand eight. And the McCain campaign had had criticized him for being, you know, out of touch with the American. So was his favorite one? It was like the Black Forest Barry. Black Forest Barry, right. And and McCain's campaign manager had criticized Obama for, you know, drinking a organic You know, he kept a s Obab kept like a stock of it in his like with him all the time. In fact I I I had an encounter with him a few years ago and he brought over his The Body Man, like first of his tell tell him tell him what I drink and what do I always have to have with me? Wow. So at what point were you able to kind of

Just feel like okay, this is gonna work. Well, I would say so when Coca Cola became an investor in two thousand eight. That was a surreal experience because They approached you. They approached us. Well, they approached us in two thousand seven and they had just created this group of venturing and emerging brands. And their goal was to invest in and build the next billion dollar brand for Coca-Cola. And so, you know, going to the headquarters in Atlanta, sitting down with the the president of Coke North America and and then the chairman. And and you know, sort of party was like looking down, like I'm really here, we're really having this conversation. So that was the first moment like this this is actually gonna work. This is gonna be around.

Coke. bought about thirty percent of forty percent of the company. And uh and they bought an option to buy a majority, which eventually they did. They bought the company uh uh fully in two thousand eleven. But like this was your company. I mean, did you feel like you were you were giving away control? Well, you know the story so often when a brand is sold, the entrepreneur gets really frustrated and and they butt heads and the you entrepreneur rarely lasts a few months. Yeah. The friend of um my friend of mine who was a ran vitamin water t said, he said he and he left shortly after Coca-Cola bought it. He said, You know, the first few first few weeks they want to know your opinion.

And the next few weeks they want to know your phone number. You know, you're you're irrelevant. So why didn't that happen to you? Because and I give Coke a lot of credit. They understood this was a brand that is that is different than what they sell in market. They couldn't connect with the organic consumer or the natural foods marketplace. And so they gave us this incredible latitude and autonomy. And there were moments where we ran up against them around regulatory language or or just marketing approaches, and they respected what we did. So I what's so w uh surpr continues to surprise me is This brand is still my brand. And and the biggest part was the distribution. We were in fifteen thousand stores

When Coke invested now we're in over a hundred thousand stores. So that's that's where the difference is. I I hope my numbers are right, that early investors, people who put in fifty thousand dollars in the company at the beginning uh made a return of one point two five million dollars ten years later. That's right. Yeah. Twenty six times their their m their early investment. How many do you know how many millionaires were created by Honesty? I don't know. Um well to me what was so exciting was some of our employees were were made millionaires as well. And that to me was you know, that was all sweat equity. that they earn. So that was especially Meaningful.

This is a question I've asked everybody who's been on the show. How much of what happened? with you in Barry and Honesty was because You guys are just really good at what you do, and how much of it was just luck? I really don't believe in luck.

I believe that the reason we're still here is the perseverance. And I to the extent there's luck You know, the it's the timing the way the consumer has evolved. But you know, I've heard someone say, Oh, you know, you were in the right place at the right time. I said, Well, you know, been in the it took 10 years to get to that right place. So this was not a This wasn't um.

You know, something that just happened overnight. Um A friend of mine likened it to water, you know, eventually water finds its way. to you know, it comes going downhill and it gets to where it needs to go. And I think Um, we've finally got to a place where we could connect with consumers.

And do it in a way that was still meaningful. So I'm I'm curious, Seth, as you kind of like look back on all this. Is there is there like one trait that Like one

s really important trait that you either developed or just had Or have that that you think all entrepreneurs need to have? Well You have to be resilient. And this is this is something that's so important. You know, I to put this on a bigger picture just for our for like our our economy, we ha people have to be resilient. So one of my one of the best ways I developed resilience growing up was I wrestled in high school.

I was the worst wrestler on the team. My first year I was one in ten, and that was only because somebody didn't show up and I got the forfeit. So I I had Um learned how to fight off my back. You know, and and uh experience rejection and and It's so important to be able to bounce back from something like not just I mean all the time, but in in life and it and especially when you believe in it. It makes it that much easier.

That's Seth Goldman, founder of Honesty. By the way, the company has now sold more than a billion bottles of its beverage. It's now completely owned by Coca-Cola, with annual sales of more than$170 million. Chef. is no longer formally involved and though it made him a rich man? His life hasn't actually changed all that much. Seth still lives in the same house in suburban Maryland.

Where he made that first bat of honesty. Hey, thanks so much for sticking around because it's time now for how you built that. And today we're gonna update a story we ran about a year ago. This one started when Jaya Iyer was raising her three year old daughter in Oakden, Virginia. My daughter uh told me that she wants to grow up to be an astronaut. Uh so that's when I started looking around for clothes with astronaut or space theme and I realized that there were really none for girls. And sure, Jaya could have bought an astronaut shirt or pajamas in the boys department, but her daughter's favorite color

Was pink. I actually looked every place, and there was nothing at all. Not a single pink astronaut shirt. But as it turned out. Jaya was just the right person to tackle this problem. She actually has a PhD in clothing merchandising. So I actually uh got in touch with some freelance designers and I created a few designs, like I made a monster truck. Which was on a t shirt that didn't say anything boy about it. I made a pink t shirt with a race car on it. I made a a girl firefighter on one. And of course Jaya also sketched out that pink T shirt with an astronaut on it. She put her drawings online, she launched a Kickstarter campaign.

And she raised thirty thousand bucks. and I was lucky that I had the support of my husband who was always uh telling me, you know, if you really believe in it, go and do it. So with the Kickstarter money Jaya found a factory in India willing to make the shirts. She then expanded her line, shirts with computer code, test tubes, and a solar system that glows in the dark. All for kids. But there was a problem. We actually had a lot of parents reaching out to us saying, hey, we don't have anything like this for the moms of these kids. Lots of moms who work in science were asking about clothes for grown ups.

So Jaya started designing dresses with things like the periodic table, the double helix, the solar system, equations. Many school teachers, college professors actually are our customers. You know, it makes them feel great about teaching math and saying that hey, you know, I'm wearing a math dress because I love math. And they say we feel like Miss Frizzle. Since we first spoke with Jaya last year, her revenue has grown to about one and a half million dollars, and she now sells items for men like cufflinks, ties, and socks. Jaya calls her company Svaha, which is the name of her daughter, who, by the way, is now six years old and no longer wants to be an astronaut. Instead, maybe a singer or robot designer. And if you want to find out more about Svaha or hear previous episodes, you can go to howibilthist.npr.org. Also, if you want to tell us your story, please go to build.npr.org. We love hearing from you about the things you're building.

Hey, thanks for listening to the show this week. Please also consider subscribing to our show on iTunes and do us a favor, write us a review while you're there. You can also write to us at hibt at npr. org And if you want to set a tweet, it's at how I built this. Our show is produced this week by Rem Team Erabloui, who also composed the music. Thanks also to Neva Grant, Sanas Meshkin Four, Noor Kutsi, and Jeff Rogers. Our intern is JC Howard. I'm Guy Raz and you've been listening to How I Built This from NPR.

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