CASE 9
TerraCycle: Garbage In, Garbage Out
A
s you walk the aisles of your favorite garden department,
you may discover a unique type of plant food made by
TerraCycle, a small company located in Trenton, New Jersey.
The company’s vermicompost tea fertilizer is a rich, organic
brew made from the castings (the actual waste product) of red
worms that are fed organic waste. Packaged in a yellow and
green shrink-wrapped bottle made of recycled plastic and
topped with unwanted extra spray devices from other manufacturers, TerraCycle may be the world’s first commercial
product made entirely from garbage. Even the shipping boxes
are recycled, misprinted rejects from other companies.
TerraCycle (http://www.terracycle.net) is sold through mass
merchandisers, including Home Depot and Wal-Mart.
TerraCycle’s flagship plant food was the top seller in its
category after it debuted on HomeDepot.com. In a series of
independent tests conducted at the Rutgers Eco-Complex in
Bordentown, New Jersey, TerraCycle performed as well as or
better than the products of its more established competitors,
whose products are not organic. In addition, TerraCycle claims
that its products never burn plants as other fertilizers might if
they are not properly applied. The more you use, the healthier
the plants become. It all adds up to a strong sales pitch. “We
have an organic product that’s both better and cheaper than the
conventional product. What are people going to buy?” asks
company founder Tom Szaky (pronounced zack-y). It is
unusual for large-scale retailers to take a chance on a young,
unproven company, especially one with a 24-year-old founder
and CEO like Tom. One reason they are willing to do so is that
TerraCycle retailers can earn gross margins two or three times
those that they get from other companies’ plant fertilizers.
Tom Szaky was born in Hungary, fled with his family to
the Netherlands, and was raised in Canada. A high school plant
project and a subsequent business plan competition led Tom
and some friends to the creation of TerraCycle. The group had
not solved the plant project problem they encountered when
they all went off to college, Tom to Princeton University and
his friends to McGill University in Montreal, but all three took
the stalled plant project with them. It was there that one of the
friends learned about fertilizing the plants with worm waste.
He created a compost heap in a box in his kitchen, placed red
worms in it, and started feeding them table scraps. By the time
Tom came to visit during the fall of his freshman year, the
plants his friend was experimenting with were thriving.
Simultaneously, Tom had been searching for a business to
enter in Princeton’s annual business plan competition. If these
worms could turn table scraps into a terrific fertilizer, he could
only imagine what an army of worms could do! The theme of
making money while recycling resonated with Tom, and when
he returned to Princeton, Tom discovered that his friend Jon
Beyer actually knew something about worms. Jon’s father was
an ecotoxicologist—a person who studies the effects of pollu-
tion on ecosystems. Tom and Jon thought the worm waste
product was an excellent fit for Princeton’s business plan competition. They came in fourth in the competition, missing out
on any prize money, and kept working on the project.
After an unsuccessful experience with a “worm gin” that
they had commissioned to be built for $20,000, the young
entrepreneurs were on the verge of giving up. The process was
labor intensive, and because working with the food source and
the waste product itself was just plain disgusting, it was challenging to get others involved. They decided that they would
liquidate their assets, sell the worm gin on eBay, and pay off
their debts. However, a local AM talk radio station invited Tom
and Jon to do a live interview. The disgruntled duo thought that
it would be fitting way to conclude the experience. They went
on WCTC-AM and told their story, and when they returned to
Princeton, a message was waiting. A local entrepreneur,
Suman Sinha, heard the interview and wanted to meet them.
Tom and Jon showed him the worm gin and explained their initial hopes to expand. The meeting ended with Sinha writing a
check for $2,000, enough to keep the fledgling company
going. They expressed their gratitude and promised him one
percent of the stock in return. With that, TerraCycle got a new
lease on life. It was not the last extraordinary event to occur in
the company’s history.
Tom kept the company alive by entering and winning business plan contests. He had effectively, though not officially,
dropped out of school, but Jon continued his studies. The two
entered the Princeton business plan competition the following
year and this time walked off with the first place prize of
$5,000. In addition, Tom had won five other competitions, earning between $2,000 and $10,000 each, and the team expanded.
The Carrot Capital Business Plan Challenge, an event sponsored by a prominent venture capital company, was next. This
nationally promoted competition was extremely competitive
because it offered the potential of $3 million in venture funding
to be split among the top 10 contestants, including up to $1 million for the winner. Much to their surprise, Tom’s team won the
competition. On April 29, 2003, Tom rang the opening bell at
NASDAQ and was interviewed on CNBC about his victory and
the $1 million prize. There was just one catch. To receive the
funding, the winner had to agree to Carrot Capital’s terms.
