IMD-3-2262
v. 17.10.2012
TERRACYCLE (A):
BUILDING A VENTURE WITH SPINELESS EMPLOYEES
Research Associate Philippe
Margery of IMD prepared this
case under the supervision of
Professors Jan Lepoutre of
Vlerick Leuven Gent Management
School and Stuart Read of IMD
as a basis for class discussion
rather than to illustrate either
effective or ineffective handling
of a business situation. This
case is based on widely
available public sources, which
are listed in Appendix A.
TerraCycle’s roots stemmed from a project that Tom Szaky and his
high school friends started in Toronto before going off to university.
They had begun growing special plants they hoped to harvest for their
produce. The results, however, had been far from satisfactory so far.
As Tom left for Princeton University in 2001, the frail plants traveled
to Montreal with his friends who were on their way to McGill
University.
This case won first prize in the
Social Entrepreneurship track
of the 2012 oikos Case Writing
Competition.
As Tom talked about it with his friends, he came up with an idea for
Princeton’s annual business plan competition to be held in early 2002.
By using worms to eat organic waste, he could make a quality
fertilizer and address a major environmental issue at the same time.
During his fall break, Tom went to visit his friends in Montreal, and
when he saw the plants, he could hardly believe his eyes. In just four
weeks, they had produced a bumper crop. It turned out that one of his
friends had been fertilizing the plants with worm poop and the results
were amazing.
If the project came to fruition, it could seed a new breed of ecocapitalism, where the product would be made entirely from waste. But
how could Tom build a business on worm poop and garbage with no
funds, few connections and little experience?
Copyright © 2012 by IMD, Lausanne, Switzerland (www.imd.org). No part of this publication may be reproduced,
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The Princeton Competition
Tom Szaky was born in Hungary in 1982 and moved with his parents, both physicians, to
Toronto, Canada, at the age of eight. Growing up, he soon discovered his entrepreneurial
tendencies, and found himself in ventures such as selling lemonade as a kid and founding a
web design agency at the age of 14. In 2001, after he started his studies at Princeton
University, he met Jon Beyer, a computer science major and they soon became friends. As is
typical with North American student life, the question of joining one of the myriad of clubs
and associations at Princeton soon popped up, but didn’t really seem to excite Tom or Jon.
They preferred throwing their own parties, which they had great success at doing and, as a
result, became very popular. Tom and Jon’s entrepreneurial natures, however, led them to
enter the Princeton Entrepreneurship Club’s annual business plan competition, which offered
a grand prize of $5,000. All they needed was an idea.
During Tom’s fall break in Montreal, after marveling over the amazing recovery of his
beloved plants, his friend Pete explained how an ordinary compost bin filled with red
wiggler worms – scientifically called Eisenia fetida – had quickly transformed table scraps
and other organic waste1 into a rich fertilizer for the plants. It was then that Tom’s idea for a
venture was born – use worms to produce fertilizer from garbage, make money and address a
major environmental issue in the process.
Developing a Viable Business Model
Now that they had the idea for the business plan competition, all they needed to do was show
that it could make a profit. Tom and Jon saw their venture as a business in waste
management. They envisaged a negative cost of materials by being paid to haul away the
garbage the worms would eat. And they soon realized the market was huge: Americans
produced 12 to 14 billion tons of waste each year, 80% of which was organic, and paid
roughly $1 trillion each year to dispose of it. On top of that, US consumers spent a total of
$37.7 billion dollars on their lawns and gardens in 2001. Of that, fertilizers and various other
soils and mixtures for growing plants were estimated to account for over $6 billion and were
growing at a rate of 5% annually. Nearly 60% of Americans bought some kind of fertilizer or
plant food every year. Better still, organic fertilizers were expanding at double the rate of
chemical fertilizers. The organic material in landfills produced vast amounts of methane gas,
which contributed to ozone depletion as well as global warming. If Tom and Jon could feed
that waste to worms and sell products made from worm poop, they could help save the planet
and start with raw material costs that could total as much as minus $1 trillion.
They also learned that worm poop has all the characteristics of a top-quality fertilizer: twice
the calcium, three times the magnesium, five times the nitrogen, seven times the phosphorus
and eleven times the potassium of the surrounding soil. Worms also have a calciferous gland
that helps them process calcium, and fertile worm poop adds busy microbes and bacteria to
the dirt. All in all, worm poop seemed to provide not only nutrients for the plants but also
improved the quality of the soil. No wonder wriggler worms are sometimes called the
“natural ploughs.”
