James Fayal. (Photo courtesy of James Fayal)

This week, an entrepreneur brewing up a business in caffeinated teas asks for help finding working capital.–Dan Beyers

The entrepreneur

James Fayal was an avid tea drinker, but his beverage of choice wasn’t giving him the caffeine kick he needed to power through his long workdays. He was working as an IT investment analyst at a seed-stage venture capital firm as part of Venture for America, a fellowship program that sends recent graduates to emerging U.S. cities to work at start-ups. Fayal switched to coffee and energy drinks for the added boost – but it was a compromise he didn’t enjoy.

He started talking to other tea drinkers and coffee drinkers who were downing the beverages purely for the caffeine. He dug into the market like he would to research any other venture investment and discovered a void of high-energy, highly caffeinated tea. So Fayal decided to seize the opportunity himself. He used a crowd-funding campaign in late 2013 to launch his company, Zest Tea. Fayal later received a $45,000 grant from Venture for America and UBS that further kick-started Zest Tea and allowed Fayal to concentrate on the company full time. In 2015 he moved Zest Tea to Baltimore to lay down roots in the community and begin building a team.”

The pitch

Fayal

“Zest Tea is a line of premium high-caffeinated teas that are designed for energy and mental clarity. All of our teas have been enhanced with a natural tea extract that boosts the caffeine levels to be on par with coffee, or about three times the caffeine levels of traditional teas. Meanwhile, the amino acids in Zest Tea have been shown to increase cognitive function and moderate how caffeine affects your body to create a more steady and prolonged alertness.

“About 50 percent of our customers used to or still do drink coffee. Many drink Zest to add some variety to their routine, or because they prefer the taste of tea over coffee. Our product bridges the gap between the coffee and tea– it’s a unique customer demographic that encompasses consumers from both the coffee and tea markets.

“Zest is offered in pyramid bags and loose leaf. We offer four flavors right now – Blue Lady black (citrus hibiscus and passion fruit blend), pomegranate mojito green, earl grey and apple cinnamon. In 2015, Zest Tea was named the top new product at the World Tea Expo.

“We’ve been focusing on direct-to-consumer and corporate clients. We have accounts with some large offices – including 2U’s headquarters in Landover, Barclay’s U.S. headquarters in New York, and Under Armour’s campus in Baltimore. Late this year or early next we are hoping to come out with a new line of products for retail.

“My question: How do you attack raising funds to support working capital for a consumer goods product? Usually, you try to avoid giving away equity for working capital – investors don’t like to invest in inventory. That’s where debt financing and bank financing come in, but that is very rarely available to smaller businesses. What routes would you go to fund working capital and growing inventory for a consumer product company?

“Also, how would you go about hiring for a consumer product start-up? Right now, I’m the only full-time employee, and I also have someone who helps on the manufacturing/production side. I plan to hire two to five people over the next year here in Baltimore.”

The advice

Elana Fine, managing director, Dingman Center for Entrepreneurship at the University of Maryland’s Robert H. Smith School of Business

“The best place to get working capital is through a bank or some sort of credit facility. But that can be difficult for a company selling a consumer product, because many banks won’t accept inventory as collateral, especially when the inventory is tea. It can be just as complicated as getting loans for technology products that are notoriously difficult for securing bank funding. If you want to fund your business with working capital, you’ll need to figure out some sort of personal liquid asset or real estate to secure against a working capital line of credit.

“Giving away equity is not the right way to fund your business. The Small Business Administration does have some working capital programs, so you might want to look into those as well. Many people end up maxing out credit cards.

“As far as hiring, all start-ups need to hire people who have a passion for the company, but even more so for consumer product companies. Every member of the team has to be a believer and a sales person for the company, regardless of their role. Find people who have fallen in love with your brand just as much as you have.

“Consumer products do seem like a very ‘insider world,’ so try to recruit someone who has worked in these businesses or channels before. Find someone who understands distribution channels and how to get your tea on shelves. You’ll also need someone who really knows the best channels to get into large corporate campuses — that is going to be really important. Until you have the money to do a major marketing campaign, you will likely need to go through a third-party channels to really reach retailers and large corporate clients.”

The reaction

Fayal

“We have avoided investing heavily in capital equipment, but it appears those types of investments would be more attractive to banks for debt financing than inventory alone. It would have the dual benefit of reducing the variable cost of goods.

“Hiring passionate employees has always been a goal and we regularly hear from individuals in the industry that love the product. We should use that feedback as a funnel for finding potential employees and advisors.”

Looking for some advice on a new business, or need help fixing an existing one? Capital Business and the experts at the University of Maryland’s Dingman Center for Entrepreneurship at the Robert H. Smith School of Business are ready to assist. Contact us at capbiznews@washpost.com.