Carrot Capital was not interested in the three other entrepreneurs who had built the business with Tom. They only wanted
Tom. The venture capitalists told Tom that he could become
very wealthy just by telling his story and that they would take
care the rest. “Well,” said Tom, “if that’s what you want, we
don’t have a deal.” Leaving his million-dollar prize on the table,
he walked out and returned to Princeton.
With only $500 in the bank, TerraCycle desperately needed
capital, but there were no more business plan contests on the
horizon. Tom and his colleagues had proved that there was
money to be made in selling an organic vermicompost tea. One
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CASE 9 • TERRACYCLE: GARBAGE IN, GARBAGE OUT
challenge they had yet to overcome, however, was to brew a tea
with a significant shelf life of at least two years. As the team
continued to work on that problem (which they eventually
solved), they began to think about how to package the product.
With their company’s limited resources, they could not afford
to buy new bottles and would have to settle for used ones. Tom
found that the reclaimed bottles were generally one of four
sizes but that all had the exact same cap size. Within each of the
four size categories, the bottles had the same height and diameter. This meant that the recycled bottles could be run through a
high-speed bottling machine. In addition, Tom realized that
TerraCycle could make its liquid fertilizer entirely from recycled waste and sell it in reclaimed and recycled bottles packed
in reclaimed or recycled boxes. With renewed vigor, Tom and
his team set out to find financing for TerraCycle. Within five
months, they had raised $1.2 million from private investors.
Tom has also been adept at generating attention through
public relations efforts, landing articles about TerraCycle in
The New York Times, Inc., Time, BusinessWeek, and Real
Simple. In addition, stories about TerraCycle have appeared in
dozens of newspapers and on several U.S. and Canadian television stations. Tom has managed to give the business the feel of
an environmental crusade. TerraCycle’s “Bottle Brigade” for
example, has enlisted elementary schoolchildren and others to
collect used soda bottles, which contributes five cents per bottle to the school, twice what TerraCycle pays recyclers. The
solid waste is recycled, worthy organizations receive money,
environmental consciousness is raised, the company gets the
bottles it needs, and it all creates a compelling marketing message: TerraCycle is not just good for your plants—it’s also
good for your planet.
This theme has also proved to be an important recruiting
factor for the small company, which cannot offer salaries and
perks that are anywhere near those of larger companies. None
of TerraCycle employees makes more than $30,000 a year, yet
working at TerraCycle is an attractive option for many people
because of its environmental mission and the financial rewards
that are possible if the company reaches its potential. When
TerraCycle placed an ad to fill 8 jobs, 150 people applied.
Some employees took 85 percent pay cuts to join TerraCycle
and receive stock options. Their decisions will pay off only if
the company’s financial performance is strong enough to make
their stock options valuable.
Abundant labor and affordable real estate were two reasons TerraCycle decided to locate in out-of-the way Trenton,
New Jersey. The company recently paid $275,000 for the
20,000-square-foot building that houses its production and
bottling operation. Although Tom insists that he and his colleagues made the decision strictly for business reasons, it is
apparent that TerraCycle is creating jobs in a community desperately in need of employment. All production takes place at
the Trenton facility, and the permanent work force in the factory of only 12 people grows to 52 when the company hires
temporary employees during peak production cycles.
Tom is doing all he can to grow TerraCycle. He is courting
Kmart, Target, and Lowe’s as customers and is lobbying for
larger orders from Wal-Mart and Home Depot. Tom believes
that focusing on large accounts is the right strategy for
TerraCycle, but some experts disagree. With the help of these
retail giants, Tom thinks TerraCycle can reach annual sales of
$5 million, pay everyone a full salary, and earn a profit. Tom is
also beginning to think that the time is right to bring in venture
capitalists, which will supply much needed capital, impose
financial discipline, and bring credibility to the company’s valuation. For now, Tom is searching for another capital infusion
of $1.6 million.
Tom’s long-term vision is to take TerraCycle public or sell
it to a larger company. He expects that to occur within the next
five years. After all, who wouldn’t want to invest in worms and
garbage?
Exercises
1. What role does the company’s public relations efforts play
in TerraCycle’s success? What factors make this company’s story so attractive? What steps can other entrepreneurs take to generate PR for their companies?
2. Consider the steps the owners have taken to keep
TerraCycle afloat. What entrepreneurial traits have Tom
and his management team demonstrated in their actions?
3. What were the key considerations regarding the team’s
location decision for its manufacturing facility?
4. Do you agree with Tom’s distribution strategy that
focuses on large retail chains? What are the potential
downsides to this strategy?
5. Where do you recommend that Tom look for the capital
he needs to fuel TerraCycle’s growth? What are the risks
and the rewards of using venture capital to grow the company? What advantages and disadvantages do Tom, his
team of managers, and the early angel investors face if
TerraCycle goes public?
Source: Adapted from Bo Burlingham, “The Coolest Little Start-up in
America,” Inc., July 2006, pages 78–83.