1
Organic waste is a type of waste, typically originating from plant or animal sources, which may be
broken down by other living organisms.
Source: <wiki.answers.com/Q/What_is_organic_waste#ixzz1b3wWF71H> (accessed 18 October
2011).
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Tom and Jon were extremely excited about the whole idea. They now had to develop
equipment that would allow them to scale up the household worm farm that Tom’s friend
had in his kitchen in Montreal. After many configurations, Jon eventually came up with the
idea of putting the worms on a conveyor belt. The conveyor belt would slowly turn away
from the center of the device where the organic waste would be poured. The worms would
work their way toward the center, leaving their castings (poop) behind them. The castings
would eventually be deposited into a receptacle at the end of the conveyor belt. As Tom
exclaimed, it was “… like a poop-producing treadmill!”2
The Competitive Landscape
Since this seemed like such a great opportunity, Tom and Jon feared there would be a lot of
competition. Yet all they could find in their research was an existing worm-farming economy
in shambles. Greg Bradley of B&B Worm Farms had set up two years earlier and had earned
$29 million through an illegal pyramid scheme in which over 2,900 clients bought wormfarming equipment.3 This left them with no real direct competition and the expectation was
low that new competition from the worm-farming community would emerge, as those people
who were burned during the previous round of investing were unlikely to invest more of
their hard-earned money in the industry.
Other potential competitors were landfills. However, landfills had developed a poor
reputation as people learned about their disastrous impact on the environment; in fact, the
largest landfill in the world would soon close. No doubt an alternative to landfills would be
welcome.
Composting sites were another possible competitor. They had a very similar business model
to Tom and Jon’s in that they applied the home compost idea on a much greater scale and
made profit from taking waste away from communities and selling an eco-friendly product to
farmers and landscapers. However, Tom and Jon’s worms would be able to process the waste
much faster (in about 20% of the time) and the quality of the fertilizer would be superior.
Also, composting sites were spread over huge areas and they emitted a foul smell, whereas
worm farming was virtually odorless. All in all, the industry looked promising!
The Final Phase of the Competition
As a next step, Tom, Jon and a few others put together a 100-page business plan detailing the
worm project, how it would solve the damage caused by the world’s landfills and make
money in the process. With the result due in March 2002, the team of eight had been reduced
to three – Tom, Jon and Noemi, an art student. Worm poop didn’t seem to enthuse the other
members as a potential future career after all. Still, the three were very confident they would
win the contest and had put a huge effort into writing an extremely detailed proposal.
After qualifying for the second round of the competition, they were given the opportunity to
do a formal presentation to the jury. With such a strong business plan, they felt the
presentation was merely a formality. The fact that they were successful in making it to the
2
Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New York:
Portfolio, Penguin Group, 2009, p. 19.
3
Bradley was eventually found dead of a cocaine overdose in 2003.
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final round with three other competitors only added to their confidence. Much to their
surprise, however, they came in fourth – the only place in the final round for which there was
no prize money. They soon realized that the judges had only skimmed their lengthy business
plan and that their poor presentation had put the judges off reading it in more depth. It was a
painful lesson. As Tom explained:
Though we lost the Princeton business plan contest that cold day in March, we gained
something more valuable: We understood the need for sizzle with the steak, a lesson we’d
carry with us for the rest of our careers. We’d figured out what we’d done wrong, but was it too
little too late?4
The three were disappointed and deflated. Was it time to call it quits?
A Breakthrough
Student life continued and each focused on their classes. However, neither Tom nor Jon
could let go of the idea of providing high-margin, low-cost, environmentally friendly
products. The problem was they had no idea how to make it a reality, especially how to
extract worm castings from the container where the worms feasted on organic waste.
One day, however, while surfing the internet, Jon found a machine that seemed to do exactly
what they wanted on an industrial scale. It was a system that collected worm poop compost
called “Harry Windle’s worm gin.” According to Tom:
The second I spoke to Harry, I could tell he was a complete nut, but he was our kind of nut – a
crazy inventor, a mad-scientist type whose business was making massive worm machines and
compost screeners. Harry’s system hinged on the same conveyor-belt principle that our idea
had, only he took the concept to a whole new level – literally. Harry’s worm gin boasted
conveyors stacked on multiple levels and could accomplish what we’d imagined in a tenth of
the space.5
Having a solution that had the potential to lift their worm poop production to an industrial
scale really brought the excitement back in and a $20,000 deal was negotiated with Harry. A
problematic detail was that Tom and Jon did not have that kind of money. Nor did they know
where to get the waste to feed the worms even if they could buy the worm gin.
