Entrepreneur of the Year 2009: Kevin Surace of Serious Materials
The Secret Service wasn't thrilled about a last-minute addition to the group sharing the stage with the Vice President. But Kevin Surace was insistent. Upon arriving at his company's Chicago factory on that warm, wet morning in April, Surace had glanced through the speaker lineup and noticed a gaping hole. Where was a union member? How could the resurrection of a union shop be celebrated without an actual worker?
A few minutes later, the motorcade rumbled up a ramp and into a cordoned-off, sharpshooter-patrolled section of the cavernous plant. As Joe Biden toured a production line, earnestly absorbing the esoterica of superinsulating windows, Surace corralled one of the Vice President's aides. The aide was doubtful. Everyone onstage needed clearance, and it was late in the game to perform a background check. Surace didn't care. "It's the right thing to do," he told the aide. "I want it to happen."
Shortly thereafter, Armando Robles, a maintenance worker and president of Local 1110 of the United Electrical, Radio, and Machine Workers of America, joined Surace, Biden, U.S. Senators Dick Durbin and Roland Burris, Chicago Mayor Richard Daley, and plant supervisor Frank Edwards onstage. Speaking before a bank of news cameras and an audience of about 100, Robles related the saga of Republic Windows and Doors, whose rescue they were marking. In December 2008, the company abruptly shut down, cutting workers adrift with just three days' warning and no severance. Furious, employees engaged in a riveting, six-day sit-in that drew national media attention. When it was over (the workers won severance and vacation pay but still lost their jobs), the cameras drifted away, leaving the plant for dead.
That's when Surace, founder and CEO of Serious Materials, which makes carbon-frugal construction products, swooped in. A white knight as well as a green one, Surace bought Republic's crippled assets out of bankruptcy and pledged to restore the factory and eventually rehire all the workers at their old pay levels.
When Robles finished, Biden took the podium. He praised Serious Materials for making "the most energy-efficient windows in the world." Then he turned to Surace, thanking him for "your faith in the people here at this factory, your faith in the country, your willingness to invest here in America." Surace stood silently with his hands clasped before him, taking it all in.
For most CEOs, such a high-profile backslap would be the unquestioned highlight of any year. For Surace, Biden's visit was certainly a highlight. But there were so many other peaks to choose from.
The Biden event occurred just six weeks after Surace basked in comparable accolades from Pennsylvania Governor Edward Rendell during a March ribbon cutting at another Serious Materials factory, this one in the steel graveyard of Vandergrift, Pennsylvania. In Vandergrift, the collapse of Kensington Windows the previous October had stranded 150 workers until Surace bought the factory and committed to bringing everyone back. Also in March, Barack Obama publicly cited Serious Materials as among the "innovators creating the jobs that will foster our recovery and creating the technologies that will power our long-term prosperity." Colorado Senator Mark Udall delivered similar plaudits during his visit to Serious Materials's Boulder plant in April.
And politicos aren't alone in showering endorsements. In November 2008, Popular Science draped a best-new-product sash around EcoRock, the company's environmentally friendly drywall. The following September, The Wall Street Journal named EcoRock the most innovative environmental product of the year. Revenue at Serious Materials, which neared $50 million in 2009, is up 50 percent over 2008. And though other entrepreneurs are running on fumes, Surace in September closed a $60 million round of financing, doubling total raised capital to $120 million.
"It's been a hell of a year," acknowledges Surace, 47. "But it's not like I have a choice. For this to work, we have to be on a world stage. We have to make people care about what we're doing. It's part of the plan. And my job is to execute the plan."
