Tom Szaky is working with some pretty slimy partners in his new venture. But TerraCycle, and its worms -- yes, worms -- may just create a whole new niche in the business of waste management.
60-Second Business Plan
The pitch: Tom Szaky is working with some pretty slimy partners in his new venture, TerraCycle International Inc . Worms, he believes, can be marketed as "a global waste-management solution." Using a gin built by six unpaid employees at a cost of $20,000, Szaky is angling to win waste-management contracts from restaurants, schools, penitentiaries, and eventually cities. He also intends to sell what experts politely refer to as worm castings: excrement that is a nutrient-rich alternative to potting soil.
The process of unleashing worms on organic waste such as food scraps and grass clippings is known as "vermicomposting." Amateur horticulturists and hippies have been doing it on a small scale for decades. It took Szaky and his team 10 months to perfect a boxy, Lego-like conveyor that passes garbage through a sieve of worms. Within a week soil comes out the other side. Szaky says his system is fast, relatively small, and odorless -- unlike traditional composting, which so far has been commercially impractical.
TerraCycle's sales pitch will focus on price. Szaky plans to charge customers a service fee that is 25% lower than the amount charged by traditional waste-disposal services. (The bill for traditional disposal runs from $50 to $150 per ton of waste.) The company can go cheap, Szaky insists, because its soil product -- branded under a different name -- will fetch a premium at supermarkets, garden centers, and nurseries. Potting soil is a multibillion-dollar industry, and its organic segment has been growing at double-digit rates for the past four years. TerraCycle will derive more revenues from soil sales than from waste management, Szaky predicts.
Though Szaky says this is his seventh start-up, he isn't likely to be perceived as a veteran by potential customers or investors. A sophomore at Princeton University, Szaky is only 20 years old. "It's not easy going into a high-level meeting with a university and trying to convince them that, as students, you'll reliably pick up their trash through sleet and snow no matter what," he admits. Still, there are some benefits to youth. This past summer Princeton's dining halls beta-tested TerraCycle's system.
GREEN IS GOOD: Hungarian-born Tom Szaky hopes to take his eco-friendly waste-management system global.
Szaky recently hired a CEO and is pursuing a $500,000 round of financing to pay for a facility in New Jersey that's large enough to handle the organic waste of 25,000 people a day (approximately 25 tons). In terms of competition, several small outfits across the country sell vermicomposting services and others peddle soil castings, but no other company does both. Szaky believes the two-tier revenue structure provides TerraCycle with a competitive advantage because it will keep the cost of disposal low enough that he'll be able to scale up the company swiftly.
Within eight years he plans to have at least 30 composting pods handling 15 to 30 tons of garbage a day. And he hopes to spread the good worm globally; he's already had nibbles from partners in Barbados, Japan, Hungary, and the United Arab Emirates. To fund the international expansion, TerraCycle anticipates an initial public offering of stock in 2004.
The Quick Once-Over
The Numbers: No revenues, $22,000 net loss in 2002; $2.5 million in revenues, $1.6 million in net profit in 2003; $12.5 million in revenues, $9.5 million in net profit in 2004; $65 million in revenues, $44 million in net profit in 2005; $165 million in revenues, $135 million in net profit in 2006
Long-Term Goals: To be the dominant alternative waste-management company, with 30 to 100 worm gins functioning worldwide by 2010
Capital Raised: $13,000 from friends and family; $309,000 from Toronto-based venture-capital firm Tropika International
First-Year Expenses: $22,000
Biggest First-Year Expense: Building a working worm-gin prototype
The Weigh-in: Our Panel Rates the Plan
Gainful or Just Grubby?
Who: David Kirkpatrick, managing director of Sustainable Jobs Fund, a North Carolinabased community-development venture-capital fund focused on sustainable enterprises
Rating: 4 (based on a scale of 1 to 10, with 10 being the highest)
"TerraCycle's plan is weak on operations. Some questions it left unanswered: Worms process only organic waste; how will the system remove metals, glass, and plastics? How will customers transition from tossing trash into Dumpsters to delivering waste to an on-site TerraCycle unit? How will the company ensure that contaminants are kept out? They have identified a big problem -- waste disposal -- and have an elegant solution for many settings where garbage consisting mostly food, paper, and yard debris is generated. I suggest they collaborate with an innovative but experienced small waste-management company."
Who: Mark Kaplan, partner at CEI Ventures Inc., a community-development venture- capital fund, based in Portland, Maine, that's focused on Maine and northern New England
"The founders understand they are in two businesses -- waste disposal and garden products -- yet it is unclear why they would not choose to develop a single brand identity conveying to customers the full-cycle benefits of using the services and buying the products. The garden-products business is very competitive -- and since more new products are available than garden centers have space, it requires effort and money to achieve sell through. Additionally, operators are typically looking for broad product lines from a brand, which TerraCycle would have to develop from other sources."
Who: S. Zorba Frankel, managing editor of Worm Digest, a quarterly newspaper
"TerraCycle's plan to use red worms (Eisenia foetida) to compost organic waste is a well-tested process for waste streams. In its marketing, TerraCycle will need to point out the successes that worm composting has already had in organic-horticulture industries. Why hasn't anyone vermicomposted on this scale before? I don't think that automated worm-composting equipment has been around long enough -- and has been inexpensive enough -- for others to aim this high before. The worm-based waste-management industry is growing and will continue to grow, as soil people (in landscaping, agriculture, and gardening) gain a wider understanding of, and appreciation for, worm castings, which are rightly called 'black gold."
Who: Loch McCabe, president of Shepherd Advisors, a Michigan-based business-development firm that specializes in "clean" technologies
"TerraCycle has multiple markets that must be developed simultaneously for it to be financially viable. The first niche market that the company must locate is 'early adopter' facility managers and innovative institutions such as universities, prisons, and so forth. Unfortunately, when it comes to waste, facility managers pretty much just want to pay someone to haul it away as quickly and painlessly as possible. TerraCycle needs to find large-volume consumers of worm-related outputs that will pay a high enough price to cover its margins on the equipment and servicing. Selling higher-margin bags of worm castings is the right idea, but that will not come quickly. In its current configuration, the company is likely to run out of cash long before it creates a financially viable business. The technical risks are still quite high, the markets are undeveloped, and the sales cycles are quite long. Yet, if they reduce their start-up expenses (especially staff) and focus on making sure that each unit sold is financially viable from the get-go, I believe they can -- one unit at a time -- build a successful business."
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