Honest Tea

IDENTIFICATION OF FINANCING SOURCE

(VENTURE CAPITAL OR ANGEL INVESTING)
Honest Tea commands strong positioning and brand equity in the
market, potential to further grow but would need investment
Purpose of existence Product suite & current performance Road ahead

- Set up in 1997 by Seth Godman and Barry
Nalebuff
- Launched with the potential to tap the
underserved ready-to-drink segment
- Aim to target a wide spectrum of customers
- Started after marathon brewing session that
boiled water and mixed tea flavours
- Early financing offered by co-founders,
friends and family
- High emphasis on research and cultural
aesthetics of tea lovers
- Reaped benefits from first movers - Highly competitive market ; players
advantage; strong brand equity servicing across the beverage
spectrum
- Generated $2.1m in 2000 sales; high growth
(~278% CAGR since 1998) - Need additional financing of at least
$2 mn to get back to profit
- Positive media reception owing to satisfied
customer and awards - Need to build a national level sales
force and enhance distribution
- Launching new products to further
strengthen the portfolio
- Whole leaf tea bags
- Variety pack
- New flavours
Honest Tea has a strong potential to grow; market still evolving
Strong growth market
• The RTD tea (along with bottled water & sports drink) is one of the fastest growing
sub segments
• Strong incentive to grow; Ready-to-drink tea market sized at $2.67 bn (growing at
9%)
• ‘Honest tea’ with ~$2 mn holds ~1% of total market (smaller than most players)
Target customer profile
• Risk awareness amongst customers for health drinks
• Lack of tasty drinks options in the market Wide product offerings

Competitors • New product

• Snapple (14.6%) launches
• Arizona Iced Tea (10.6%)
• Lipton (9.5%) • New flavours being
• Starbucks launched
• Nestle
• …Range of other firms • Strong research
backed tasted
Honest Tea has shown strong performance; needs incremental
financing to turn cash positive
Net income generation Total cash generation Profitability metrics
Large cash pile at the end of 5
year forecast window
Strong return generation for
Projected
equity investors
Sales growth assumed to
persist at 2002 levels
Cash positive from 2001 with
additional $2 mn investment

Accounting profit from 2002

onwards

Source of funds Usage of funds

Funds being used to finance

inventory and push sales
Investment of $2 million needed
The key concern here is to chose the best investor – VC or Angel
Current financing situation
• Started with founder’s money of $300,000 along with additional $27.5K from external sources
• First round, raised $1.2 million with pre money of $ 4 million
• Second round, raised $1 million
• For next rounds, the business needs additional financing for growth and two alternatives exist

