Growing up in Toronto, Tom Szaky enlisted his fellow third graders in a cool project to do under their desks — folding 5,000 origami cranes to set a record. In eighth grade he taught sixth graders how to put their yearbook on a CD-ROM. In high school he produced a three-night sold-out fashion show, installing rock band style lights in the school gym and grossing $60,000. Also in high school he organized 100 fellow students to give rocketry workshops to grade schoolers. So when it came time to write his college admission essays, Szaky had many topics from which to choose.
Szaky’s enterprising personality apparently surmounted a lackluster SAT score. (He had learned four languages before emigrating to Canada, and English grammar was not his strong point). He was, nevertheless, admitted to Princeton University with the Class of 2005 but dropped out the following year to pursue his next cool project, building TerraCycle, a company that sells earthworm excrement.
TerraCycle is an environmentalist’s and an entrepreneur’s dream: It uses worm castings (affectionately called worm poop) to manufacture organic, industrial-scale liquid fertilizer, and it has a negative raw material cost. That’s because worms feed on discarded food scraps that companies pay TerraCycle to take. The flagship product, a 20-ounce bottle of indoor plant food for $6.99, is the first mass-produced product in the world to be packaged in used plastic — discarded and relabeled soda bottles that are collected by children, who also sell the product for school fundraisers.
And it works. This reporter squirted TerraCycle’s Plant Food on her plants and they nearly grew out of their pots. On the lawn, it transformed four kinds of weeds into lush green grass.
The three-year-old company started out on the grounds of Princeton University, then moved to an office at 20 Nassau Street with its bottling operation and worm beds at a Rutgers facility in Burlington County. Now it is moving everything to its own 20,000 square-foot building at 121 New York Avenue in Trenton. It has attracted wide press attention, has 20 full time employees, has landed $2 million so far in funds, has sold 25,000 bottles on the Internet and at retail (at stores such as Shop-Rite, Whole Foods, and Obal’s Garden Market), and anticipates delivering its product to big box stores in New Jersey early next year.
But start-up euphoria inevitably fades, and with the less dramatic work just beginning, it is fair to ask whether TerraCycle’s 22-year-old Pied Piper can play the right tunes to keep his team motivated and find the money to continue the explosive growth.
If you ask the more than half of TerraCycle’s employees who are seasoned veterans of the workforce, they profess stalwart enthusiasm. “Tom is really good at finding out what each person does best and challenging them to do more,” says Brian Young, a 1968 graduate of the University of Toronto who was a librarian at Szaky’s grade school and now directs TerraCycle’s program for Canadian schools. “He has a knack for bringing out the best in people.”
“I walk in and I feel energized,” says Rick Ober. A 1965 alumnus of Princeton University, Ober used to be the executive vice president, general counsel, and secretary at Summit Bank. He is now the vice president, general counsel, and secretary of TerraCycle. Asked to compare Szaky to his former boss, Joe Semrod, Ober suggests that both have intelligence and charisma, are willing to accept suggestions, “and both care very much about the people who work for them.”
“In my experience this is a unique mix of younger people who don’t have to think out of the box because they haven’t been in the box,” says Ober. “And unique because they have brought in experienced people and listened to their advice.”
Priscilla Hayes (Princeton University, Class of 1975) would agree. Trained as an attorney, she coordinates the New Jersey Solid Waste Policy Group at Rutgers and works to get food waste diverted into usable products. She gave good advice to Szaky at a crucial moment, and he took it. “People come at me all the time with ideas for recycling,” says Hayes, “Tom is leaps and bounds beyond anybody else. He and his people just have a lot more entrepreneurial savvy, and Tom has been so very dedicated.”
“Every little corpuscle in his body seems to say ‘I am an entrepreneur,’” venture capitalist David Geliebter of Carrot Capital has been quoted as saying. He awarded Szaky first prize in a national business plan contest last year.
