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TerraCycle CEO Tom Szaky: Talking Trash

Garbage in, profits out might sound like a dubious business model. But it’s working for Tom Szaky, who dropped out …

Garbage in, profits out might sound like a dubious business model. But it’s working for Tom Szaky, who dropped out of Princeton to sell worm poop.

The original idea for Terra- Cycle came to Tom Szaky when, as a 19-year-old Princeton student, he and his roommates went to Montreal to indulge in a bit of underage drinking. A friend there was growing plants in his basement and hadn’t had much success with chemical fertilizers, but did amazingly well when worm food was used. As Szaky recalls, “The light bulb went on for me. The plants were thriving because the garbage fed to the worms generated worm poop that served as this fantastic fertilizer.”

Upon returning to Princeton, the behavioral economics major wrote a business plan using a business model “where you get paid at both ends”- to take the waste away and again for the end product. During the summer of his freshman year, he took all his savings, maxed out his credit cards and invested $20,000 into scaling a system of converting garbage into “lots of worm poop.”

While his fellow students were interning at Goldman Sachs, Szaky shoveled rotting food waste and slept on the floor of a friend’s dorm room. Just as the venture seemed poised to end in frustration, a local radio program picked up the story. “Someone heard the show and called to say he wanted to give us $2,000-not a lot of money but it saved the company,” he says.

Since their worm poop company lacked the charm of a dot-com start-up,Szaky and his pals entered business plan contests, collecting amounts ranging from $5,000 to $20,000 to keep their idea alive. The piecemeal financing method saw them through their sophomore year, during which Szaky dropped out of Princeton to pursue the venture full time. (His parents did not learn this at the time-and were not amused when they did.) During this time, he figured out how to liquefy the worm poop-a big turning point in the enterprise’s fortune. A business plan contest that earned them a $1 million prize in May of 2003 might have been another big step, but the founders had to turn away the funding because of the terms. “They wanted us to change our management,” the spiky-haired Canadian now remembers, “but even worse, they also wanted us to move away from garbage, which was the essence of our company.”

Just as bank funds were dwindling to slightly over $500, a badly needed breakthrough came when the company hit upon the idea of using discarded 20-ounce soda bottles for its “tea,” as the brew became known. With this epiphany, the idea of a product not only made from waste, but packaged in waste, crystallized. Meanwhile, media coverage of the $1 million contest won the interest of angel investors and funding of more than $1 million in just six months. Another $4.5 million soon followed, along with the promise of another $2 million on the way.

The reaction from Big Soda was mixed. Coca-Cola’s initial reaction was cool to the fledgling Trenton, N.J.-based outfit but the company has since come on board. PepsiCo, on the other hand, embraced TerraCycle more readily.

“Within 10 days of Pepsi first hearing about us, we had a meeting with every one of their vice presidents in the marketing division talking about ways we can further this,” says Szaky. 

Like many entrepreneurs, Szaky, now 24, is evangelical about his product; but unlike many green entrepreneurs he doesn’t position it as a vehicle to save the world from itself. Whole Foods sells TerraCycle fertilizers, but Szaky shrewdly sought relationships with big box retailers, which are now his biggest customers. Consumers, he contends, may support politically correct products, but their purchase behavior demonstrates that they are value-conscious. It’s nice if a product is eco-friendly, but it’s nicer if it works better than the alternative and doesn’t cost more.

Recently, CE caught up with the sultan of worm poop in his graffiti-festooned factory in Trenton.

Instead of starting with small independent retailers you managed to sell to Wal-Mart and Home Depot Canada. How does a small, unknown outfit with no track record approach a giant big box retailer?

Tremendous persistence. We called Wal-Mart every day, five times a day for 60 days before the buyer took our call. He said he would give us a meeting if we promised to stop calling. Just a few weeks ago, we were in Phoenix meeting with PetSmart. They’re excited about potentially launching our product, but it took 40 phone calls from one of our salespeople to get the meeting.

If anyone wants to know the trick to getting into major retail, it’s persistence. That’s pretty much it. We have a rule here in sales: You should never assume anyone’s ever going to call you back or return any email of any sort.

Didn’t they ask about product effectiveness?