Tom and Jon began lobbying Princeton to allow them to dispose of the school’s dining hall
waste during the coming summer. They met several times with the dining services
management, buildings management and grounds management. Eventually, they were given
the clearance to remove the barrels of organic waste from Wilcox Dining Hall every day
throughout the summer and bring back the empty barrels by the evening. Getting Princeton’s
approval to remove the waste had been a tedious process, but it allowed them to fine-tune
their pitch. Slowly their steak was beginning to sizzle.
4
Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New York:
Portfolio, Penguin Group, 2009, p. 21.
5
Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New York:
Portfolio, Penguin Group, 2009, p. 22.
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Tom and Jon’s combined savings amounted to $5,000, which they sent to Harry as a down
payment. Then Tom contacted an old high school friend who agreed to loan them another
$5,000. Finally, Tom pushed the credit to the limit on the card his parents had given him and
within a month, they managed to reach the magic $20,000 they needed. In mid-June Harry
drove onto the Princeton campus with a brand new worm gin. TerraCycle, as they had
decided to name the company, was born.
Now that they had the worm gin and the organic waste, they realized they needed to break
the waste down to a size that the worms could consume quickly. They were able to get hold
of a wood chipper and figured that would do the trick. The plan now was to transport the
rotting food, complete with maggots, from the dining hall back to their base near Princeton
University, shovel it into the wood chipper, grind it into a homogeneous sludge and then
transfer the mixture of organic waste into the worm gin where the worms would be waiting.
A few weeks of waste had already accumulated at the Princeton dining hall, so Tom and
Noemi made many trips on the first day. Unfortunately, the wood chipper kept getting
clogged, so they had to regularly reach down into it to clear the obstacles. They kept making
their trips until around 2:30 in the morning. While they were manipulating the last foulsmelling barrel in the pouring rain, it fell over and the maggot-infested contents spilled all
over Noemi’s legs and feet. She backed off in disgust, turned around, threw up and quit.
The End of the Road
Jon left his summer job to help Tom shovel rotting waste. The worms were producing poop,
but no one was interested in buying it. Tom and Jon both had many sleepless nights worrying
about the debts they had racked up with friends and family. They had not accounted for the
cost of food and lodging and found themselves penniless, sleeping on the floor of their
friends’ dorm rooms and eating whatever they could get their hands on. Still they kept up
their routine of carting the barrels from the dining hall to the wood chipper, then dumping
the waste into the worm gin where the worms would be waiting. Each day they finished at
about 18:00 and went for dinner. After dinner, they sent their business plan to every venture
capitalist they could think of. Each time they were rejected, if they heard back from the
investors at all. As the summer wore on, good news eluded them. The only positive aspect
was the fact that their idea for producing worm poop was working – the worm gin could
process large amounts of worm excrement. On the business side, however, things weren’t
working out.
During a breakfast conversation near the end of the summer, Jon and Tom accepted defeat
and decided to put the worm gin up for sale on eBay. They would use the money to start
paying back their debts, and Tom reluctantly accepted the idea that he would have to work as
an investment banker during the next three summers to pay back his friends and relatives in
full.
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Appendix A
Public Sources
Szaky, Tom. Revolution in a Bottle: How TerraCycle is Redefining Green Business. New
York: Portfolio, Penguin Group, 2009.
“Princeton to Poop.” Forbes Driven <video.forbes.com/fvn/driven/princeton-dropout-sellspoop-makes-millions> (accessed 18 October 2011).
“TerraCycle: The Beginning, Part 1.” Venture <www.youtube.com/watch?v=UvWNlH_4gRg>
(accessed 18 October 2011).
“TerraCycle: The Beginning, Part 2.” Venture <www.youtube.com/watch?v=VUyUdgNKoQ&feature=related> (accessed 18 October 2011).
TerraCycle website. <www.terracycle.net/en-US/histories.html> (accessed 18 October
2011).
“The
coolest little start-up in America.” Rediff Business, 23 June
<in.rediff.com/money/2006/jun/23inc.htm> (accessed 17 October 2011).
2006.