The term “boy wonder” was applied to Szaky when he started the firm at age 19. At the ripe age of 22 Szaky seems to be following these guidelines for entrepreneurial success:
Find a cool project so others will want to help. Just as he was able to enlist classmates to do “fun” projects such as teaching rocketry, Szaky’s business model involves school participation in growing worm boxes, collecting soda bottles, and selling the product.
For recruiting, he does not try to convince people to quit what they are doing and join him. “My job is to get you as excited as possible, to have you share in my dream. The only way to get people to stick around in a start-up environment is for them to really care and love what they are doing, and to believe in what they are doing, to miss it when they are not doing it, to think about it when they are sleeping and when they are cooking. If I am able to impart that, then you would work for us.”
Think big and consider nothing impossible. Makers of similar products start selling them in small stores before moving to big stores. Szaky began with Home Depot, which now offers the spray bottles from its website, and is negotiating an in-store contract this month
It’s got to be fun and it’s got to make money. TerraCycle is definitely a for-profit firm. Says Szaky: “It is not like we are trying to manifest another form of treehugging, but the part that puts a smile on everyone’s face is that we are doing a good thing for the environment.”
Don’t ask permission, just do it. More on that later.
Just what the product actually costs to produce, Szaky won’t divulge, other than to say that a competitor, Miracle-Gro, offers a 15 percent margin to retailers, “and we are able to offer 40 percent margins and still net more than Miracle-Gro. That’s because we get paid for a lot of our raw materials and the others are incredibly cheap.”
Here’s how TerraCycle makes its product. The wriggly red worms, “Eisenia fotida,” are two to three inches long, and they replicate rapidly. Two pounds of worms becomes four pounds in 90 days says Szaky. “Two worms come together and they both leave pregnant,” he explains.
Worm castings have long been a favorite fertilizer for organic gardeners, and a New York Times article on November 2 described how one woman started a worm compost bin in her apartment. Dozens of online companies, employing cutesy websites with animated worms, sell these kits and instruction books for home or school. In this area, Ken Chiarella has a worm farm in Jamesburg (wormman.com). In California, Vierra’s Worm Farm sells liquid castings, made from a different method, for a slightly lower price than TerraCycle, and it also sells the castings themselves.
The voracious worms will eat anything, including dead worms, but TerraCycle’s formula uses two or more ingredients (Szaky mentions beer hops, coffee grounds, and paper sludge). William Gillum, a former Bell Labs chemist, is in charge of making what is called “vermicompost tea,” along with Erin McBride, an agriculture specialist from Rutgers. For five days the waste is heated to 150 degrees in a computer-regulated rotary composter that controls the oxygen and the speed of rotation. This EPA-certified process kills the pathogens.
Meanwhile the worms are eating and multiplying in a multi-platform “worm gin” modified for mass production by TerraCycle so that it moves an inch per hour. “We did a lot of tweaking to make it really work well,” says Szaky. What comes off the worm gin is separated by a fine sieve into undigested material, worms, and pure worm poop. The live worms go back to their “squirm” (the official term for a group of worms). The pure poop is liquefied in 3,000 gallon-vats by a seven-day secret process and turned into TerraCycle’s brand of vermicompost tea, unusual for its two-year shelf life.
Why production is cheap: Worms are self replicating, and the other raw materials have a negative cost. This is what attracted the support of Brian Tuffin, president of SE Johnson Canada and now a board member of TerraCycle. “He thought that what will make TerraCycle a successful consumer product company is that we get paid for our raw material,” says Szaky, explaining that paying TerraCycle costs less than trucking waste to a dump and paying tipping fees.
Szaky foresees an endless supply of used soda bottles at a cost of one cent each. “Most of our bottles are collected by students in New Jersey,” says Szaky. “That is something we are really proud of. It gets kids excited about recycling and to literally be involved in building something by recycling.”
In three-week “educational fundraisers,” the company hosts field trips to the TerraCycle plant and provides a worm composting bin for each classroom plus boxes for the collection of from 1,000 to 10,000 used soda bottles. Schools also receive materials for the students to make a mural, which will be posted at the plant and might even be used for the following year’s label designs. Students sell the squirt bottles for $8 to raise money for their school.