Oh, we had already proven that our product was 30 percent better than chemical fertilizers. TerraCycle was independently rated by the Zerofootprint Foundation, Eco-Options Foundation and others as the most eco-friendly consumer good. But unlike most eco-friendly items, ours is not more expensive because of the way it’s made. For example, if we used recycled plastic, it would drive up the cost. Most organic, eco-friendly items are more expensive because they’re luxury goods-which means that only 5 percent of the population choose to buy them. In surveys where people are asked if they would pay more for an eco-friendly product, only 5 percent say they will, but 100 percent say they will buy the eco-friendly choice if price is not an issue.

We are the only company in North America that reuses soda bottles in packaging. Wal-Mart recently created an environmental report card that they are giving to vendors this year. Re-using packaging is on the list because no one does it. That’s what helped persuade Wal-Mart to launch us. We had no production, no track record and they gave us a quarter-million-dollar order plus end-caps nationally.                    

  At TerraCycle’s trenton plant, five different varieties of “tea ” are brewed

So you’re a hard-headed business person, not an eco-romantic?

I’m not an environmentalist at all. I don’t buy organic food. I don’t drive a hybrid. I’m here to show that I can make a tremendous amount of money for my investors. The consumer wins by not having to pay more. The retailer wins by getting great margins. My shareholders win because we grow the company at 400 percent a year consistently and we’re doing that in the most eco-friendly way possible.

How do you market your product, other than word of mouth?

We use national guerrilla marketing tactics. For example, we set up a program where a school, a church or animal shelter can have boxes delivered to them for the purpose of sending used soda bottles to us. We pay five cents a bottle and the sender knows it will be recycled. What’s more, they fill out names on neck tags that are placed around our final product so a TerraCycle purchaser sees that the original bottle was saved from the landfill by “Jill from California” or “Billy from Massachusetts.” It personalizes the recycling effort. We have 1,700 locations that do this. The number of groups signing up on our Web site grows by 30 to 50 a week, and we’re not even promoting it.

We have two full-time publicists who call each of these locations and say, how much money did you raise? Okay, $30. What are you doing with that $30? One kindergarten class used the money we sent them for its pet rabbit that needed surgery-true story. That’s a great local human interest story that was featured on the cover of the local paper. We average at least two publicity hits on the bottle brigade stories across the country every week. Local papers have no staffs. They’re becoming syndications for AP and Reuters, which means they crave local stories. Our engine pushes local stories. These are the kind of stories our partners like Wal-Mart, Home Depot and Target can’t readily get. When we met with the Wal-Mart PR team, they told us that all they care about is getting positive local press. We said, “Hallelujah, we do that well.” That’s something that our halo produces, and Miracle-Gro can’t.

In addition, we spend a lot of our money on in-store material displays. Miracle-Gro advertises the idea of gardening. We can’t afford that, so we try to educate people about the brand and then get them to select our product once they’re in the store.

What do you suppose the folks at Scotts make of TerraCycle given that your sales are not significant enough to worry them?

Oh, I don’t necessarily agree with that. There are four major players, with Scotts being the biggest. We’ve already had acquisition interest from two of them. It’s too early, and we’re not really interested in that now, but it’s good to see. We’re definitely getting aggressive pushback from Scotts because we’re taking shelf space away. In Home Depot, we’re going to have three feet of shelf space this year. Competitors might have anywhere from 50 to 100 feet, but every increment helps against Miracle-Gro, the dominant player.

Are you concerned that the big boys might come up with an eco-friendly product to rival yours?

They couldn’t come up with something this eco-friendly. Miracle- Gro, which invests most of its R&D into genetically modified turf grass, is at the exact opposite end of the spectrum. They have launched organic products, but organic is just one aspect of their product line. Keep in mind that ours is the more effective product. The word “organic” doesn’t appear on the front of our label. We don’t even talk about it because that’s not the reason you should buy this product.

We’re moving so fast that we’re pumping out new products with great concepts in an environment where there’s very little innovation: deer repellent, de-icers, fire logs-anything in the lawn and garden space as long as we can reinvent it in an ecofriendly fashion-not just slightly more eco-friendly, but the most ecofriendly choice.

Where do you go from here? What are your future plans?

We’re executing strongly on our 2007 plan. We’re aiming to be a $5 million to $6 million company, which we’re pretty much on track for. We hope to launch probably 20 new products in 2008, add more retail and then keep aggressively expanding our product offerings. We want to become the Procter & Gamble of eco-friendly products. That’s our goal.

About J.P. Donlon

J.P. Donlon
J.P. Donlon is Editor Emeritus of Chief Executive magazine.