Golfers of the 19th Century, in the living memory of the early historians, all say that the 'tee' was the area where from which you played and they 'tee'd' on the ground, as laid down in the first rules of golf 1744 - 'Your Tee must be upon the Ground'.  Golfers at this time used sand to make a tee within one club length of the previous hole, later expanded to within two and four club lengths.

The word tee itself is derived from the Gaelic word 'tigh' meaning house and is related to the 'house' in curling (the coloured circles).  Of course, as the first golf tees were within a 'circle' of one club length round the hole, this would make sense.  Nowadays the curling 'tee' is the line through the centre of the 'house' in curling and is in fact the target not the release line, which is the 'hog' line.  

It was not apparently until after Old Tom Morris created separate teeing areas at St Andrews in the late 19th Century that this defined area became common place.

Golfers continued to make tees from piles of sand.  This was messy and towels and water were provided to wash the golfers' hands as they are today to wash golf balls. Original sand boxes were still found until recently on some old courses, such as Bruntsfield Links, though today they contain fertilised soil for filling in divots on the teeing ground.

Old Sandbox at BLGS on Eighteenth

Throughout the end of the 19th Century and the beginning of the 20th Century, golfers began trying to create re-usable tees, using cork, paper or rubber.

The Singular History of the Golf Tee by IR Valenta (1995) documents that the earliest known portable golf tee was invented by two Scots W Bloxsom and A Douglas in 1889, and was a small rubber slab resting flat on the ground, with three vertical rubber prongs or a hollow rubber tube to hold the ball in place.

The History says that the first known tee to penetrate the ground was the "Perfectum" tee, for which a British patent was granted in 1892 to P Ellis, also a Scot. It comprised a rubber circle with a metal spike that was pushed into the ground. A variation of this, the "Victor" tee, with a cup-shaped rubber top connected to a ground spike was patented by PM Matthews of Scotland in 1897.

The first United States patent for a golf tee was issued to the Glaswegian David Dalziel on 8th September 1896. The patent was for a rubber tee with a flat base and slightly concave top, in combination with an artificial ground surface.
 

Dr George Grant

On 12th December 1899, an American dentist, Dr George F Grant, one of the first black graduates of Harvard College, was the first American to patent a tee that he had invented in 1898.  It was a peg with a rubber top and was pushed into the ground, and is very close to the modern tee, but but it did not have a concave head.  He did not market it and neither this nor any other previous tee inventions caught on.

Reddy Tees

The first commercial golf tee, which is the one we know today, was the Reddy Tee invented at Maplewood Golf Club in 1921 by another American dentist William Lovell. First manufactured in wood and painted with red tops so that they could be seen easily, they were soon produced in a variety of styles and materials. The "Reddy Tee" made of white celluloid by the Nieblo Manufacturing Company, was patented in 1924. Although plastic tees are available, simple wooden tees similar to those made in the 1920s are still the most common type.

Thus the final aspect of the game we know today was put in place.

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