(FORTUNE Magazine) – A chance encounter sparked my love affair with Honest Tea. As I browsed the refrigerator in a Washington, D.C., deli, the artsy label on a bottle of Decaf Ceylon piqued my interest. The taste won me over--a full-flavored, barely sweetened brew, nothing like the syrupy stuff sold in cans. I sampled other flavors: Assam, Gold Rush, and Moroccan Mint. All delicious.

Curious, I logged on to www.honesttea.com and learned that the Bethesda, Md., company was the brainchild of Barry Nalebuff, a professor at the Yale School of Management, and Seth Goldman, his former student. The duo has zealously embraced socially responsible business practices. Besides the usual pledges of recycled packaging and organic ingredients, the company buys peppermint from Theresa Sends-Part-Home, a Crow Indian in Montana.

Better not get hooked on this stuff, I thought. Biodegradable tea bags are great but won't necessarily help these guys compete against huge rivals like PepsiCo (which owns 50% of Lipton) or Coca-Cola and Nestle (which together own Nestea) or Snapple, Arizona, Sobe, and Tazo Teas. If Ben and Jerry can't stay independent, what chance do Barry and Seth have?

To find out, I called Emanuel Goldman (no relation to Seth), a top beverage analyst at ING Barings in San Francisco. He had never heard of Honest Tea. Uh-oh. "For a startup beverage company to break in successfully is akin to climbing Mount Everest," Goldman tells me. "It can be done, but you have to be very skilled, and there's no room for error." Switching metaphors adroitly, he adds, "Remember Gypsy Rose Lee? You gotta have a gimmick if you want to get ahead."

Well, Honest Tea has plenty of those (Goldman is Tea-EO, and investors in their privately held firm get "equitea"). But behind the puns are two really smart guys. Nalebuff, 41, the company chairman, teaches beverage-industry case studies in class--they sparked the discussions that led to Honest Tea. Goldman, 34, developed an appreciation for tea while teaching in China after earning his BA from Harvard. (His father, Harvard scholar Marshall Goldman, is a noted expert on Russia who used to store cases of tea in his basement in Cambridge for distribution.) Later, Goldman worked as a Capitol Hill press secretary, helped start an inner-city nonprofit, and marketed socially responsible mutual funds. "My resume's eclectic," he says, "but I feel like every part of my past experience applies here."

They argue that the two-year-old company fills a niche no one else is targeting. "There's a need for this product," says Nalebuff. "All the beverage companies go after the same target market--14-to 18-year-old boys with big bladders and infinite metabolism rates. For a normal person, who doesn't want something that tastes like liquid candy, there was nothing out there. Water's good, but it's boring. People are concerned about the health effects of Aspertame. And tea, except for water, is actually the most popular beverage in the world."

The secret of Honest Tea's taste is that it's brewed with real tea leaves in spring water, and only lightly sweetened. A 16-ounce bottle has between 18 and 34 calories, depending on the flavor. By contrast, a 16-ounce bottle of Snapple's bestselling Lemon Tea has 200 calories, the equivalent of 13 teaspoons of sugar. Other teamakers use powders or concentrates.

Honest Tea's muted taste isn't for everyone. ("Give me back those 13 teaspoons of sugar," said one FORTUNE editor.) But it has whetted the palates of some prominent backers. Personal finance writer Andrew Tobias and cartoonist Berkeley Breathed both drank the tea and then invested in the firm, which has raised $2.7 million from about 30 donors.

So how's business? Honest Tea's not making money, but sales are growing at an Internet-like pace: $250,000 in 1998, $1.1 million last year, and a projected $3 million for 2000. That's with spotty distribution. Backing from Whole Foods, the nation's largest natural-foods chain, which carries the tea in its 112 stores, should help. This spring, Honest Tea introduced a line of tea bags and bought a one-third stake in a bottling plant in Pittsburgh.

But to get a much bigger share of the $13 billion tea business, Honest Tea will have to sell some or all of its soul to a powerful partner--as Nantucket Nectars, another funky startup, did with Ocean Spray, Tazo Tea did with Starbucks, and Snapple did with Quaker Oats and Triarc. If Goldman and Nalebuff make the right deal, their future could be filled with prosperi-tea. (Sorry.) But just in case they stumble, I'm storing a few cases in my own basement.