IMD-3-2263 26.04.2012
TERRACYCLE (B): A MILLION TRADEOFFS
Research Associate Philippe After almost a complete summer of shoveling maggot-infested, foul Margery prepared this case smelling waste from the Princeton dining hall in 2002, Tom Szaky and under the supervision of Jon Beyer had resigned themselves to cutting their losses and giving Professors Jan Lepoutre of up on the worm project. September was fast approaching and with that Vlerick Leuven Gent a new academic year. Management School and Stuart Read of IMD as a basis for Many months of hard work had gone into developing the idea of class discussion rather than to building a business in waste management. The idea was brilliant in its illustrate either effective or simplicity, its revenue generation model and its eco-friendliness: Let ineffective handling of a red wiggler worms, or Eisenia fetida, eat organic waste to produce the business situation. This case is best fertilizer. Get paid to take people’s waste and sell the fertilizer to based on widely available gardeners and landscapers. public sources, which are listed in Appendix A. TerraCycle, as the company would later be called, had already acquired a worm gin and it had demonstrated its capability to process a This case won first prize in the large amount of waste into natural fertilizer. But its money had run Social Entrepreneurship track out, debt was accumulating and no one was showing any interest in of the 2012 oikos Case Writing paying to have their waste removed or in buying the magic fertilizer. Competition. Tom and Jon had decided to give up on the worm project and sell their worm gin, the proceeds from which would help them pay back some of the loans they had received from friends and family. They would then have to get summer jobs as investment bankers – a gruesome thought – to pay off the rest of their debts.
As closure seemed all but certain, unexpected events offered new opportunities. Still, many more difficult decisions lay ahead on a path that remained uncertain and lacked glamour and financial profit.
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New Life
As part of closing down the business, Tom and Jon needed to sell the worm gin and participate in a previously scheduled live interview on a local radio station. It felt like the interview would be the ceremonial burial of the TerraCycle idea before going back to school in a month’s time. They told their story on the program and left the station with a recording of it in hand.
When Tom arrived back at Princeton, he almost deleted an email waiting for him because it looked like spam. It said, “I WANT TO INVEST. CALL ME.”1 Suman Sinha, the sender, had heard their story on the local radio station that morning and wanted to see them. That night, Tom and Jon had dinner with Suman and left the restaurant with a check for $2,000.
The money gave them the time they needed to regroup. Priority one was to find a place to stay – either an apartment or an office. They ended up renting a cheap basement space that had one central room and two small offices that would function as bedrooms. Showers would be taken at the gym. As for furnishings, it was all somebody else’s garbage. Tom and Jon had gone “dumpster2 diving” for chairs, desks and computers. It was all student waste that they had found in the trash on move-out day.
Survival Mode
Tom and Jon had fulfilled their promise to Princeton to dispose of the organic waste from the dining hall. But with summer coming to an end and school starting, they did not have time to continue production. Though they were still in business, they had to shut down the worm gin, box up the worms and store them in their office. After their summer experience, they realized that they would have to process several hundred tons of waste in order to turn a profit. This would require dozens of employees and worm gins, as well as millions of worms. And though worm poop was excellent fertilizer, to which everyone who tried it could attest, selling it had not gone to plan.
Tom and Jon were ecstatic about the $2,000 investment, but it soon became clear it was not going to last. They needed more money, quickly. They started looking for ways to bring in money or get resources cheaply. One day they got the idea of presenting a hairdresser friend from Los Angeles as a celebrity stylist to the Princeton community. They were able to fully book him for a weekend, so it turned out to be a very lucrative weekend for TerraCycle, which meant that it paid the rent. Inspired by the idea, Tom and Jon started to host art parties on most weekends during semester. One of the regulars at the parties, a senior named Hilary Burt liked TerraCycle so much that she convinced her father to invest $6,000 in the company. The parties also attracted the attention of a lot of Princeton students who offered to volunteer at TerraCycle. As a result, TerraCycle managed to keep its nose just above water.
With school back in session, Jon was spending more time on his studies. Tom, however, could not stop thinking about how to build TerraCycle and make a difference to the environment in the process. So, early that fall, Tom asked a Canadian friend, Robin Tator, to
1 Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New York: Portfolio, Penguin Group, 2009, p. 26.
2 A dumpster is a large industrial trash container, sometimes called a skip outside the United States.
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join the company. Robin had given Tom his first job some ten years earlier. Robin already had a couple of ventures of his own, but one of them was a seasonal ice cream business, so he thought he could find time to help Tom. He agreed to spend one week per month at TerraCycle in exchange for a share of the company.
Redefining the Business
Tom and Jon’s biggest challenge was figuring out what business they were in. So far no one outside the university was willing to pay them to haul organic waste away. Tom and Jon always thought they would sell the worm poop as fertilizer but they were quickly realizing that selling the fertilizer was a necessity rather than just a nice additional source of revenue. They decided to abandon the idea of being a waste-management company for the time being and focus on selling the vast amount of worm poop fertilizer they had accumulated.
