Stay on Top of Emerging Technology Trends
Get updates impacting your industry from our GigaOm Research Community
Elyse Petersen arrived in Las Vegas on Halloween, ready — like so many others before her — to strike it rich in Sin City. Unlike her predecessors, though, Petersen’s plan didn’t involve a poker table, a planned community or a UFC octagon. It revolved around small-batch teas, the viability of crypto-currencies such as Bitcoin and an airport with easy flights to anywhere. And — fingers crossed — a piece of Tony Hsieh’s Vegas Tech Fund (spoiler alert: it got one).
Petersen’s startup, called Tealet, sources specialty tea from small growers around the world and sells it online to wholesale buyers as well as individuals. That’s cool if you’re into tea (I tried some, and it is really good), but e-commerce isn’t exactly cutting-edge. Except the way Tealet does it and the industry in which it does it.
If there’s one word that pretty much explains how Tealet received funding from a technology venture firm and made it through two startup accelerators, including the 500 Startups one in Silicon Valley, it’s Bitcoin. Crypto-currencies aren’t normally a big part of how the tea industry does business, but Tealet is not a normal tea company.
Changing the tea experience one Bitcoin, and one Reddit post, at a time
First, there’s its customer base and its preferred approach to reaching those buyers. Tealet currently makes most of its money selling its specialty teas to individuals who are all about deep knowledge of what they’re drinking. Along with the tea, they receive trading cards featuring the farmer and more information about the tea — all in attempt to help consumers track the exact origin and flavor profile of what they’re drinking.
Digg creator and Google Ventures partner Kevin Rose and other techies are big fans, Petersen is quick to point out, which helps explain why about 60 percent of Tealet’s web traffic comes from marketing content it posts on Reddit.
It turns out the Reddit crowd is really into Bitcoin, too, something that was not lost on Petersen. “There, people are just like begging, searching for places to use their Bitcoin,” she explained during an interview in the downtown Las Vegas home that doubles as Tealet headquarters, and they want to use it somewhere that aligns with their own ideals. For someone’s who’s passionate about helping the world, she continued, “What is using your Bitcoin at Walmart really going to do? … They want to use it for things that have purpose and meaning.”
Already, between 40 and 80 percent of Tealet’s monthly revenue comes from Bitcoin, although the total amount coming from crytpo-currency is bound to increase. Earlier in February, the company rolled out its own Litecoin payment processor so buyers can use it to buy tea just as easily as using Bitcoin. Litecoin is only worth a fraction of what Bitcoin is worth right now, but Petersen (who did go to graduate school with Litecoin developer Warren Togami) says it’s a legitimate currency that addresses some of Bitcoin’s shortcomings.
Still, Tealet does ultimately convert Litecoin revenue into Bitcoin. Litecoin transactions pool in Tealet’s BTC-E account, where they’re converted to Bitcoin before being transferred into a Coinbase account. Transactions from Tealet customers using Bitcoin bypass BTC-E and go directly into Coinbase.
And while Bitcoin might be a hip way to pay in the United States, it’s actually a better way to pay for international transactions. Exchange rates can get pretty high in some countries using bank wires and even PayPal, so Tealet likes to use a Danish service called BIPS (yes, the one that fell victim to a $1 million cyberheist in November) when it can to bypass some of those fees. BIPS converts the buyer’s Bitcoin to the receiver’s local currency and transfers it to their bank account for a flat fee of $7.50, or about 1 percent on average in the case of Tealet’s dealings with farmers.
“We’ll take advantage of it while we can,” Petersen said, alluding to rumors that sprung up in November that Tealet caused the Indian government to investigate Bitcoin activity by tea farmers and ultimately shut down Bitcoin exchanges. She takes some credit for the former, suggesting that a viral Reddit post followed up by an Indian newspaper article helped tip off the government. Tea is big business in India, she noted, and the Indian banking industry doesn’t want to lose the fees it collects for converting currency.
“People have never bought tea from a website before.”