Headquartered in Sunnyvale, California, Serious Materials is a dirt-under-its-fingernails business situated among such giants of the virtual as eBay and Yahoo. Serious Materials aims to save a billion tons of carbon each year by reinventing, of all things, windows and drywall. Those may not sound like environmental supervillains (though tainted Chinese drywall has caused a panic over sulfur emissions). But after crunching some Department of Energy data, Surace estimates that the construction and operation of buildings -- heating; cooling; lighting; the manufacture of cement, drywall, and glass -- produce 52 percent of global greenhouse gas emissions. In other words, says Surace, the "built environment" presents a far greater opportunity than oft-demonized cars and light trucks, which produce 9 percent of emissions. "What we're doing is brand-new-materials science," Surace says. "This is the big play."
The big play, Surace believes, has received short shrift -- an opportunity cost of the IT revolution, which sucked up trillions in research and development investment. "We've all got BlackBerrys on our hips, but we're building with the same materials we used 30 or 40 years ago," he says. And some of those decades-old products are cutting edge compared with drywall, which has been made roughly the same way for 115 years. (Drywall accounts for about 1 percent of emissions worldwide, Surace estimates; heat loss through windows contributes about 5 percent.) "We can do better," says Surace.
That vision of better is spelled out in applications for 30 patents across an array of goods -- including EcoRock, a gypsum drywall alternative made of recycled waste that cuts manufacturing emissions by 80 percent; and super-energy-efficient windows that reduce emissions from heating and cooling up to 40 percent. The company is improving not only building materials but also the way they are produced. In 2008, it installed a drywall production line in its Sunnyvale headquarters that generates just 3 percent of factory emissions spewed out by typical drywall makers.
Of course, those numbers matter only if Serious Materials sells a lot of product. So for two years Surace has been on a capacity-building tear, snapping up factories around the country, with the goal of owning 20 or 30 in a decade. To date, the company has purchased four plants, three of which were on the verge of failing -- most notably Republic and Kensington, both in 2009. The publicity that sprang from those acquisitions, coupled with a growing industry reputation for innovation, have provided Surace a vast stage and rapt audience. He has become a regular at big-brain forums, such as the TED conference, where his message blends Al Gore's grim factual ballast with vaulting entrepreneurial can-do-ism.
It's an unfamiliar role for a guy who just a few years ago was trundling around town in a Lexus SUV. (He now drives an electric Toyota RAV4.) But few are better suited for it than Surace, who has found a cause as boundless as his energy. While other entrepreneurs sprinkle a pinch of green into their product lines, Surace's phalanx of the climate-change army is waging a war -- a "third industrial revolution," in his characteristically exalted vernacular. Territory gained is measured in dollars, BTUs, pounds of carbon dioxide, and American manufacturing jobs saved.
"Kevin has become a real celebrity in the green industry," says Paul Holland, general partner in charge of the clean-tech practice at Foundation Capital, an investor in Serious Materials. (Netflix is among Foundation's other portfolio companies.) Holland says Surace stands out from other CEOs in that he is both a deep-dyed engineer (don't get him started on viscoelastic damping polymers) and a natural showman. That combination, says Holland, gives Surace "the potential to be the Larry Ellison of Green. He's that passionate. He's that good."
A Cassandra armed with PowerPoint, Surace folds his lean body across a table in his uncluttered office and clicks through an apocalyptic weather report. The Amazon burns. Oceans exhale CO2. Methane escapes from permafrost. Hydrogen sulfide poisons the air.
"We're adding carbon dioxide to the atmosphere so fast, it would be unbelievable that we could stop it as low as 550 parts per million," warns Surace. "A good case would be to stop it at 750. That would be a 12-degree-Fahrenheit rise. That is so dramatic, you understand, that much of humanity wouldn't survive. That's the good case."
Such pronouncements are typical of Surace. As colleagues past and present attest, he is also a tornado of activity: setting and meeting outrageous deadlines, pinballing from appointment to appointment, revering the on-time ship. He once reoriented an entire company from a business-to-consumer to a business-to-business focus in just two weeks. "If you work for Kevin, you are running a pretty intense marathon every day," says Jane Lalonde, who was vice president of marketing at that company, Perfect Commerce. "People say, 'I've been here a year, but it feels like seven, because it's in dog years.' That's the pace he sets."
