When 2 Small Startups Take on an Industry--Together
"Despite their artistic pretensions, sophistication, and many accomplishments, humans owe their existence to a six-inch layer of topsoil and the fact that it rains." --Anonymous
The earth is still covered with plenty of soil, and if you want yours to be healthier (and more carbon-friendly), there's a business in Berwyn, Pennsylvania (population: 3,631) awaiting your order of biochar, a porous, sustainably sourced substance that can last for centuries in soil, retaining water and nutrients.
As it happens, the six-employee Biochar Company (TBC), the makers of Soil Reef biochar, has amassed more than $4 million in capital. And it's one of 11 finalists in Richard Branson's Virgin Earth Challenge, which is dangling a $25-million windfall for "an environmentally sustainable and economically viable way to remove greenhouse gases from the atmosphere." There's as yet no timetable for when Branson's judges, which include Al Gore, will pick a winner. (The finalists were selected in November, 2011, winnowed from more than 10,000 applications.)
Behind the headlines, the story of TBC is actually a tale of two companies, recently reinvented as one.
The vehicle for the reinvention was an old-fashioned merger: Two small businesses walked in. One walked out. Beyond the usual perks of combining forces--economies of scale, operating synergies--this merger moved the needle on a national level. Alone, each company had a chance to emerge as the leader in a nascent industry. United, they are suddenly a favorite. This is the story of that merger, and why it should matter to you--especially if you, too, are leading a young company through the shape-shifting landscape of an evolving market category.
The Merger: Behind the Scenes
It was on March 31 that TBC announced the big news: the merger with Biochar Solutions Inc. (BSI). Based in Carbondale, Colorado, BSI produced and sold its own biochar products, and specialized in commercial research and development. The merged entity took TBC's name.
Three elements of the merger and subsequent reinvention make it worthy of any entrepreneur's attention. First of all, the investor world is beginning to recognize biochar's potential. For example, Cool Planet Energy Systems, a Greenwood Village, Colorado-based green technology company which makes a biochar product called CoolTerra, just raised $100 million in Series D financing. Participants in the round included Google Ventures, BP, Energy Technology Ventures (GE, ConocoPhillips, and NRG Energy), and the Constellation division of Exelon. Reinvented as one company, TBC has a stronger chance to raise larger sums of capital.
Second, TBC and its competitors face an uphill battle, educating potential customers (consumers and organizations with soil to nourish) about what biochar actually is. The brands within the category face a comparable struggle. Think of it this way: If you're trying to break into the market for sneakers or jeans, it won't be easy, but at least your customers already know what sneakers and jeans are; you can differentiate your startup brand through pricing, design, distribution, and marketing. For TBC, though, the challenge is to simultaneously define the product and plausibly argue that its brand, Soil Reef, is the one you want. "To the majority of the world, biochar is unknown," says COO Fernando Migliassi, 47. He explains the challenge like this: "How do you communicate a product and a process in a way that attracts people to become curious, when they're bombarded with other messages in home and garden centers?"
Third, and perhaps most important: the founders of the two merged companies might never have met, if one of them hadn't spent $600 trying to track down a boat on the Amazon.
Background: Two CEOs Meet
It was in September, 2010, that the leaders of TBC and BSI (separate entities at the time) both found themselves at the International Biochar Initiative's field trip to the "Terra Preta" (black earth) in northern Brazil. The soil at these sites is black (i.e., healthy and fertile) because of the homemade biochar with which the native farmers in the region have treated it, going back 2000 years. In fact, the land on one of the sites is five times more valuable than the (less healthy, dry, light-brown soil) land that surrounds it.
Jeff Wallin, cofounder of TBC (and now the CEO of the merged entity), almost never made it to the Terra Preta. The plane he needed to catch from Rio de Janeiro to Manaus, from where the tour boat heading to the Terra Preta was departing, was late. As a result, he missed the boat. By 12 hours.
In an adventure he chronicled in a cell-phone video (now on YouTube, called "Don't Miss The Boat On Biochar!"), Wallin, 38, managed (despite the limited power of what he calls the "coconut wireless" in rural Brazil) to find a tour boat of his own. He hired it (for $600) to speed north up a 100-mile stretch of the Amazon, in search of the boat that had left earlier. At one point, the fisherman ominously said to Wallin, "I've never gone this far up the river before." But after 3.5 hours on the river, they found the boat, which had stopped at the site.
It was at the site that Wallin met Morgan Williams, BSI's cofounder (and now the director of R&D for the merged entity). The two founders would then see each other regularly at industry conferences. Over time, they realized that their companies were extremely complementary. Serious merger talks began about one year ago.
