Ethics in a bottle

(FSB Magazine) -- Nestled in the coolers of more than 7,000 Starbucks (Charts, Fortune 500) stores sits Ethos Water, a 23.6-ounce bottle festooned with a map of the world. What distinguishes it from other brands? The company was founded by Peter Thum, a former strategy consultant who dreamed of providing clean drinking water to Third World countries by selling expensive bottled water in the West. His idea was simple: For every bottle sold, Ethos would donate part of the profit to clean-water initiatives in developing countries such as Honduras and Kenya. After three years of bootstrapping a concept that repelled most investors, Thum sold Ethos to Starbucks for $7.7 million in 2005. Already Ethos's per bottle donations have increased by 263%. By 2010, Ethos plans to give at least $10 million by 2010 to nonprofits that fund safe-water projects. From his new digs in the coffee giant's Seattle offices, Thum, 39, tells FSB how he got Ethos off the ground.

My first exposure to the water crisis in the developing world came while I was working on a consulting project in South Africa. I saw hundreds of people who didn't have access to safe drinking water or sanitation services.

Thum hydrates beside the pool at a Seattle hotel.

Thum spent heavily on fancy packaging to appeal to style-conscious consumers and he used Ethos's last dollars to attend a closed-door conference to meet well-heeled industry leaders and VCs.

Thum lectures kids at an elementary school in Sumatra, Indonesia, in 2006

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The water problem was vast but subtle. It's not that unusual to hear of a 2-year-old child dying of diarrhea, especially when higher-profile problems such as the HIV/AIDS crisis are engaging the world's attention.

More than one billion people worldwide have no access to safe water. More than two million people die each year from illnesses related to unsafe water. Children die in disproportionate numbers because their immune systems are not fully developed.

After returning from Africa, I kept thinking about these things. I later took on a consulting project in England, advising a soft drink manufacturer. Bottled water was a fast-growing, $35-billion-a-year global industry at the time, and I saw that people in England were willing to pay more for premium-branded water. I wondered whether there was a way to leverage this luxury industry to address a problem for people at the other end of the economic spectrum.

The idea

One day I put my initial ideas for Ethos on a napkin: Develop a fashionable bottled-water brand that generates funds to finance water programs in developing countries, and make the social message on the bottle more compelling than the source of the water. If people were willing to pay a premium for water named after its source, wouldn't they want to pay for a brand devoted to funding humanitarian water programs ?

I conducted a few focus groups to test demand for the concept. I lured some consultant colleagues to participate by opening expensive bottles of Bordeaux wine. I came up with a few names for the groups to consider, and "Ethos" was their favorite.

I decided to pursue Ethos full-time in 2002. My life changed entirely. I had no time for friends, and most stopped calling. I had no income for the next couple of years and lived off my savings.

After about a year I asked my business-school roommate and friend Jonathan Greenblatt, a VP at a software company at the time, to be my partner. Jonathan began working full-time for Ethos about ten months later, and the next thing I knew I was living on Jonathan's couch in Santa Monica. His house became Ethos's headquarters.

Money troubles

While Jonathan and I believed Ethos was a promising business, the first 150 investors we spoke to thought otherwise. They thought that the charitable percentage - we operated Ethos for the first year and a half aiming to donate 50% of profits - was too generous, and that the water market was too crowded.

The fact that we were first-time entrepreneurs didn't help either. One meeting took place at the mansion of a well-known venture capitalist. A staffer offered us a seat on a couch that was probably worth more than Ethos's balance sheet. A half hour into the interview, the investor interrupted and advised us to start a "real" company. His perspective echoed the views of most VCs at the time: Philanthropy is philanthropy, business is business. We eventually decided to use our own capital to get Ethos off the ground.

Out of college I had worked for E. & J. Gallo Winery. I helped build its division in Germany for four years and then spent a year in marketing at the headquarters in Modesto, Calif., before attending business school. My experience pricing and selling the product and building customer relationships became critical a few years later when I was launching Ethos.