It's a pace appropriate to the demands of inexorable environmental catastrophe. "If we don't execute quickly, one of two things will happen," Surace says. "Someone else will execute, and we'll be dead. Or no one will execute, and we'll be dead."
Surace inherited much of his intensity from his father, a retired Army man and longtime General Electric executive who adapted the rigor-and-results focus of both those organizations to running his household. After graduating from high school (he played percussion in the marching band), Surace earned an engineering degree from the Rochester Institute of Technology and began his career working for large companies: IBM, Seiko Epson, and National Semiconductor, which relocated him to Silicon Valley. There, he joined his first start-up, Hestia, a maker of chip technology. Corporate bureaucracy had frustrated Surace's do-it-yourself instincts; at the perpetually just-scraping-by Hestia, he became something of a human Swiss Army knife, handling finance, marketing, sales, engineering, and production. "I started to understand the mechanics of operating a real business," says Surace. "And I wanted to start my own."
In 1992, Surace did just that. Air Communications was in the wide-area wireless game. Surace trucked around to 50 VCs before landing his first round of financing. He got the money, but the investors required he step down in favor of an experienced CEO; they later sold the technology and closed up shop. From there, Surace became vice president of network services at General Magic, a highflier in handheld communications. Surace came in with a concept for a voice-activated interface that would fetch e-mail and voice mail and perform other tasks over a cell phone. He led the team that developed Portico, a human-sounding "assistant" that could understand 20 million phrases and speak several thousand; it was incorporated into General Motors's OnStar Virtual Advisor.
In 1999, Surace launched Perfect Commerce, which began as a shopping site and morphed into an auction-based system for corporate procurement. "Kevin decided we could not raise our second round as a consumer play, so in just two weeks we shifted," says Lalonde, whose branding firm, Match Design, now works with Serious Materials. "We changed the mission, the business model, the website. It was like a speedboat crashing into a wall." In 2002, Surace orchestrated a merger with a Web-based supplier network called eScout. The combined company relocated to Kansas City, Missouri, and Surace decided not to join the exodus.
Looking back at his previous ventures, Surace explains that each had a grand vision. "At Air Communications, the vision was to bring wireless access to every mobile person," he says. "At General Magic, it was that everyone would someday have their own personal virtual assistant. At Perfect Commerce, it was to revolutionize the way people shop."
But no such exalted mission animated the launch of Serious Materials. "There's a lesson here for entrepreneurs," says Surace. "You never know which company is going be the one."
Surace left Perfect Commerce in 2002. At the same time, his friend Marc Porat was on the verge of unloading a going-nowhere venture of his own. Porat, a founder of General Magic, had recently acquired a tiny business that made a soundproofing product for vehicles. At that time, peace-seeking drivers would buy special mats or floor coverings to muffle road noise, essentially putting more mass between themselves and the vibrations that cause sound. QuietCar, by contrast, was a polymer -- a liquid coating that transformed vibrations into kinetic energy. That approach was cheaper and more effective than mats. But sales were meager, and Porat asked Surace if he would like to take it over.
Surace viewed the business as a hobby: a chance to play with materials instead of software for a change. So he built a QuietCar website and signed up for Google AdWords. Soon, Google was delivering thousands of customers. Some of those customers asked whether the product would work on walls. "No," Surace told them. "But maybe we could develop something."
The concept behind soundproofing walls resembled that behind soundproofing vehicles: Just add mass. Surace preferred the QuietCar approach and began searching for an effective polymer. Retreating to a tiny lab adjacent to his office, he messed around with chemicals and powders, using a secondhand bread-dough mixer and measuring cups borrowed from his home kitchen. After extensive Internet research, he came up with a sound-dampening substance, QuietGlue, designed to be spread between layers of drywall. But contractors rejected that peanut-butter approach as too much hassle for a job site.
