How the Serial Entrepreneur Behind Tazo Tea Brews Up Success

This story appears in the February 2012 issue of . Subscribe »

Steven Smith has built a career around tea. A rare serial entrepreneur who has made repeated waves in a single industry, the never-satisfied Smith has built and sold companies multiple times, including closing a multimillion-dollar deal with Starbucks. With his latest venture, Steven Smith Teamaker, he is finally succeeding on his own terms. But is he already looking ahead to the next big thing?

Forty years ago, Steven Smith stood up at a meeting of disgruntled Oregon farmers and offered them an alternative to the falling price of peppermint oil. He bought up their mint leaves and began selling them to tea giants Celestial Seasonings and Lipton. Eventually, he sold the leaves as bagged tea under the Stash Tea Company name, which he helped grow from an $800-a-month botanicals supplier into a multimillion-dollar brand. Then he created and built a company called Tazo, which he sold to Starbucks. After that, he moved to France to live the good life.

It didn't last. Today he dips a spoon into the first of a row of small, handle-less cups of white porcelain, lined up like chess pawns on the counter in front of him. He lets the tea, a green blend flavored with jasmine, flood over it. Then he brings the spoon to his mouth with a loud whooshing sound, like a vacuum seal opening. He nods approvingly, clanks the spoon against an open jug to remove any remaining droplets and leans over to try the next.

A lithe 62-year-old whose features might remind you of Bill Clinton's, Smith has been running tea companies for pretty much his entire professional life, all of them within a few miles of the combination workshop, factory and tasting room he now rents in a semi-industrial neighborhood of Portland, Ore. A serial entrepreneur who won't take yes for an answer, he'd clearly rather be in his workshop, slurping and nodding, than lolling about on the Cote d'Azur.

"I've seen Steve in many iterations, and he always has a creative spirit," says Michael Harney, who for two decades has bought and blended tea for his family's company, Harney & Sons. "Tea can support many different kinds of businesses. We're just hoping Steve stops at five or six of them. He has to be coming to the end soon, wouldn't you think?"

Not necessarily. Smith's latest venture, Steven Smith Teamaker, sold its first box in late 2009. Today its products are in hundreds of U.S. outlets, including 150 Williams-Sonoma stores, Whole Foods Markets in the Pacific Northwest and California and Zabar's in New York. The company's classically styled labels, among the cleanest and most elegant in the marketplace, can be spotted throughout Oregon and Washington and in restaurants and hotels from Blue Ribbon Sushi in Las Vegas to Trump in Toronto.

All of that is exactly what Smith was hoping for when he returned from his early retirement in France to start another business. "When you're building a company, there's inevitably that struggle, that scramble," he says. "Are we going to get over the hump? Is this going to make it? Then you get to a certain point and you realize, ‘I think I have a business here. If I go away for a week on vacation, I'll actually get a paycheck.'"

It's usually at that point--right about where Steven Smith Teamaker is now--that Smith begins to decouple. He dabbles in side projects. He begins to consider the negatives of his current situation: recalcitrant partners, perhaps, or a lack of resources, or a brand with bandwidth that's too narrow to encompass his ruminations. Before long, the negatives seem to outweigh the positives. And, in the back of his head, there are always ideas that, if he could just find the time to get them going …

Smith admits he'd rather be starting a company than running one, and he prefers doing just about anything to doing nothing at all. "There are ideas percolating around here all the time," says Dave Leger, one of Smith's two partners in Stash and now director of production for Steven Smith Teamaker--a man who clearly can't even talk about his work without employing a beverage metaphor. "All Steve needs is the time to implement them."

Some of the ideas are pretty far out there, but they all circle back to tea. While many creators of companies wander across the consumer landscape, confident their creativity transcends category boundaries, Smith is that rare serial entrepreneur who has concentrated on a single industry. "In tea, Steve has found his medium," Leger says.

In fact, Smith has pretty much been selling the same product for 40 years; only the quality and the packaging have changed. Each time, he explains, "I saw an opportunity to be a little more fearless in the way we merchandised, the way we talked about tea, even the blends and formulas we could create."

While Smith says he plans to always keep control of his current company (this was part of the point of putting his name on it), he doesn't rule out the idea of starting over yet again. Each time he has built a company, it has altered the landscape of the tea industry. By raising the consciousness of the tea-buying public, he has created opportunities where none previously existed. Someone will surely step in and take advantage of them.

Why, he wonders, shouldn't it be him?