Venture Capital Funds Angel Investors

- Strong industry connect and expertise on managing
business
Pros - Prior track record and experience in growth businesses
- Deeper financing pockets, thus offering better strategic
partnership
- Representation on the board and decisive say on
strategic decisions
Cons - Can hamper the basic essence of the company and
move towards short term performance goals
- Lower offered pre-money valuation; resulting in
higher stake dilution
A detailed assessment of both the alternatives would be required to decide the most strategic investment option
- Involved with prior rounds of financing and
feel a connect to the firm
- Current management gets a free hand
- Invested because of the love of tea and the
essence of business
- Relatively less informed about the business
and overall market; require much hand holding
- Need for multiple investors as average ticket
size is smaller
Current market valuation of ‘Honest Tea’ indicates the need for
financing
P/E 15
1995 1996 1997 1998 1999
TRIARC COS INC - - - 32 43
SARATOGA BEVERAGE - - 8 8 15
NATIONAL BEVERAGE CORP 10 17 14 12 11
CLEARLY CANADIAN BEVERAGE, INC - 93 - 44 - Venture Capital is the best source of funding:
P/S 0.43
1995 1996 1997 1998 1999 1) The size of investment is much higher than estimated $2 mn and
TRIARC COS INC 0.28 0.35 1.00 0.57 0.51
SARATOGA BEVERAGE 1.67 0.58 1.01 0.79 0.52 hence a VC is a better fit (rather than angel investors who
NATIONAL BEVERAGE CORP 0.25 0.48 0.47 0.41 0.35 generally have a smaller ticket size)
CLEARLY CANADIAN BEVERAGE, INC 0.31 0.83 0.66 0.34 0.17
2) Considering the current financial situation of the firm, the
business can make use of the strong industry expertise and
Based on the 2002 projected earnings, the valuation of ‘Honest connections that a VC would get
Tea’ would be:
3) The current pre and post money valuations indicate that the
1) Using Peer P/E ratio, valuation in 2002 comes out to be $ 16 mn offered price is good considering the peer valuation
2) Using P/S benchmark, valuation comes out to be $7 mn
Since, the venture fund is currently valuing it at pre-money of $5-$7
million, this means a post money valuation of $10-$12 million
Appendix
Balance sheet
Income Statement
Balance Sheet
Total Assets
Income statement 1998 1999 2000 2001 2002 2003 2004 2005
Current Assets $ 33,578 $ 450,173 $ 799,164 $ -1,524,204 $ -2,093,642 $ -1,938,687 $ 271,469 $ 18,432,102
Revenue 180% Cash $ 33,578 $ 450,173 $ 799,164 $ 475,796 $ -93,642 $ 61,313 $ 2,271,469 $ 20,432,102
Sales $ 273,913 $ 1,229,882 $ 2,118,094 $ 8,992,400 $ 16,888,500 $ 47,324,462 $ 132,611,227 $ 371,599,314 Accounts receivables $ 61,066 $ 176,039 $ 303,173 $ 1,287,126 $ 2,417,333 $ 6,773,781 $ 18,981,291 $ 53,188,819
Sales discount $ -7,807 $ -149,027 $ -156,172 $ -619,400 $ -1,162,800 $ -3,489,334 $ -9,777,709 $ -27,398,811 Inventory $ 98,477 $ 297,571 $ 512,475 $ 2,175,719 $ 4,086,187 $ 11,450,194 $ 32,085,400 $ 89,908,771
Prepaid expense $0 $ 36,131 $ 36,131 $ 36,131 $ 36,131 $ 36,131 $ 36,131 $ 36,131
Other income $ 5,862 $ 15,167 $ 6,030 $ 22,500 $ 44,900 $ 134,736 $ 377,553 $ 1,057,969
Total current assets $ 193,121 $ 959,914 $ 1,650,943 $ 3,974,772 $ 6,446,010 $ 18,321,419 $ 53,374,291 $ 163,565,824
Total $ 271,968 $ 1,096,022 $ 1,967,953 $ 8,395,500 $ 15,770,600 $ 43,969,865 $ 123,211,072 $ 345,258,473
Cost of goods sold $ 222,414 $ 745,321 $ 1,165,821 $ 4,722,900 $ 8,680,300 $ 21,781,318 $ 61,034,974 $ 161,528,734 Investment - Three river bottle $0 $ -38,207 $ -38,207 $ -38,207 $ -38,207 $ -38,207 $ -38,207 $ -38,207
Gross Profit $ 49,554 $ 350,701 $ 802,132 $ 3,672,600 $ 7,090,300 $ 22,188,547 $ 62,176,098 $ 183,729,739 Secured notes rcvbls $0 $ 57,742 $ 82,538 $ 82,538 $ 82,538 $ 82,538 $ 82,538 $ 82,538
Depreciation $ 22,644 $ 69,022 $ 182,335 $ 154,894 $ 127,454 $ 100,013 $ 72,573 $ 45,132
Expenses Amortization $ 1,389 $ 25,033 $ 25,033 $ 25,033 $ 25,033 $ 25,033 $ 25,033 $ 25,033
Broker commission $0 $ 38,787 $ 26,391 $ 125,600 $ 196,500 $ 547,860 $ 1,535,197 $ 4,301,884 Deposits 0 $ 58,095 $ 114,336 $ 114,336 $ 114,336 $ 114,336 $ 114,336 $ 114,336
Consultants $ 81,464 $ 43,659 $ 18,400 $ 93,200 $ 137,000 $ 381,968 $ 1,070,341 $ 2,999,278 Rounding off $ -1 $2 $2 $2 $2 $2 $2 $2
General and Admin $ 29,970 $ 103,242 $ 147,818 $ 965,800 $ 1,100,600 $ 2,454,858 $ 5,159,199 $ 12,047,464 Total Assets $ 217,153 $ 1,131,601 $ 2,016,980 $ 4,313,368 $ 6,757,166 $ 18,605,134 $ 53,630,565 $ 163,794,658