The Honeymoon Period
The most difficult aspect of the merger, notes Williams, has been "the time required to fully understand all of the different initiatives each independent entity has underway." Specifically, each entity was several years old at the time of the merger. TBC (founded in 2008 as The Ecotechnologies Group) and BSI (founded in 2009) each brought to the table its own laundry list of clients, products, strategies, relationships, and internal practices.
And despite the increasing automation of most business processes, even in the M&A space, there is still a need for lengthy, old-school conversations to take place. It's the only way for each entity to learn about the other's capabilities and weaknesses.
In addition, it's the only way both leaders can fully grasp which of these capabilities will become complementary in the merged entity, and which ones will become redundancies that can be shed. "We're still learning how to create these efficiencies," says Wallin, whose email signature is the quote at the top of this article.
He compares the process to individual musicians learning to play together in a band. You can figure some of it out by talking before you play. But for the most part, you have to play together, hear how it sounds, discuss what's working and what's not, and then take it from the top, once more with feeling.
So far, though, the combined TBC has found several efficiencies. The most obvious of which was geographical: TBC was based in Pennsylvania. It was strong in the east, in terms of supplier and customer relationships and distribution networks. BSI was based in Colorado. It was strong in the west, in the same ways. The combined company can "very effectively service everywhere in the country," says Williams, 29. Plus, by merging, each entity eliminated a prime competitor. Previously, the two had competed on price. They don't have to do that anymore.
The merger also allowed each entity to benefit from the other's previous accomplishments. For example, it was BSI that originally entered--and became a finalist in--Branson's Virgin Earth Challenge. BSI also brought its considerable R&D chops to the table. Likewise, it was TBC that launched the Soil Reef brand, which is now sold in Whole Foods Markets. Soil Reef is also used in the largest organic rooftop garden in the US: The Brooklyn Grange.
As for economies of scale, they are what you might expect: Everything (legal fees, supplies, shipping, administrative costs) is cheaper, now that only one company is buying them. For example, the cost of char itself--the main ingredient used in making biochar--has decreased 40% since the merger, by Williams' estimation. "Which is why we can be cost-competitive, at price points no one else could achieve," he says.
The Story Is in the Soil
So who is buying the biochar?
For the combined TBC, the customer breakdown is roughly this: 35% are landscapers all over the US; 30 percent is industrial: remediation and reclamation sites, mines, roadsides, things like that. The actual customer in this case varies. It could be a contractor who has won a government contract; a local department of transportation; an environmental consultancy; a mining company; or a gas company. The smallest chunk, 10-15 percent, goes to "blenders," other organizations (including businesses) that in some way or another incorporate TBC's products into their own. As for the remaining 20-25 percent, it is sold directly to consumers, usually through the SoilReef.com site or the company's Amazon.com page.
TBC's goal, going forward, is to cement itself as the go-to product for all of these customers. As challenging as it can be to develop a product and a brand in a nascent space, one benefit of that nascent space is that there's immense room for everyone--including one's competitors--to grow. So to some extent, it's actually a good thing for TBC when Cool Planet announces it's raised a nine-digit sum from high-profile investors. It raises the profile of the entire industry.
Likewise, if another biochar company wins Branson's competition, it could mean "that biochar's day in the sun has finally arrived," says Migliassi. "And that is nothing but a good thing for us all. Additionally, we would see this as a signal to the capital markets to accelerate investment in this industry."
Though TBC is a business, there's no question that the entire team is exceptionally mission-driven. Sure, they want to make money, but you don't toil for years in an emerging industry like this unless you believe, deep down, in your product's ability to solve larger problems. Every employee at TBC is a soil-health evangelist. Williams, for example, says he got religious around 2005, when he realized through scientific readings that soil was "the ultimate membrane of earth--the skin of the planet."
The story of the soil amazed him to the point that he knew he had to make its health his life-mission. "It takes tens of thousands of years for the soil to grow and to form," he explains. "But if current practices are maintained, we've only got 100 years of soil left. We could live without oil. But there's no way we could live without soil. There's no way."
Wallin and the rest of the team have similar stories of conversion to the soil gospel. They point to the Terra Preta in Brazil as evidence that as far back as 2000 years ago, people grasped the importance of collaborating with soil in a beneficial way. Through their work at the merged TBC, they believe that this legacy still exists. And that what they're working on matters more than anything on earth--for today, for tomorrow, and for the next 2000 years.