If Smith is a natural innovator, he wasn't always aware of it. Returning from a stint in the Navy in 1971, he landed a job in his soon-to-be brother-in-law's natural-foods store. He ran off to Europe with the girl who ran the juice bar. Then he came back home and got a job selling herbs for a tiny Portland startup.

For his first assignment, he drove his VW bus up to Vancouver, British Columbia, and down to San Francisco, offering up chamomile and rose hips, spearmint and lemongrass. He racked up $15,000 in sales and $1,500 in commission. Strapped for cash, owner Steve Lee offered Smith a piece of the company, which he'd called Stash. "It was clear that Steve was a natural marketing guy," Lee says. "He has always had a great sense for where a brand is going and should go."

Until Mo Siegel created Celestial Seasonings in the late 1960s, tea and herbal infusions in America existed largely as commodities. Celestial gave them personalities and stories, with memorable, evocative names. Smith had the idea to do the same with Stash's infusions, but to make the product upscale, at a price point at which Celestial feared to tread. As a side project, he opened a store in Portland's Old Town and stocked it with loose tea purchased from a broker--typical stuff, such as Russian Caravan, English Breakfast, Earl Grey. When that didn't move quickly enough, he talked Lee and Leger, who'd come on as a third partner, into letting him sell bags of tea under the Stash name, but with tweaks that rendered them proprietary. He combined the usual jasmine and orange spice into Jasmine Spice, that sort of thing. "I hadn't been to China or India," Smith recalls. "I knew nothing about tea. But it worked."

Smith had many ideas for products but no budget with which to implement them. Instead, he became innovative in how he brought his existing products to market. Rather than hitting up groceries or coffee shops, he called on college bookstores; he developed office beverage programs. The company boomed. But Smith grew tired of operating on a shoestring. He had ideas jockeying for space in his mind, sure successes ready to happen, such as chilled, premixed tea-and-juice beverages and black teas with unusual flavorings like cucumber and passion fruit--like those that would come to define Tazo.

Telling the story now, Smith walks around to the front of his desk and lifts up a framed photo that's leaning against the baseboard. It's from when Tazo was up and running, before he sold it to Starbucks. In the photo are Tazo's frozen tea pops, a product that existed only briefly but during that time was one of the fastest-selling frozen novelty items in America. "You know what I liked best about this?" Smith asks. "Planning to market, the whole thing took 90 days."

At Stash, there was no pipeline for new product, let alone one with a 90-day turnaround. So one day Smith announced to his partners that he'd sold his shares to Yamamotoyama of America, a Japanese beverage company. He went off to import tea accessories, mill and sell lemongrass from Guatemala and work in a joint venture with a coffee company.

One day in 1986, he went for a run with Lee and agreed to help Stash on a contract basis, shifting it from regional to national distribution. "We just wanted him back," Lee says. "I knew he'd be a big part of what we were trying to accomplish. Besides, he's fun to be around."

Really, how could he not be? For Smith, creativity is a faucet with a steady drip. "He has idea after idea," Leger says, "and not all of them are bad." Some of those ideas are actionable in current circumstances. Others have to wait until the world catches up.

"I don't think his taste buds could have influenced the market when we first started, because they're too sophisticated," notes Celestial Seasonings' Siegel, who compares Smith's palate to that of a winemaker or gourmet chef. "His tastes are the equivalent of high-end cuisine. And he has always been willing to stretch the market to places that I'd never go."

By the early 1990s, Smith developed an interest in selling higher-margin teas. Stash was already spending more on its raw materials than the other mass-market brands, but, he thought, What would happen if a company spent double that? Smith understood that the expense of sourcing and buying tea is actually quite small compared to the labor, packaging and distribution costs. "If you had the best raw materials, you could create a super-premium product and charge even more," he says. "Nobody was doing that."

This wasn't possible under the Stash umbrella, for reasons having to do with both branding and finances. But that didn't mean it wasn't possible.

In his workshop, Smith opens a bottle of iced tea blended with fruit steeped in filtered water and pours out samples. He has three flavors under the Steven Smith Teamaker line, with more to come.

The concept is familiar enough to consumers. But before Snapple bottled its first blend, before Honest Tea pushed the envelope with a lightly sweetened juice product, a first iteration of that beverage launched Tazo.

After leaving Stash for the second time, Smith set up in his kitchen with a batch of teas, fruit juices and a refractometer. Earlier, he'd created a product called Simply Red that combined apple juice with tea. That was the template. But if he was going to start a new business, he needed a line of products. Soon he had three flavors.

