Entrepreneurs and startups are disrupting the beverage aisle – and the status quo – by changing the way consumers think about their drinks. Consumers now demand that their beverages do something more besides hydrate or quench thirst. 

That’s led to an explosion of new options in the marketplace. At last count, there are some 5,000 different brands available to a consumer, which makes for a dizzying array for anyone trying to keep up with all the new players.

And competition is fierce. Very few of these brands, just 3%, will crack $10 million in annual sales. An even smaller percentage will generate enough momentum to cross the $350 million threshold and go mainstream.

That then begs the question: Which of the thousands of entrepreneurial players in the market today have the potential to be the next big household names?

It’s a question The Coca-Cola Company has been asking in recent years through its Venturing and Emerging Brands, or VEB for short. VEB’s mandate is “to identify and build, and incubate the next billion-dollar brands for Coca-Cola North America” by identifying promising products that fit well in the company's portfolio and meet unmet consumer needs, says Matthew Mitchell, VP of Investments and Ventures.

While the company continues to eye potential acquisitions and investments of all sizes (evidenced by recent deals with Monster and Keurig), VEB connects with entrepreneurs building businesses at far earlier stages and in new and emerging categories. “We created VEB to engage with a changing world,” says Mitchell. “Our job is to build a pipeline of brands that we can potentially acquire once they have grown and succeeded.”  

VEB breaks down the players in the beverage market into one of five phases of development:

1.     Experimentation: Companies with less than $10 million in revenue.

2.     Proof of Concept: Companies with between $10 million and $50 million in revenue.

3.     Pain of Growth: Companies with between $50 million and $150 million in revenue.

4.     Scale to Win: Companies with between $150 million and $350 million in revenue.

5.     Mainstream: Companies that have broken through to become billion-dollar brands. 

Rather than waiting until a company breaks into the mainstream to consider an investment or acquisition, VEB identifies interesting companies earlier along the growth curve. Specifically, VEB targets companies that have reached the "Proof of Concept" phase since they have already beaten the odds and established themselves in the market.

VEB’s strategy is to take a minority interest in the company first and, then, if the company continues to be successful, The Coca-Cola Company might acquire 100 percent of the business down the road, says Mitchell. 

“We are willing to take some risk and get in early,” he says. “But we also don’t want to take on too much risk.”

This strategy has already proven to be successful with brands like coconut water maker ZICO, Honest Tea, fairlife and Suja Juice, all of which were spotted early on by VEB and, with the help of Coke’s marketing, operational and distribution power, have now shown their potential to be even bigger. “We love the capabilities we can bring to bear for smaller brands,” says Mitchell,  “but the key is that we are unlocking synergies that are driven by that brand’s needs, and not our own bias.”

Casting A Wider Net

The challenge for VEB, however, is keeping up with all the disruption in the market. “I know a lot of brands in the marketplace,” says Mitchell. “But no matter how many late hours I work, I can’t keep up with all 5,000 of them.”

That’s why VEB has more recently been teaming with other entrepreneurial-facing firms as a way to cast a wider net over the emerging brands in the beverage industry. These partnerships provide a good compliment to VEB’s own efforts by accessing brands in Phase 1 via extra capital and resources. 

Two of the most prominent organizations playing key roles in that effort are L.A. Libations and First Beverage Ventures.

L.A. Libations was founded by three former merchandisers at Coca-Cola – Danny Stepper, Dino Sarti, and Pat Bolden – who, after working for the company for a decade, struck out on their own in 2009. Originally, L.A. Libations, which now has 28 employees, teamed up with emerging brands like ZICO to offer outsourced sales services and received a small equity stake in return.

Aloe Gloe

They also kept feeding information on promising brands and products back to their contacts at Coca-Cola. “A third of the growth in the beverage world is coming from brands that didn’t exist five years ago,” says Stepper, who is also a film producer. “Picking the entrepreneurial beverage winners is even riskier than being in the movie business. But over time, we started to see what it took to win, and The Coca-Cola Company started listening more to our insights.” 

Sarti adds, “We are small and agile. We have our ears to the ground about what is happening in the beverage market and, as a result, early-stage brands wanted to trade equity for our knowledge and capabilities and retail relationships.” 

Stepper, Sarti and Bolden eventually realized they were also interested in complementing their knowledge and expertise in selling third-party beverages to building brands of their own, something they began in earnest four years ago. Two early successes have been Aloe Gloe (pictured at right), a low-calorie, aloe-based drink that launched four years ago; and Arriba, a Horchata beverage. The unique model to build and invest in brands caught Coke’s attention and, eventually, VEB took a minority stake in L.A. Libations. 

Another way VEB has extended its antennae into the world of beverage entrepreneurs is by developing a partnership with First Beverage Ventures (FBV). FBV is the venture-capital arm of First Beverage Group, a boutique financial services firm founded by Bill Anderson.

What makes the venture fund unique is that it only makes investments in companies that are tied in some way to the beverage market, says Tom First, the fund’s managing partner. "We don’t look at just liquids... we also invest in technologies and capabilities that drive growth in the beverage industry,” he says.

First, who happens to share a last name with the firm and the fund, founded Nantucket Nectars before selling it in 2002. He brings years of experience as a beverage entrepreneur, which he uses to choose which emerging brands the fund invests in. When the fund raised it first round of financing in April 2014, VEB became one its first investors, or limited partners, as a way to keep a close eye on which firms might have the legs to grow quickly.  

Tom First
Tom First

The firm’s second investment was in Kombucha maker Health-Ade. Kombucha, a probiotic tea that dates back to ancient China, is surging in popularity around the country, with Health-Ade being one of the fast-growing firms in the market.

“Health-Ade has grown exponentially,” says First. “VEB is excited about the space and enjoys watching Health-Ade’s progress.”

According to First, VEB’s work with emerging brands is compelling because the team doesn't just talk about the importance of connecting with entrepreneurs; they are actually executing. “Their reputation in the beverage entrepreneur community is really strong because many emerging entrepreneurs look at them as peers rather than as a big company,” says First. “They understand the industry and have found partners like us who give them capabilities that they may not have without our relationship.” 

Mitchell is excited about VEB’s partnerships with firms like L.A. Libations and First Beverage Ventures because they help give Coca-Cola better insight into what the beverage industry might look like five years down the road – far better than they could do on their own.

“We have amazing R&D folks and strong brand marketers at The Coca-Cola Company who are dedicated to doing the best at what we know with our brands,” says Mitchell. “Our job at VEB is to augment these internal capabilities with external partnerships. Since consumers can’t elaborate what they are looking for in a specific brand innovation, entrepreneurs help bring to life these consumer needs. In effect, they help make the unknown known. And that’s how we’ll uncover the next billion-dollar brand.”