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Home > Business > Special

Coolest little start-up in America-II

June 23, 2006

Part I: The coolest little start-up in America

He, in turn, recruited an engineer and environmental consultant named Bill Gillum--a 23-year veteran of Western Electric, Bell Labs, and Lucent--to work full-time for TerraCycle on product development. Together the gray hairs undertook what Pyle describes as "the laborious process of taking an amusing, energetic, youthful garage shop and trying to put some corporate process around it."

Hardly had they begun, however, when another extraordinary event intervened. All that winter, Szaky had been keeping the company alive by entering and winning business plan contests. He had effectively, though not officially, dropped out of school by then, while Beyer continued his studies. (Beyer graduated and joined the company full-time in 2005.)

The two of them had reentered the Princeton competition and this time walked off with the first place prize of $5,000. In addition, Szaky had won five other competitions, earning between $2,000 and $10,000 a shot.

So Pyle wasn't particularly surprised when Szaky said he was off to another contest in late April 2003. The next evening, he gave Pyle a call. "I have a surprise for you," Szaky said.

"What's that, Tom?" Pyle asked.

"We won another business plan contest," he said.

"Very good, Tom," Pyle replied. "How much was it this time?"

"A million dollars," said Szaky.

"A million dollars!"

It was called the Carrot Capital Business Plan Challenge, and it was extremely competitive. Of 750 entries, 25 had been chosen to advance to the final stage, a shootout at a New York City hotel where they would be going for $3 million in venture funding to be split among the top 10 contestants, including up to $1 million for the winner.

On Saturday, April 26, Szaky and Robin Tator headed up to the city. Once there, they found themselves adrift in a sea of white shirts, rep ties, and power suits. Each team had 20 minutes to make its case before a panel of three judges, and each presentation was videotaped for the other judges to watch later.

At the end of the day, everybody was taken to a cocktail party at the Forbes building on Fifth Avenue, where the judges and sponsors mingled with the crowd and talked with the contestants--all of them, that is, except for Szaky and Tator, who felt they were being ignored. At one point, Tator motioned to Szaky, and they went outside. "There's no point in staying here," Tator said.

"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." But mostly because of the free meal involved, they decided to stay for the awards dinner. There they learned, much to their surprise, that they had won.

On April 29, 2003, a contingent from the company joined Szaky in New York City, where he rang the opening bell at NASDAQ and was interviewed on CNBC about his victory and the $1 million he had won. There was a catch, however. To receive the funding, the winning entry had to agree to Carrot Capital's terms.

Szaky got his first inkling that there might be a problem when David Geliebter, Carrot Capital's managing partner, took him aside and suggested that he tone down his statements about the environmental aspects of the product. Later when Geliebter (who declined to be interviewed for this article) and his lieutenants came to see the Princeton operation, they separated Szaky from his colleagues and talked to him about their plans for TerraCycle.

They said they would make him "the poster child" for organic fertilizers. The following week, he went into Manhattan at Geliebter's request to meet with the Carrot Capital people alone. There were five of them in the room, and they got straight to the point. They didn't want Tom Pyle or Bill Gillum or Robin Tator. They wanted Szaky. They would make him a star. He could become very wealthy just by telling his story. They would do the rest.

"Well," said Szaky, "if that's what you want, we don't have a deal." Leaving his million-dollar prize on the table, he picked himself up and went back to Princeton.

Once again, TerraCycle was at a crossroads. It had $500 in the bank. Szaky needed a new source of income right away, and there were no more business plan contests in the offing. By then, he and his colleagues had realized that there was more money to be made in a vermicompost tea than in worm poop itself or in solid-waste disposal.

The challenge was to brew a tea with a significant shelf life--at least two years. Gillum had made progress on that score, but what would they put the tea in? They couldn't afford to buy new bottles. They would have to settle for used ones. Szaky recruited a team of students and led them into the streets on a night when Princeton citizens put out their bottles for collection.

Unfortunately, Szaky was not aware that it is illegal to take bottles from recycling bins in Princeton. Fortunately, they were able to collect all the bottles they needed by the time they were stopped.

But it was not until they returned to the office on Nassau Street and began examining their booty that Szaky fully took in what they'd found. He noticed that, although there were many different brands and types of beverage, there were only four bottle sizes by volume, and they all took caps of the same size.

Within each of the four size categories, moreover, the bottles had the same height and the same diameter. "That was the big discovery," says Szaky. "It meant that they could be run through a high-speed bottling machine. That was the moment when it all came together, when we crystallized what we could do in a powerful way. We realized we could make a product entirely from recycled waste. I thought, This is it. This is what we have to do. Within five months, we had raised $1.2 million from private investors."