Payroll & benefits $ 13,191 $ 41,559 $0 $0 $0 $0 Total Liabilities

Professional fees $ 35,467 $ 24,307 $ 27,828 $ 156,700 $ 207,200 $ 577,692 $ 1,618,793 $ 4,536,134 Current Liabilities
R&D $ 22,254 $ 80,957 $ 11,083 $ 37,100 $ 37,100 $ 230,072 $ 644,702 $ 1,806,565 Account payables $ 1,518 $ 217,630 $ 374,801 $ 1,591,223 $ 2,988,453 $ 8,374,155 $ 23,465,813 $ 65,755,218
Current Liabilities $ 1,518 $ 217,630 $ 374,801 $ 1,591,223 $ 2,988,453 $ 8,374,155 $ 23,465,813 $ 65,755,218
Salaries $ 125,967 $ 390,867 $ 233,022 $ 1,297,100 $ 1,735,000 $ 4,837,338 $ 13,555,046 $ 37,983,555
Sales and marketing $ 87,016 $ 399,649 $ 256,405 $ 1,358,800 $ 1,909,100 $ 4,790,470 $ 13,423,715 $ 37,615,541 Long term lease obligation $0 $ 1,843 $ 1,843 $ 1,843 $ 1,843 $ 1,843 $ 1,843 $ 1,843
Travel and entertainment $ 15,647 $ 65,865 $ 88,991 $ 499,700 $ 662,600 $ 1,847,389 $ 5,176,699 $ 14,505,996 Total liabilities $ 1,518 $ 219,473 $ 376,644 $ 1,593,066 $ 2,990,296 $ 8,375,998 $ 23,467,656 $ 65,757,061
Total expenses $ 410,976 $ 1,188,892 $ 809,938 $ 4,534,000 $ 5,985,100 $ 15,667,647 $ 42,183,692 $ 115,796,417
Shareholder's equity
Bad debt $0 $ 31,136 $ 30,086 $ 30,086 $ 30,086 $ 30,086 $ 30,086 $ 30,086 Face value $1 $2 $2 $2 $2 $2 $2 $2
Depreciation $ 4,090 $ 11,916 $ 27,441 $ 27,441 $ 27,441 $ 27,441 $ 27,441 $ 27,441 Paid in capital $ 581,153 $ 2,366,662 $ 3,161,309 $ 5,161,309 $ 5,161,309 $ 5,161,309 $ 5,161,309 $ 5,161,309
Interest expense $0 $ 1,107 $ 1,107 $ 1,107 $ 1,107 $ 1,107 $ 1,107 $ 1,107 Loss from investment in 3 bottling $0 $ -206,657 $ -206,657 $ -206,657 $ -206,657 $ -206,657 $ -206,657 $ -206,657
Total expenses $ 415,066 $ 1,233,051 $ 868,571 $ 4,592,633 $ 6,043,733 $ 15,726,281 $ 42,242,325 $ 115,855,050 Retained earnings $ -365,519 $ -1,247,879 $ -1,314,318 $ -2,234,351 $ -1,187,784 $ 5,274,482 $ 25,208,255 $ 93,082,943
Total shareholders $ 215,635 $ 912,128 $ 1,640,336 $ 2,720,303 $ 3,766,870 $ 10,229,136 $ 30,162,909 $ 98,037,597
Net income $ -365,512 $ -882,350 $ -66,439 $ -920,033 $ 1,046,567 $ 6,462,266 $ 19,933,773 $ 67,874,688
Total liabilities $ 217,153 $ 1,131,601 $ 2,016,980 $ 4,313,368 $ 6,757,166 $ 18,605,134 $ 53,630,565 $ 163,794,658