Other bottles are sourced from end-runs from the bottling companies, and the sprayers are also discards and end-runs in lots of 1/2 million.
It costs one cent to wash one bottle. TerraCycle has full-time workers to man high-powered bottle washing lines, and next month Szaky plans to add youth workers from Isles Youth Build, a training program organized by the Trenton-based charity. The “you have to have fun” requirement is fulfilled by the soda companies, many of which use bottle caps for contests. When the bottles come into TerraCycle’s possession many still have the caps. Szaky, who has won a total of $200 and 35 baseball caps from his bottle-washing stints, claims that the washing team “most likely would win a huge number of prizes.”
The labels, which sport the winning designs from the children’s murals, are applied in a heat tunnel. The 100-foot bottle-filling production line can support up to 10 workers, but right now it has just two, one for quality control and one to install the sprayers. The new plant is big enough to turn out 4 million bottles of plant food a year that could produce $15 million in revenues, says Szaky. “Our goal is to get the current plant to producing 20,000 units a day, and most likely in a year we will have to get another plant and scale up a little more.”
Robin Tator, a serial entrepreneur who signed on as the company’s vice president of sales and marketing, is creating partnerships to source containers, sprayers, and misprinted or discarded boxes for collecting bottles and shipping products. A classic example, says Szaky, is the company that had 50 boxes of gallon containers with labels that had been printed upside down. “At that point we didn’t have a use for them, but we took them all. They shipped them to us for free, because they would have had to spend money on dumping them. Three months later when we were developing our hydroponic product, we had free bottles.”
The staff also includes Rick Kraemer, director of logistics, a Princeton University graduate who, when he worked for ALK Associates, helped bring TravRoute’s mapping software into the retail market. Rebecca Leonardis, former marketing manager for a large New York-based professional service firm, is director of public relations. Jon Beyer, Steve Kurz, and Kyle Whittaker, are holding down jobs but are still in college, and Kristine Campbell is the office manager. Then there are three interns and more than 100 school sales consultants in the tri-state area and Canada.
Szaky is confident of his intellectual property. Patents are pending on the use of used soda bottles and on the secret formula for the vermicompost tea. “We have a proprietary way to liquefy the product to have a shelf life of more than two years,” says Szaky. “Let’s say, for the sake of argument, somebody figured out how to do it and circumvented our patents and also used the soda bottles. It would still be difficult to rip this model off. It took an enormous amount of time to figure out the high speed bottling lines and to do the brand marketing.”
How it got started: Szaky says his “Aha Moment” came when he saw a friend’s worm composting box in Montreal and realized that both the raw materials and the product could contribute to the bottom line of a company. The summer after his freshman year he contracted with the university’s food service to take food waste and put it through a three-step process. He and Jon Beyer (whose father happens to be a worm scientist in southern Maryland) were undaunted by having to shovel 150-pound barrels of putrid garbage.
In the middle of his sophomore year, Szaky and his friends, some of whom are still with the firm, borrowed $30,000 from family members to set up a grungy basement office at 20 Nassau Street. Tom Pyle, Class of 1976 at Princeton, also has an office in that building, and he served temporarily as CEO when the first CEO, Find Findsen, took a job at the United Nations.
Pyle had been taking a mentoring role and was asked to step in to provide CEO services. “I quickly adjusted the arrangement so that Tom would be CEO and I chairman, which was much more suitable to the tempo of the company,” says Pyle. “I helped Tom compose a board and source some seasoned executives, thus providing some ballast in the early stages that helped bring a more business-like outlook and presumably some confidence to investors.”
At that point Szaky did not have a marketable product, and solid-waste expert Hayes suggested an idea: compost tea. “We had been working on vermicompost with another entrepreneur, and we did some initial trials using a compost tea (a liquid version of vermicompost) as a replacement for fungicide,” says Hayes. “When Tom called, I suggested he try compost tea, and he took off with it. His team is just so well organized.”
