The Start-up: Ventana Health

The Founder: Tim Avila

San Clemente, California

The business proposition: An all-natural sweetener that's calorie-free, Ventana Health's Zsweet aims to be the sugar substitute of choice for the health conscious, particularly those who have special dietary needs because of diabetes, obesity, or cardiovascular disease. Zsweet is made from erythritol, a type of sugar alcohol that doesn't leave an aftertaste or cause tooth decay. The product is sold at Whole Foods (NASDAQ:WFMI), at Wild Oats, at independent health food stores, and online.

The founder: Tim Avila, 41, learned about erythritol while working as a freelance nutritionist for Nestlé and Procter & Gamble (NYSE:PG). Having watched four family members suffer with diabetes, he saw the possibility for a zero-calorie sugar substitute. He pitched industry heavyweights, but after getting the "thanks but no thanks" treatment, Avila went out on his own.

No. of full-time employees: 11

Capital raised to date: $3.25 million from friends and family

Market potential: The market for sugar substitutes is pegged at about $950 million dollars annually. Artificial sweeteners account for $500 million, while natural alternatives, where demand is growing at a faster rate, account for $450 million in total sales. If the market for all-natural foods continues to grow at more than 10 percent per year, as it has in recent years, then Zsweet should be well positioned.

Revenue projections:
2006: $300,000 (actual)
2007: $3 million
2008: $10 million

Cash-flow picture: Zsweet expects to break even on a cash-flow basis at the end of the year, when revenue will approach $3 million. The company's largest monthly cash deficit will occur in September, when it will introduce a new "sweeter than sugar" product line.

Competition: The leading sugar substitute is Johnson & Johnson's (NYSE:JNJ) Splenda, which has roughly 80 percent of the tabletop market. Sweet'N Low is the low-cost granddaddy of the industry. Equal is strong in soft drinks, though Coca-Cola is developing a no-calorie alternative. Then there are the other upstarts. Avila has filed for a U.S. patent, but rivals include Organic Zero and Sweet Simplicity, which are also erythritol-based products.

For now, Zsweet has the most momentum of the bunch, due in no small part to the lucky break it caught when a senior Whole Foods buyer, Perry Abbenante, read about the product in an industry e-mail and contacted Avila out of the blue. ("That never happens," Abbenante says.) Zsweet aced a 60-day trial run, prompting Whole Foods to distribute it nationwide. Zsweet's catchy orange packaging works well at retail, says Abbenante.

Growth strategy: Zsweet has decided to avoid general food service distribution, meaning that packets of Zsweet will not be made available for free in diners and fast-food joints. "We don't want to be in the giveaway market," says Avila. Instead, Zsweet is going after distribution through upscale markets, caterers, and hotels.

Challenges: Avila wants to position this as a premium product; he charges up to 30 percent more than some competitors. At the same time, his growth strategy is to get on the shelves of Costco (NASDAQ:COST). But what next? "To go truly mass market, they're going to have to be cheaper," says Mike Richardson, an analyst at the Freedonia Group, a firm in Cleveland that recently published a study on sweeteners.

Opportunities: Avila, who is Hispanic, sees an opportunity marketing to the country's growing Latino population, which has a high rate of diabetes. To that end, the company has tapped Latina celebrity chef Laura Diaz Brown, who goes by the moniker Chef LaLa, to serve as its culinary director and create original recipes incorporating Zsweet as if it were a kitchen staple.

What You Can Learn From Zsweet

  1. Talk to every industry newsletter. You never know who might be reading.

  2. The more markets you target, the more you have to reevaluate your pricing.

  3. You don't have to use the same distribution model (in this case, lots of giveaways) as the competition.

Advice from Roxanne Quimby of Burt's Bees

I don't know if people really want Zsweet, but that doesn't matter. The best products are those that people don't yet know that they want. For now, Zsweet shouldn't worry about distribution. If you can get the consumer to ask a store manager for your product, then distribution will take care of itself.

How do you do this? The first step is to realize that it doesn't matter what you or your staff thinks. You need to get closer to the consumer. At Burt's Bees, I started by watching people at craft fairs. I would sit at my table with my candles and my beeswax, and I'd watch them carefully: how they acted, what they said, how they dressed, how they spoke to their children. And that would reveal who they were. Based on these observations, we built the brand around my co-founder, Burt. In reality, Burt was a cranky guy with terrible manners, but we developed this persona. Our Burt was funny and eccentric--people felt cool because he was in their circle.

So get a cup of coffee and sit at the end of the cashier line at a place like Whole Foods. Stores like these are fascinating: People spend more money than they have to, like $4.99 for a pound of organic spinach. But, of course, they're buying more than the spinach. They're buying a connection to the land and the earth. Zsweet needs to figure out how to satisfy people's unconscious needs in that same manner.

One potential barrier here is taste. I tried Zsweet and it doesn't seem like a chemical. I can actually taste the sweetness. But the other sugar substitutes I've tried have tasted awful. Zsweet has to do a lot of work to convince people that it actually tastes good. Some consumers are also going to say, "Well, if sugar is bad for me, I'll just use less sugar." Zsweet has to head that off right away by creating a belief that there is something really different about it.

I like what they are doing with the packaging. It's on the funky side with rainbows and flowers, but I think they could push it further. They might try using a brown or green background on the individual packets instead of white, which seems too sanitary and sterile. You want to project an image that's crunchy and yummy.

That brings up another possible consumer objection. The reason I don't use NutraSweet or Equal is that I try to avoid chemicals in my diet. If Zsweet wants to succeed at Whole Foods, the message should be: "We're not NutraSweet. We're not about chemicals. We're simple and holistic." For that reason I'm not sure Costco is a good fit. It's a price store, and I don't think Zsweet wants to start competing on price.

I would also focus on overweight people rather than diabetics. Sixty-five percent of the population is overweight, and people can put themselves into the overweight category without going to a doctor. Those customers will be relying on hearsay and cultural norms, which Zsweet has the power to influence.

On a personal level, the biggest challenge for any start-up entrepreneur is dealing with stress. Meditation helped me through the worst times at Burt's Bees. I would force myself to darken the room and meditate for 20 minutes before I went to work. It gave me that extra bit of strength to get through the day. Or the year.

Back to Tim Avila for some final thoughts:

"We're very aware of the differences in markets and we plan to expand our brand accordingly. We are an all-natural product, and we are separating ourselves from the big three--Splenda, Equal, and Sweet'N Low--through our branding efforts. For now our presence in Costco is all about getting feedback and gauging consumer response. As we expand, we'll be launching other products at different values--some for the mass-market consumer, others for the more upscale all-natural outlets."