We knew that if we were going to compete with other premium water brands, we had to design a product that would stand out on the shelf. We wanted to turn out the bottled-water industry's equivalent of a Ferrari, but we had a few production problems: The clear plastic label, which used multiple colors of ink, was self-adhesive and difficult to stick on.

Sweat equity

Workers at the label factory had to run the bottles through the machine one at a time. I would then pick up the bottles in a truck and drive them to the facility where they were filled. Because we were producing such a low volume, it wasn't efficient for the capping machine to accommodate our type of cap. So I stood with five other workers in the bottling line, wore a hairnet and gloves, and screwed the caps on by hand.

This is largely how we produced Ethos for the next year. We probably lost $2 on every bottle we made, but we chose not to compromise on labeling because we wanted to appeal to a style-conscious crowd. We had so few customers that losing money on variable costs made more sense than investing in production capabilities.

Pennies per bottle separate profit and loss in the bottled-water business. We were donating thousands of dollars (our first project was funding a filtration system in a village in Honduras) but were unprofitable. We weren't taking salaries.

I ignored the self-imposed deadlines that were supposed to jolt me when it was time to return to a stable job if it looked as if Ethos wasn't working out. Each incremental sale was evidence that the brand was catching on, and we rejoiced when celebrities such as Kate Hudson were photographed drinking Ethos. Our bottles started showing up in the tabloids.

We spent the next several months pitching Ethos to natural-food stores in Los Angeles, handing out samples to shoppers. Our success in these venues helped us get into Whole Foods (Charts, Fortune 500). The sales process was like a page out of the Gallo sales manual, only this time I was pitching my own brand. We prospected customers in the phone book and drove around spotting locations at night, when there was no traffic. I made deliveries out of an old Volvo (Charts) station wagon that I borrowed from my mom's friend.

The breakthrough

Signing up Whole Foods was an important step forward, but Ethos was still severely undercapitalized. With few tangible assets, Ethos couldn't get a bank loan, so we kept dipping into our personal savings. We were on the verge of starting consulting gigs to generate some cash when the annual technology, entertainment, and design conference in Monterey, Calif., gave us the break we needed.

The invitation-only conference attracts leaders from industries around the world. Explicit fundraising or marketing is a no-no, so Jonathan researched the attendee list and created a tight networking plan during the three-day event.

We arranged for our bottles to be placed inside the gift bags handed out to guests. We built displays near each door with posters featuring children from the projects we had funded. We feared being kicked out, but we donned Ethos T-shirts and placed our bottles wherever we could.

At one point Pierre Omidyar, the founder of eBay (Charts, Fortune 500), stopped by our table and asked us to explain Ethos's mission. A week later, an investment manager with the Omidyar Network - which invests in both non-profits and for profit firms with social missions - asked us to visit and pitch Ethos. Pierre also introduced us to Howard Schultz, the chairman of Starbucks.

Coffee klatch

We met Howard at his office soon thereafter. We had prepared a PowerPoint presentation, but when Howard walked in and saw us setting up, he laughed and said, "What's all this?" We gathered in his office, he asked about three questions, and then he had his assistant pull other executives out of meetings to join us. Vendor discussions quickly turned into acquisition talk, and about ten months later Starbucks bought us.

Since then, Ethos has been distributed in more than 7,000 Starbucks stores in Canada and the U.S. Cost Plus World Market (Charts) and Target (Charts, Fortune 500) also sell our water, and through Starbucks' joint venture with Pepsi (Charts, Fortune 500), Ethos's distribution could grow to about 100,000 retail outlets in North America by next year.

Starbucks extended our model by donating 5 cents a bottle. That's a 2.5 times increase above the $0.019 per bottle that Ethos initially gave. The scale of the projects we fund has grown from about $10,000 to $1 million a project. And as of today, our grants to organizations such as Mercy Corps and UNICEF hope to reach about 370,000 people gain access to safe water, sanitation, and hygiene education..

What does this mean for me? I have achieved much of what I originally set out to do. I no longer have to worry about making payroll.

I moved to Seattle and now manage Ethos inside a company of 150,000 employees. I just bought a house for the first time. Recently, as a big stride toward living a more settled life, I got a betta fish named Lawrence. His bowl water is tap.