Also at that point Szaky’s composting operation consisted of a bin on the university grounds. Hayes pointed him to Rutgers Eco Complex in Burlington County’s Resource Recovery Park, a $6 million, office/lab/conference center, and a $2.5 million, 56,000-foot greenhouse/warehouse space currently containing aquaponics (aqua culture and hydroponics), a crop to produce neutriceuticals, and single cluster tomatoes.
TerraCycle set up its bottling operations in about 3,000 square feet in the warehouse and put its worm-growing beds, the five-layer “worm gin,” in the greenhouse.
“We were able to do some experiments with TerraCycle’s product on some of the crops we grow,” says David Specca, acting director of the complex. Time lapse photographs at TerraCycle’s website show how TerraCycle-treated plants flourish significantly better than plants treated with chemical fertilizer.
Incorporating his youthful teaching experiences, Szaky set up school programs and hired Bob Cioppa, an experienced sales manager, to run them. “For us, the school program is really crucial,” says Szaky. “It allows the people and students in the local community to literally build part of what we are doing.”
A third profit center is the lawn business, run by Alex Salzman, an economics major still enrolled at Princeton. Salzman sells homeowners on the idea of replacing lawn chemicals with TerraCycle’s product.
Another unusual part of the company is its intern program. Szaky bought a 10-bedroom 7,000 square-foot Victorian house near Trenton High School and hired a cook. Interns work for free, and in return they get room and board. One of last summer’s 30 interns made a 15-minute documentary posted on the website.
Since TerraCycle was incorporated in 2002, the firm has received $2 million from about 20 investors including Isles, the Trenton-based community development group, which owns about three percent of the stock. Marty Johnson, the CEO of Isles, is enthusiastic about Terracyle’s potential for creating jobs in Trenton.
TerraCycle has had some precarious moments, such as when Szaky has had to look for an additional investor in order to pay the office rent. The age-old problem: Potential investors want to see purchase orders, but without money the manufacturer can’t scale up to land the orders.
The business plan has changed since 2002, when Szaky was interviewed in Inc. Magazine. Then he was trying to build a $500,000 facility that could handle the organic refuse of 25,000 people a day (approximately 25 tons). “Within eight years he plans to have at least 30 composting pods handling 15 to 30 tons of garbage a day,” wrote Inc. “And he hopes to spread the good worm globally; he’s already had nibbles from partners in Barbados, Japan, Hungary, and the United Arab Emirates. To fund the international expansion, TerraCycle anticipates an initial public offering of stock in 2004.”
But TerraCycle, at least for now, is concentrating on retail products. In 2003 it won the $5,000 grand prize, in the university’s business plan contest. In 2003, Szaky won first place in the national Carrot Capital Business Plan Challenge. (Szaky walked away from Carrot’s investment offer because, he says, he would havegiven up too much control.)
Szaky admits that, worrying about the company’s payroll, he gets four hours sleep a night. (His remedy for stress-related insomnia is to get up and accomplish a task, and he says it also helps that he has an equally intense girlfriend, a Manhattan-based concert pianist to whom he was introduced by one of the investors.)
But he is proud that he has no loans or debts and that he has landed all the investment so far by himself. That’s a great record when you consider that the angel investors and venture capitalists are looking across the table at someone young enough to be their intern. Older affluent people, Szaky says, remember their youthful ambition and don’t doubt that a young person can be successful. But he encounters strong and occasionally nasty grilling from sometimes spiteful staffers — usually only a decade older than he — who prepare the due diligence reports that the VCs require before contracts are signed.
Szaky has raised $1.25 million inseries A funds and $750,0000 in series B. He hopes to close on $4.5 million in the B round before years end, and in this effort he will be joined by a new CFO, a 1988 Princeton University alumnus who, last summer, successfully sold his Wall Street technology firm and made big profits for its founders and investors.
All his life Tom Szaky has been, theoretically, too young for what he did, and all his life he has grabbed for the next challenge. In the basement of 20 Nassau Street, a dingy, cluttered office where every piece of furniture has been salvaged from discards, six workers are working on every available surface, and in the adjoining small room, Szaky talks to a reporter about how his parents grabbed for freedom.