So Surace turned his attention to drywall itself. Drywall panels -- used for interior walls and ceilings -- are formed from wet gypsum plaster, wrapped in paper, and then dried in a kiln. At first, Surace tried the obvious tack: He created thicker panels. But their weight made them difficult to install and costly to ship. So he experimented with inserting a layer of vinyl coated with QuietGlue into the panels -- but the product was still more than an inch thick. Finally, he used a layer of galvanized sheet steel, which had superior damping power and was thin enough to keep the panels to five-eighths of an inch -- the industry standard.
That product, called QuietRock, worked beautifully. But it was expensive to make and sold to contractors for $100 a panel -- more than 10 times the price of ordinary drywall. At that price, Surace figured, it would never be a huge business. Still, QuietRock's reputation grew swiftly, chiefly through word of mouth, and within six months, orders climbed to more than 100 panels a day. "People were screaming for product we couldn't deliver," says Surace. "We had a million-dollar product almost overnight." He soon plumped the product line with doors and wood panels and acquired a window factory, whose products he redesigned to prevent vibrations from passing through. By 2005, the company -- then called Quiet Solution -- employed 30 people and had been profitable for several years.
Quiet Solution was a soundproofing business. Period. Surace thought he could expand the company to $50 million and then sell it.
Then one day Porat, who remained on the company's board, turned up at the office with a revelation. Porat had been learning about clean tech at the Aspen Institute, a nonprofit that champions values-based leadership. There, he had discovered that all those walls, doors, and windows made by Quiet Solution -- and the operation of the buildings those products went into -- were among the world's biggest energy sinks and carbon culprits. About 40 percent of the energy used to control the climate in buildings seeps out through windows and doors, producing more than 250 million tons of emissions a year, according to the Department of Energy. The manufacture of drywall releases 200 million tons of CO2 annually.
Porat presented the numbers to Surace. "Climate change should be your next challenge," he told his colleague. "What can you do to take energy out?" Over lunch at a sushi bar, the two shaped an audacious goal: to drive 80 percent of carbon emissions out of the built environment. Surace sketched on a napkin some early notes for what would become EcoRock.
What appealed most to Surace was the wide-open nature of the field. He had been drawn in to the construction-materials business by an intriguing product puzzle and found himself in an $11 billion industry that bore the onus of helping fend off a global crisis. It was also an industry populated by older companies that viewed R&D as overhead. A student of the Valley's investment cycles, Surace was confident that materials science was destined to be the next click on the wheel. Clean tech would push it forward.
In 2006, the movie An Inconvenient Truth publicized a timetable for global annihilation. For Surace, the film was a road-to-Damascus moment. He dug into the numbers, consulting with a friend from NASA, and concluded that some of Al Gore's models were too conservative about the rate and impact of climate change. Suddenly, Surace found himself with a cause transcending -- though never replacing, he cautions repeatedly -- making money.
"It's this huge thing that's overtaken him," says Lalonde. "All of a sudden, he's driving an electric vehicle. He's my only customer who wants business cards printed on 100 percent recycled paper with soy-based ink. He educates people about their carbon footprint."
Despite his public eloquence about climate change, Surace is almost curt when discussing his own conversion, as though the subject makes him uncomfortable. "Of course I'm more passionate about this than soundproofing, because this can have a fix-the-world good result," he says. "That said, I'm still just executing a plan."
It seems too big for the room it inhabits: a 180-foot assemblage of platforms, elevators, rollers, and vats, hanging like huge steel udders. The machine is just a baby, though, able to produce only a limited line of EcoRock, which is being beta-tested by a number of Northern California contractors. Once the operation is perfected and the debt markets improve, the company plans to install larger lines in new plants around the country. Each facility, Surace says, should achieve carbon savings equivalent to taking 65,000 cars off the road. Most customers -- who will begin installing the product next year -- are contractors working on LEED projects. (Leadership in Energy and Environmental Design is an industry certification system for green buildings.)