But he needed a name. "I was aiming for Merlin meets Marco Polo," he says, "with some Raiders of the Lost Ark thrown in." He sat in a room with Lee, who had invested in the new venture, and they emerged hours later with Elixir, later altered to Tazo. Soon after, a tea-leaf reader informed him that Tazo means "river of life" in the Romany language she'd grown up speaking. Never one to turn down an auspicious omen, Smith made that phrase the guiding principle of the business.

Tazo, which launched in May 1994, took the new-age earnestness of Celestial Seasonings and presented it with a dash of mysticism and a large dollop of humor. "Nobody was having fun with tea at that time, and that's what we were determined to do," Smith says. (The shelf life of the ready-to-drink beverages was listed as "longer than milk, shorter than a Twinkie.") Once a line of eight bagged teas was launched, the packaging seemed to promise entry into some mystical otherworld. The names of the teas--Awake, Zen, Calm--didn't tell you what was in them, but rather how they were supposed to make you feel.

"The teas were fairly straightforward," Harney says, "but then he'd have shamans and all that. I mean, he wasn't a shaman. It was all marketing shtick. Effective marketing shtick, obviously, but it didn't appeal to everyone."

Smith knew that. Though Tazo's Awake would end up as the bestselling black tea in natural and specialty foods in the U.S., he wasn't trying for mass appeal. Recalling how he was always low on funds at Stash, he decided to price his teas at $4.49--a huge leap from the $1.99 and $2.09 that Celestial Seasonings, Bigelow and others were asking. He didn't do research, and he didn't write a business plan; he just saw a niche and went after it as he'd always done.

"When Tazo first came out, I really thought it was bullshit," Siegel admits. "It was like a screenplay somebody had written. It was cute and well done, but it seemed totally invented. But he moved it around to where it became more mainstream."

Smith had created an equity with a life of its own. From the beginning, Tazo was a success. Though industry leaders doubted he could sell any volume of tea at $4.49, the boxes jumped off the shelves. The company grew so fast that Smith went looking for new investors to keep the momentum going. What he needed, he calculated, was for someone to buy 20 percent of the company--to put in the money, keep their mouth shut and let Tazo ride its wave. Howard Schultz at Starbucks didn't seem a likely fit. But he did have the money.

Smith already had a history with Schultz. When he left Stash the second time, he'd been offered the job of Starbucks director of beverage. Instead he told Schultz he'd start a company and create a tea brand for Starbucks on the side. "We were one sentence away, just haggling over who would pay for a $10,000 piece of equipment," Smith says. "But it didn't happen. Someone else swooped in and got the job. It ended badly." At the time, he says, he never wanted to set foot in the Starbucks building again.

This time, Starbucks told him they weren't interested in Tazo. The coffee giant had a tea of its own in the works, produced by the same company that had failed with the original assignment. And the story gets worse before it gets better. Through other sources, Smith learned that Starbucks was planning to launch its own line of ready-to-drink beverages called Tiazzi, a name perilously close to Tazo. Smith wrote a letter asking them to cease and desist.

Shortly after, he took a call from a Starbucks executive who reiterated that the company had scant interest in buying 20 percent of Tazo and operating as a silent partner. Yet everyone who'd attended the meeting hadn't been able to stop talking about Smith and the Tazo brand, and how well it dovetailed with what Starbucks was trying to accomplish. So how about if Starbucks bought the entire company and kept Smith on to run it?

Smith was crammed down by venture capital to a point at which he owned just 10 percent of his company. He loved the Tazo vision, but it wasn't his to implement anymore. In January 1999, he and his investors sold.

The multiple was a paltry 1.2 times earnings, $9 million total. "Had we held on for another two years, we would have gotten substantially more," Smith says. But because they sold when they did, he and his investors were able to hitch a ride on one of the great growth spurts in American corporate history: Tazo started out in 1,000 stores and soon found itself in 10,000. "We had the chance to take advantage of a larger corporation and get compensated based on our growth," Smith says.

For five years, tea's comparables throughout the Starbucks empire were better than those of coffee. From arriving at less than 1 percent of the chain's sales, Tazo hit 8 percent. But eventually--and probably inevitably--corporate control started to chafe. Smith's ideas never stopped coming, but a billion-dollar company is hardly as nimble as a startup. "Everything I'd suggest," Smith says, "they'd say, ‘Good idea, but we don't know how to scale it.'"

The offer to join Starbucks had been open-ended; he could have stayed forever. But flying back from a tea-sourcing trip to India in March 2006, Smith realized his run at the company needed to end. He worked out a plan that day that let him gradually disentangle, with a one-year noncompete agreement. By the end of 2006, he was gone.