Inside the TerraCycle factory in Trenton, a radio is blasting "Le Freak, c'est chic, freak OUT!" and a couple of the guys on the filling line can't resist trying out some dance moves. There's a skeleton crew in today, working on a special order for Wal-Mart Canada.

Nearby, someone is putting together display racks for Home Depot stores in the United States. Szaky notes that the permanent work force in the factory numbers just 12 people, though the company hires up to 40 temporary employees during periods of peak production. Finding them is never a problem. When TerraCycle placed an ad to fill eight jobs, 150 people showed up.

Of course, abundant labor was one reason TerraCycle decided to locate in Trenton. The other was cheap real estate. The company bought the building, all 20,000 square feet of it, for just $275,000 in 2004.

While Szaky insists that he and his colleagues made the decision strictly for business reasons, it is not lost on anybody that TerraCycle was thereby creating jobs in a community desperately in need of them. As if to emphasize the company's inner city identity, Szaky arranged to have the factory painted inside and out by local graffiti artists. The only condition was that the most visible outside wall had to promote TerraCycle.

At the moment, the Trenton facility is where all the production is done. The tea brewing occurs in nine blue 500-gallon tubs that were once horse-feeding troughs. They cost $200 each. There are also two yellow 1,000-gallon tubs that used to be storage tanks. They were free.

Szaky and his crew found them in a landfill, cut the tops off, and used them to brew the tea needed to fill the opening orders for Wal-Mart Canada and Home Depot Canada.

But it's the bottles, not the brewing tubs, that dominate the scene. Everywhere you look there are bottles. Outside is a trailer brimming with them. Inside are huge plastic bags filled with them. There are bottles with soda labels, bottles with no labels, and bottles with TerraCycle labels. Indeed, most of the space in the factory is given over to the receiving, delabeling, cleaning, shrink-wrapping, filling, capping, boxing, and shipping of reused bottles.

They are critical to the entire operation, not to mention an essential part of the company's marketing. TerraCycle misses no opportunity to remind people about the source of its packaging, even going out of its way to make sure every rack contains bottles with different shapes. So important are reused bottles to the company's identity that it is attempting to patent the practice of using them for packaging. That may, in fact, prove to be the only part of the product that competitors won't eventually be able to copy.

Then again, the bottles are also the only part of the product that is potentially in short supply. The new vice president of operations and logistics, Larry Palermo, expects to fill 1.5 million or 2 million bottles in 2006 and perhaps twice that many in 2007, but Szaky is doing all he can to render those estimates obsolete.

He and Smith are courting Kmart, Target, and Lowe's and lobbying for expanded programs at Wal-Mart and Home Depot. Focusing on large accounts is the right strategy, Szaky believes, although many people told him otherwise. "They said, 'Go to small nurseries; develop a name.' I didn't like that. It was too slow. Each sale was so hard and took so long. We decided to go to the biggest retailers instead." With their help, Szaky thinks TerraCycle's sales can reach $5 million next year, beyond which it should be able to pay everyone a full salary--and turn a profit.

In the meantime, he has other things to think about--like selling the house in Trenton. He decided it was time to get out when he came home one day to find bullet holes in his bedroom window. There's also the financing he's been working on.

The $1.2 million he raised following the Carrot Capital episode carried the company through the middle of 2005. He raised an additional $1.5 million last year. This year, his goal was to raise another $1.6 million, and he already has commitments for that amount from angel investors.

That brings the total that TerraCycle has raised from angels to more than $4.3 million, for which Szaky is grateful. They have been relatively hands-off, leaving the company free to find its own way and develop its own character.

But he's beginning to think it may be time to bring in venture capitalists, who will demand financial discipline and bring credibility to the company's valuation. That's important because Szaky is already looking ahead to the day when TerraCycle will go public or get acquired. He expects that to happen within five years.

And then what? He says he hasn't had time to give it much thought and doesn't want to take his eye off the ball. He might go back to school. He might write a book. He might move to New York City with his girlfriend, Soyeon Lee, a Korean concert pianist. He'll certainly have options. After all, he still owns 11 percent of the equity. If his timetable is right and all goes according to plan, he'll have plenty of money to do whatever he wants.

Come to think of it, he could even retire--at the age of 29.

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Number of User Comments: 1

Sub: Great stuff

A very inspiring story. Hats off to Szaky for following his convictions. May the team achieve many more successes.Rediff - please move this article to ...

Posted by Rahul



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