So off they went in jeans and t-shirts, trying to sell worm poop in plastic bags with a black and white label that said “Pure Worm Poop.” As a cutting edge environmental company, fancy packaging and lots of flash just didn’t seem like their style. Yet their sales success was not forthcoming. For the most part, potential customers, if they even got a chance to talk to them, simply laughed in their faces. Others suggested they change the packaging, arguing that it didn’t look professional.
Eventually, Robin, whose background was in marketing, came up with the idea of bottling the fertilizer in spray bottles. They all agreed that spray bottles would be more appealing to potential customers. Liquid fertilizers also had a number of advantages over solid ones. Liquefying the solids would make them last longer, spraying the fertilizer directly onto the leaves would reduce the chance of diseased foliage and increase the nutrients the plant absorbs. Transforming the solid worm poop into a liquid would be relatively straightforward and would not require complex or expensive machinery.
They decided to put the liquefied worm poop – or tea as they called it – in a spray bottle with a label they had designed themselves with a new name: TerraCycle Plant Food. Now, they had a product to sell.
Gaining Traction
By the fall of 2002, Tom found himself drowning in the day-to-day dilemmas of TerraCycle. He was spending more time figuring out where next month’s rent was coming from than he was on his studies at Princeton. So he made a decision. As the semester drew to a close, Tom decided to take a leave of absence from Princeton.
Around the same time, Priscilla Hayes, who was responsible for solid-waste management in the county, introduced TerraCycle to the EcoComplex at Rutgers University. The Rutgers EcoComplex had a mission to “research and educate people about environmentally sound business practices” – TerraCycle was a perfect fit. The company became the EcoComplex’s first and only occupant when it set up its worm gin in the incubator.
Over the winter, Tom kept the company afloat by entering and winning several business contests including reentering the Princeton competition and walking off with first prize. Tom also recruited Bill Gillum, a highly experienced chemist with a PhD from MIT who was looking for a new challenge. Bill joined TerraCycle’s stable, which consisted of mostly Princeton interns at the time, as Director of Operations, and spent his first six months shoveling poop.
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Despite various injections of capital, TerraCycle found itself chronically short of cash. So Tom and Jon decided to participate in the mother of all business plan contests: the Carrot Capital Business Plan Challenge. The nationwide contest was sponsored by the venture capital firm Carrot Capital, and the winner would take home $1 million. With only $500 in the bank, TerraCycle had reached the point where their very existence depended on winning the contest, which had 750 entries in the 2003.
Carrot Capital
TerraCycle made it through the first round of the competition and on Saturday, April 26, 2003, Tom and Robin headed to New York City, where they found themselves adrift in a sea white shirts and power suits. Each team had 20 minutes to present its case before a panel of judges.
The day ended with a cocktail party for all involved at the Forbes building on Fifth Avenue. The judges and sponsors seemed to mingle with everyone – everyone except Tom and Robin. At one point, Robin called Tom aside and said:
There’s no point in staying here. We’re out of it. They’re not even looking at us. We’ve got better things to do. Let’s go run a company.3
But lured by the promise of a free meal, they decided to stay for the awards dinner. As dinner progressed, the losers were called. When they didn’t hear their name, Tom and Robin became increasingly confused, until eventually, much to their surprise, they realized they had won. And the prize was $1 million.
The following Monday, the whole TerraCycle team – about thirty people – met with David Geliebter, Carrot’s managing partner, in New York City where they opened the NASDAQ and were interviewed on some news shows including CNBC’s Power Lunch.
Over the following weeks, Carrot would work up a deal sheet about the specifics of the prize – and discuss it with Tom during a visit to the EcoComplex. When David and some investors arrived at the EcoComplex, they took Tom aside to talk to him about their plans for TerraCycle. They explained that they were not interested in the environmental benefits of producing and selling worm poop. They were more interested in the organic nature of the product because they saw a big opportunity in the fast-growing organic fertilizer and plant food market.
The following week Tom was invited to New York to meet with the Carrot Capital people alone. They got straight to the point. They didn’t want Bill or Robin or any of the other managers – they wanted Szaky and they wanted to make him the “poster child” of organic fertilizers. They would bring in their own team to take over every aspect of the business. By telling his story, which he had become very adept at doing, Tom could become rich and famous. His heart was pounding. This was an important moment for the future of TerraCycle.
3 Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New York: Penguin Group, 2009, p. 41.
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Appendix A Public Sources
Strauss, Robert. “But the Employees Really are Spineless.” The New York Times, 10 April 2005.
Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New York: Penguin Group, 2009.
TerraCycle website.
“The Coolest Little Start-up in America.” Rediff Business, 23 June 2006.