The market in Villeneuve-les-Avignon, France, is held on Thursday and Sunday mornings. Smith wandered through with his basket at least once a week during the summer of 2007, buying cheese from his favorite fromagiere, chocolate from the chocolatier, biscuits from the bakery stand. These were craftsmen selling their wares directly to customers who understood and appreciated what they did. One word came to Smith's mind, and it isn't hard to guess what it was: tea.

While at Tazo, Smith concocted the idea of a faux workshop that would be open to the public. It would be staged almost like a Disney construct, with onlookers catching glimpses of "workers" packing "product" that in truth had come in through a back door preprocessed from a warehouse. "I was going to have a really slow machine, spitting out one tea bag every three or four seconds," he recalls. "Workers would be wrapping packages like they'd be shipping them out somewhere."

The flaw in the idea, Smith understands now, was the faux part. The artisans in the French market had authenticity in a way that none of his tea companies ever had. He moved back to Portland, inspired to rectify that.

This time around, Smith's idea was small-batch tea, produced by a company nimble enough to turn on a dime. He wasn't looking to steal away Tazo's customers, just as Tazo hadn't been about competing with Stash. This was a new category, something between the mass-market landscape and the rarefied products bought by tea fanatics from internet specialty sites.

"It's always interesting when you start a new business," Harney & Sons' Harney says. "It's hard to cancel out all the legacy things from an existing brand, but this way, he's back at zero. And he has the benefit of having sold the last business, so he has a little cash. And it isn't like he went into books or something entirely new. It's still tea, so he has the same contacts."

As part of his effort at authenticity, Smith decided to name his new company Steven Smith Teamaker. He created teas with names such as Mao Feng Shui, an amalgam of the connoisseur-level tea Mao Feng and the widely known Chinese phrase feng shui, the art of site orientation. Then he set out to raise money, a process that lasted about half a day before Smith realized he didn't have the stomach for it. Raising capital is an onerous process. Even worse, it usually leads to a loss of control.

After some hand-wringing, Smith decided he had enough money of his own to finance the business for 18 months. Then he'd see where he stood.

Smith's tea bags are gorgeous, miniature works of art. "He's got an incredible design aesthetic," says Richard Harvey, president of Williams-Sonoma Brand. "You walk into our stores, and they just look like they belong there."

Still, it's Smith's Portland atelier--part retail shop, part performance-art space, part laboratory--that was the creative breakthrough for Steven Smith Teamaker. One weekday morning, groups of two or three people wandered in--some who knew exactly what they were looking for, others who were passing the building and became intrigued by the sign.

"I've had people come through that door I'd never seen before who ended up not just buying tea but investing in the company," Smith says.

Running a brand out of a workshop gives him license to experiment with products unlike any that have ever hit the market, such as teas that incorporate Douglas fir needles or have been steeped in used Pinot Noir barrels. His more familiar teas also have qualities that render them unique: Fez holds the space of a traditional Moroccan mint, for example, but consists of Mao Feng blended with Oregon spearmint and lemon myrtle. "Until now, the consumer wasn't ready for something like this, and Steve wasn't ready," Harvey says. "Now both of them are."

In 2009, Smith took a three-year lease on the building. He's about to sign on again, but needs even more space for an additional production facility. He has Celestial Seasonings' Siegel as an investor, as well as Jean-Michel Valette, the chairman of Peet's Coffee & Tea who formerly ran the Robert Mondavi winery. Smith, Siegel says, "has found himself a niche picking off the edges
of Bigelow, Lipton and Celestial. He has done it twice and clearly seems to be doing it again."

Lee, who founded and now runs Kombucha Wonder Drink in Portland (with Smith as a minority partner), says, "It'll take five years to get Teamaker fully up to speed. I think he'll have a good ride with it."

Yet with all that, as he looks ahead into his future, Smith isn't certain he can see Steven Smith Teamaker around the bend. "They're going to want a liquidity event at some point," he says of his investors. "Recently I had to go away for a week and I realized this business can run without me. I wouldn't have to leave, necessarily, but at this point I could pass the baton to someone else."

Smith has been doing product optimization and freelance development work for the Bright Tea Company line from Mars Drinks, a division of worldwide manufacturer Mars. For years, he says, he has taken insights gained from other categories and applied them to tea. When he talks about a session with that company or one of his other nascent projects, you can almost hear the machinery whirring in his mind, that perpetual-motion idea machine gearing up. "Another company for Steve after this one?" Lee asks. "I don't see why not."

Who'd bet against it? The only thing the man has ever failed at is standing still. And he's not eager to try it again.