Unlike traditional drywall, which is made of gypsum, EcoRock is produced from the recycled waste of steel and cement plants. That means there is no mining, no calcining (a thermal treatment process), and no baking (the calcining and baking of gypsum produce as much as 200,000 BTUs per 4- by 8-foot panel of drywall). The formula that keeps EcoRock dry, eliminating that trip through the ovens, is among the company's most significant breakthroughs. In addition, waste used in EcoRock production is waste that doesn't end up in a landfill. And EcoRock itself is recyclable -- into new EcoRock or other building materials. EcoRock panels cost $14 or $15 -- close to twice the price of ordinary drywall.
Serious Materials has also pumped dollars into improving technology that layers glass, coated film, and inert gas to make windows more energy efficient than almost anything else on the market. Energy Star, the U.S. standard for efficient consumer products, "is actually a really low bar," says Ian Sullivan, Serious Materials's vice president for windows. "There's a perception it's a good thing, but we have opportunities to do so much better."
Public-policy winds are blowing the company's way. The American Recovery and Reinvestment Act of 2009 is shoveling nearly $13.6 billion toward housing programs, many aimed at improving energy efficiency. Serious Materials recently formed a government sales group to exploit such opportunities. Even without a penny of federal money, which is only now sluicing through the pipeline, the company has increased revenue 50 percent over last year. More than 200 new leads roll in each day in response to corporate marketing that stresses saving money as much as saving the planet.
The 260-employee company is not profitable, though Surace says it would become profitable "almost instantly" if it wasn't investing so much in R&D and production capacity. "We specifically decided to continue to invest in growth," he says. "We're building this to go public."
Surace, meanwhile, sits atop the sales pyramid, negotiating commercial deals with large property managers and others that he plans to announce early in 2010. He spends much less time in the lab, though when R&D is too snowed under to explore tantalizing new technologies, he will often investigate on his own. To feed his invention jones, he also devotes some weekends to experimenting with sausage recipes. The current challenge: a maple breakfast sausage made from chicken or turkey and sweetened without syrup to prevent scorching. "It's been complex to get the texture and the taste right," says Surace. "I've gone to an artificial maple and used Splenda to sweeten it up. The Splenda won't melt like sugar will."
Surace also spends more time than most CEOs fine-tuning his presentations, a task he refuses to delegate. One recent production consisted of 125 slides displayed over half an hour. ("Basically, a movie," says Surace.) He debuted it before 36 VC firms over the summer and scored $60 million from four new sources -- led by Mesirow Financial in Chicago -- and five repeaters. "When it comes to fundraising, a lot of CEOs make excuses," says Holland. " 'The recession. The building industry. It's hard.' Kevin never does any of that. And he's getting a very good price for the company."
Adds Lalonde: "Kevin knocks on doors, and if that doesn't work, he knocks them down." Nowhere is that persistence more evident than in the events that transpired last winter in Chicago.
The lunchroom at the former Republic Windows plant is shrouded in shadow. The yellow tabletops are bare; the kitchen, a dark void; the only sound, the distant clanking of air-circulation machinery. But a year ago, this nondescript room looked more like an emergency evacuation center. For six days, more than 200 union workers and their families camped out here to protest what they considered an egregious injustice. On December 3, the workers received three days' notice that the 40-plus-year-old plant would close. Severance and accrued vacation pay would not be forthcoming. The summary dismissal violated federal law requiring 60 days' notice before the shuttering of a company.
Taking the occupation in shifts, the workers played cards and dominoes, napped on broken-down boxes, and watched on portable televisions as then-President-elect Obama proclaimed his support. Restaurants donated food; sympathizers, toys for the children. The Rev. Jesse Jackson sent a truckload of turkeys. Outside, camera crews -- denied access to this steel-frame structure on Chicago's Near North Side -- massed around Teamsters hoisting protest signs. The inevitable giant inflatable rat loomed gray against the snowdrifts.