However, just because farmers like doing business with Tealet (they get to sell higher-grade teas at higher profits than selling to large companies, and in markets they otherwise couldn’t have reached), that doesn’t mean life is easy for Tealet. Petersen would really like to get the wholesale business off the ground and start selling lots of tea in bulk to tea shops and other resellers, but that’s a tougher nut to crack than selling to techies with Bitcoin burning holes in their pockets.
To begin with, she explained, the wholesale tea business is still largely an analog one and a slow one, which kind of mitigates Tealet’s digital platform for moving its farmers’ product. Most people still prefer to do business via a traditional paper order form (the company has actually redesigned the wholesale order form on its website to more closely resemble a paper one — including with the option to send a check to the company) and many tea rooms, for example, don’t really go through a lot of tea. One pound of tea can last a typical tea shop three months, Petersen said.
It doesn’t help that so many of them have already bought lots of tea from larger wholesalers. Tealet is trying to figure out whether it’s best to just buy out their subpar inventories so businesses can get started selling Tealet’s better tea. Currently, even a $1,000 wholesale deal (anywhere between 5 and 25 pounds of Tealet product) can take a year to close, she said. The good news for Tealet is that it sells on consignment (taking a 20 percent cut of each sale) so it isn’t saddled with loads of tea it already paid for and can’t move.
When Starbucks comes for your tea room
But there’s a looming threat that might help tea businesses come around on Tealet’s web-based platform, and prices, a lot faster: Starbucks. The coffee giant that doomed mom-and-pop coffee shops a decade ago bought mall staple Teavana about a year ago and is now getting into the business of opening tea bars around the country. Starbucks has the market cornered on ambience, Petersen said, which means places selling mediocre tea in lame setting could find themselves in real trouble.
“As soon as Teavana opens in that neighborhood, people are going to much rather prefer to get their crappy tea from Teavana,” she said. “[People who want to compete] are going to have to sell tea like we sell tea.”
Some coffee shops are doing very well financially catering to coffee aficionados, but Petersen thinks their businesses would fall fast if quality slipped and they failed to provide all the information (origin, flavor notes, etc.) that their patrons expect. It would just be easier to go to Starbucks. She believes Tealet, with its specialty leaves and detailed information about every one, can help supply the businesses that will become the tea world’s answer to Blue Bottle or Sightglass or Philz.
Tealet even sees an opportunity to make tea-selling a data-driven affair. If wholesale buyers want data on which types of teas and flavor profiles people in their countries or states prefer, Tealet can supply it. Because Tealet lets users review teas, a retail recommendation engine wouldn’t be too crazy an idea, either.
Tealet’s funding from the Vegas Tech Fund also came with a silver lining that could help make this dream a reality. It turns out that Vegas Tech Fund partner (and Project 100 founder) Zach Ware was Minister of Interactivity (meaning, essentially, he managed the company’s web presence) at retail tea bigwig Republic of Tea until 2010. He knows tea — the product and the business — and a lot of people.
“Wow!” Petersen said, reliving her excitement after her first meeting with Ware. “Not only did we get investment, but we’re gonna get an awesome adviser.”
“That’s when the tables turned”
But while the Petersen siblings were optimistic they’d receive an investment, the decision to move to Las Vegas from their original headquarters in Hawaii was already made. It’s part of Elyse Petersen’s personal history that might be as unique as her decision to run an online tea platform largely on Bitcoin.
Petersen spent years working in what she calls the “bad” part of the food industry while studying food science at the California Polytechnic University. Until one day in 2006, just a few months after graduation, a seemingly innocuous event pushed Peterson past her breaking point. While working for a large food processor — one that produces and packages private-label goods, such as Trader Joe’s Jalapeño Blue Corn Bread — a meeting with Whole Foods shifted from concocting a recipe for gluten-free macaroni and cheese into devising a color scheme for the packaging that would get people to buy more of it.
“When I heard that,” Petersen said, “that’s when the tables turned.”
So Petersen sought to put her knowledge to a better use by joining the Peace Corps for two years — another experience that wasn’t all she assumed it would be. Living in a mud hut in Niger for two years was a “really awesome, life-changing experience,” but not because she got to teach villagers refrigeration and food-processing methods that would change their lives, as she had planned.