Both parents worked as medical doctors in Budapest when, immediately after the Chernobyl incident, border security briefly weakened. Seizing the opportunity, they packed two suitcases with clothes and books and piled their four-year-old son in the car. They spent six months in France and six months in Belgium before settling in Amsterdam for three years. During this period his mother, a nephrology specialist, worked as a mere aide in nursing homes, and when the trio emigrated to Canada, it took both her and her husband considerable time to regain their medical licenses and prestige.
When eight-year-old Tom arrived in Toronto, he was conversant in Flemish, French, Dutch, Hungarian, and the art of fending for himself in strange environments. Soon he learned to speak English and attract adult support for some amazing ventures. “My parents never told me ‘No’,” he says of his exploits. All of them involved rallying his peers to do something “cool” and then convincing adults that the project was OK. His motto: “If you are going to do it, do it big, and if no one helps, do it anyway.” Success usually meant getting started before getting permission.
“In third grade, somehow we discovered how to fold origami cranes, and two weeks later I had half the class spending the entire day folding,” he remembers. “We folded 5,000 to 10,000 of them for no other reason but to build the world’s longest crane line. If we had asked the teacher, he would have said no, so we just did it. Once he saw what we were creating, we transferred the excitement, and he thought it was cool.”
Young (the grade school librarian and current employee) says he was impressed by Szaky’s determination that the sixth graders would learn to do the yearbook CD-ROM themselves. Then came the rocketry. In ninth grade Szaky attended a space camp, and in 10th grade he volunteered to teach his own rocketry workshops for grade schoolers with Young as the faculty sponsor. Canada has a volunteer requirement for high school graduation, and other students were eager to participate in this very cool volunteer opportunity.
Szaky says his goal for the now infamous fashion show was to do as big a show as possible in the high school gymnasium on a $50,000 budget. “We had 20 tons of lighting fixtures, the same as Dave Matthews had had, and it takes three days to set them up. But the school put up hurdles and said we had to set up in 24 hours. We brought in 18-wheeler power generating trucks and had structural engineers looking at the load on the roof. Any more lights, and the roof might come down. With 250 high school kids working on it, I was the producer who put it all together. It was so big that the school said it was never allowed to happen again.” The show cleared $10,000.
Szaky also captained the swim team and was involved in a couple of dotcom startups: We’re Home, an online home improvement firm, and Student Marks, an online grade-tracking firm.
The parents who never said “No” did say “No” when their son dropped out of Princeton in his sophomore year. “It was a really tough situation,” he says. “They remember how Hungary had had inflation, when one day you had money and the next day you didn’t, but you always had your education. And they were able to leave Hungary when it was a Communist nation because of their education. For me to leave to shovel poop and rotting food waste — they were not pleased at all. But it’s not like I ever asked permission to do anything.” He left in spite of their objections. “But subconsciously, I took inspiration from my parents, who left their life behind. And now they offer their support.”
There will be a time, he admits, when he will no longer be the right CEO for the company he founded. “It takes a certain kind of person to get to $20 to $30 million, and a different one to get from $30 to $250 million. I know it’s coming, and the faster we can get to that point the better,” he says. “Being paid relatively decently, that’s my personal goal. Once the company is self sufficient, I really want to go back to school.” A behavioral economics major, Szaky hopes to return to his former advisor, Nobel laureate Daniel Kahneman.
Szaky admires Canada’s healthcare and education systems, and he admits that, here in the United States, he would not have had the freedom for his high school exploits, such as teaching gradeschoolers how to make rockets. But he also says that the U.S. is the only possible location for TerraCycle. “I could not have started this company in Canada or anywhere else in the world. This is the only place where you can have the American dream.”
TerraCycle, 20 Nassau Street, Suite 14, Princeton 08542. Tom Szaky, CEO. 609-252-9600; fax, 775-213-4593. Www.terracycle.net