Two thousand miles away, Surace watched the story unfold and mulled whether Republic was an opportunity, a can of worms, or both. He had ample experience acquiring businesses, one or two out of bankruptcy. But Republic was no mere particle of economic fallout. According to union members and others, the company's CEO, Richard Gillman, had for months been stripping the Chicago factory of equipment and trucking it to a new, nonunion plant he was secretly setting up in Iowa. (In September, Gillman was charged with looting Republic and defrauding creditors. He denies the charges.)
"The workers were up in arms," says Surace. "The equipment had been pillaged. The computers were destroyed. The customers didn't want to buy. The records weren't accurate. There was no management team. No one but the craziest person on earth would take over that." He dismissed the idea from his mind.
But at the Serious Materials holiday party a week later, Porat urged Surace to reconsider. "Think what can happen!" Porat argued. "We're creating green-collar jobs. We're creating an energy-efficient product. We're hitting climate change. And it's Chicago! It's 10 minutes away from Valerie Jarrett's house! It will come to the White House's attention. It's a perfect expression of their policy. They will love you, Kevin. They will love you."
Surace says he doesn't much care whether the White House loves him, but he certainly wants people in power to know and respect Serious Materials. After penciling out the numbers and performing as much due diligence as possible, he pitched the Serious Materials board on the advantages -- and the public relations potential -- of owning one of the largest window-glass facilities in the country, with a seasoned work force and a fabulous location. Go ahead, responded the board.
Right after Christmas, Surace flew to Chicago and met with Carl Rosen, president of the Western Region of the United Electrical, Radio, and Machine Workers of America, and several workers from the plant. Rosen calls Surace's approach "a little unusual." In most cases, says Rosen, a prospective buyer will contact the union only after he has talked to someone who has the legal authority to sell. "Kevin came directly to us, because he understood the importance of the skilled work force to making this work," Rosen says. The parties agreed that Serious Materials would run a union shop, bring back employees at their old salaries, and recognize workers' seniority.
Only then did Surace approach Bank of America, Republic's chief lender. "I said to them, 'You just took $20 billion from the Feds. Give us the thing for $1 and look like heroes.' " When that didn't fly, Surace laid out an offer of several million dollars -- and a deadline of two weeks. "One minute after the deadline, we sent a new offer that was half the price of the old offer and gave them 24 hours to accept that," says Surace. That deadline passed as well. Unperturbed, Surace took another approach: He went to General Electric and paid $900,000 for the lease on Republic's manufacturing equipment. With the equipment and a collective bargaining agreement in hand, he obtained the remaining assets from the bank -- chiefly computers and software -- for just $500,000. (He later arranged a lease with Wm. Wrigley Jr. Company, owner of the building.) "It was a very creative negotiation," says Surace.
The Republic rescue has paid off handsomely in publicity, just as Porat predicted. Aspiring vendors, curious dealers, and assorted well-wishers began stopping by the plant after its reopening. These days, salespeople rarely need to introduce Serious Materials to their prospects; the White House has already done that for them. Still, says Surace, "If I'd had my druthers, I'd have preferred to do [the Biden event] when we had 100 workers back in. The administration wanted to do it sooner, and I understand that. But it raises expectations that we're going to be hiring like crazy."
The timing was poor for a different reason in March, when the White House contacted Serious Materials about participating in a different event. Shortly after the Republic Windows deal closed, Surace received a note announcing a press conference to promote the stimulus bill's effect on funding for clean tech. Would he be willing to attend and introduce the President? Anyone who questions whether Surace is motivated by celebrity should note his response: He said no. He had another commitment -- a dress rehearsal of Thoroughly Modern Millie at St. Lawrence Academy in Santa Clara, where he serves as musical director for the school's theater program. "Unless I'm on my deathbed," he says, "if I've signed up to be somewhere, that's where I'll be." Foundation Capital's Holland went in his place.
But Surace has no regrets. "I would love to meet the President," he says. "And doing what we're doing, I'm sure there will be many more chances."