“Uh, no, I didn’t do any of that,” she said. “… There, [those concepts] didn’t exist. Money didn’t even exist.”
Instead, she sat back and learned about what food really means at its core. It’s not something you buy off a shelf and eat way too much of when you’re depressed or bored, or something to be laid out in ornate spreads at parties and thrown away when the night is done. It is something grown in the ground to feed one’s family, something that can nourish life when it’s available and kill when it’s not.
“I connected with origin,” Petersen said. “I connected with the true essence of what food is.”
Diving headfirst into tea and the startup world
When she returned to the United States in 2008 with a newfound passion for fomenting a more-ethical food industry, she went to work in Hawaii for a Japanese company that produced canned tea drinks. Not the sugar-laden kind, but those straight-up Japanese green teas you can find at Asian groceries or organic stores. It wasn’t the perfect gig, she acknowledged, but knowing that tea is at least healthy even in large doses did let her sleep at night.
She spent two years there learning the industry, until in the summer of 2010 (after another six-month Peace Corps stint, this time in the Caribbean) she left to earn an international MBA from the University of Hawaii on the company’s dime. In the summer between her two years of studying, Petersen worked with the state of Hawaii on a study measuring the feasibility of building a market around Hawaiian-grown tea. If the state were to build the infrastructure to support it, the report found, there was a multibillion-dollar opportunity.
So she and report co-author Jie Gonsowski decided to start a consulting company helping Hawaii’s tea farmers get their products into the mainland. That business didn’t work out too well, but the idea was solid. Some work Peterson was doing simultaneously in Japan while completing an internship — launching a festival along with a network of tea farmers to bring growers and drinkers together in one place — confirmed it. About 5,000 people showed up, and farmers began asking Petersen’s team if it could help sell their tea in America, because the small operations lacked access to the U.S. market.
Her first week back from Japan in 2012, Petersen took this experience to a Startup Weekend in Hawaii where she pitched the idea for what would become Tealet and got second place. Within five months, the company — Petersen and co-founder Gonsowski– were in the 500 Startups accelerator. Gonsowski still helps out, but she left after the first year because she had a growing family and didn’t want to commit too much energy to the company. That’s when Petersen’s brother Michael came on board as media director.
In March 2013, after 500 Startups was done, the company moved back to Hawaii to take part in the Blue Startups accelerator program. That summer, Tealet evolved from its retail roots and added the wholesale business, as well. It began fundraising with the new business model, ultimately applying for the Vegas Tech fund in September.
But it didn’t take long to figure out that logistics matter when you’re running an international business. Or, if you’re in Hawaii, a national one. Tealet is a small company (Petersen and her brother are still the only full-time employees) and all the time traveling to meet buyers, sellers and partners made it hard to get back in the groove of actually building the company once she got back to the office.
So before they had even their first meeting with Hsieh’s fund the siblings Petersen decided their future was in inexpensive, logistically friendly Las Vegas.
Now that it’s settled in Sin City, Tealet is doing what it can to spread its name and its message as it tries to scale into the tea supplier to the stars. It has 70 ambassadors around the world trying to sell its tea and it’s trying hard to establish a foothold locally. Petersen wants to turn the house she shares with her brother — the current Tealet headquarters — into a teahouse where people can come when they please and enjoy some quality tea and camaraderie. She’s trying to obtain permits so the company can stage “guerrilla tea parties” on the street downtown where folks can plop down on pillows and enjoy a cup en route to wherever they’re going.
I suggested Tealet set its sights bigger than downtown, too, by taking to the suburban malls and selling the Anthropologie set on its high-end tea. Petersen was hesitant (“They don’t drink our tea, hipsters do,” she said), before quickly noting that partnering with chocolatiers or similar businesses on upscale tea tastings could be a good way to reach and teach a new, affluent and generally socially conscious audience.
“We’re gonna be working every angle,” Petersen said. “We’re just hustling the tea.”
Update: This posted was updated at 2:33 p.m. to clarify that Petersen did her MBA studies in Hawaii, not Japan. She did do an internship in Japan.