Who in the world would ever invest in worm poop?

In the very beginning it was pretty much just one person, Tom Szaky, who began by investing his time and energy in 2002 as a Princeton University freshman. Szaky had seen friends in his hometown of Montreal feed kitchen scraps to worms in a composting box and then put the worm poop into the soil of their indoor plants, which were thriving. Szaky thought that the worms could be put to some profitable use. The summer of his freshman year he contracted with the university’s food services department to compost food waste. In his sophomore year he borrowed $30,000 from his family to form TerraCycle.

Soon after Szaky dropped out of college and guided the company on a steep growth curve. Way back in 2004 TerraCycle showed its early proclivity for environmental consciousness while also building a successful business enterprise. The initial flagship product used worm castings (read: poop) to manufacture organic, industrial-scale liquid fertilizer. The worms fed on discarded food scraps that companies paid TerraCycle to take anyway. The product was then packaged in a 20-ounce bottle made of used plastic from, you guessed it, discarded soda bottles. The product, known as TerraCycle Plant Food, was sold at Home Depot, Walmart, and other stores.

The theme of TerraCycle’s successful future growth was set. By 2006 Szaky had appeared on the cover of Inc. magazine.

Today Szaky has permanently settled TerraCycle at a 20,000-square-foot facility at 121 New York Avenue in Trenton. The company has more than 60 employees at the Trenton headquarters, and both Szaky and TerraCycle have received environmental and business awards from organizations such as the U.N., World Economic Forum, Forbes, Fortune, and the EPA.

TerraCycle operates in 20 countries, and the worm poop business is a small part of its overall $24 million in revenue. The company is the global leader in recycling hard-to-recycle waste and is known for developing scientific solutions for hard-to-recycle items such as chip bags, coffee capsules, and pens. It converts these items into raw materials that are then used by manufacturers to create new products.

Cigarette butts are a case in point. The company separates the filters, which are made of plastic, and recycles it into plastic pellets, used as the raw material for other plastic products. The tobacco and paper are composted. TerraCycle now collects, converts, and sells more than 100 waste streams in the U.S. that would otherwise be destined for landfills.

So why is it profitable for TerraCycle to recycle miscellaneous pieces of garbage, while other companies have written the materials off as un-profitable? The answer is that TerraCycle has mastered the art of adding “value” to recycled products beyond the material value of the products. That value comes in the form of marketing and storytelling. It turns out that some people are willing to pay a little extra for plastic that was cleaned up from beaches rather than made from newly drilled oil.

“This incremental value ranges from communication and shopper marketing platforms for consumer product companies, to incremental foot traffic for retailers, to cleaner streets for cities, to charitable donations,” says a company circular about an upcoming stock offering.

TerraCycle says it is in “serious due diligence to acquire a company later this year that we expect will increase our company’s revenue and profits by over 50 percent in 2018.” With hopes of continuing this dramatic growth through the acquisition of additional companies, TerraCycle is preparing a $25 million Regulation A offering.

So now the question becomes: Who in the world would invest $25 million in a company that was founded on a product based on worm poop?

The answer is pretty much anyone who wants to.

As the TerraCycle press release announcing the planned offering states, “this year TerraCycle, the global leader in recycling hard-to-recycle waste, will collect and repurpose billions of items otherwise destined for landfills. That’s important to the roughly six-in-ten Americans who, according to a Pew Research Center survey, say they always try to live in ways that protect the environment and say it bothers them ‘a lot’ when others throw away things that could be recycled. Now, after nearly 15 years of innovation, those who support the TerraCycle mission to eliminate waste will have the chance to invest in the company. In an effort to raise $25 million in growth capital, TerraCycle has filed for a Regulation A offering with the SEC which allows any category of investor to become a shareholder.”

Regulation A offerings are relatively new, part of the JOBS Act (Jumpstart Our Business Startups) that started under the Obama administration. A Reg A offering still requires SEC reporting as you would have with an IPO, but it has the advantage that you do not have to be an accredited investor to invest in TerraCycle now. Szaky refers to a Reg A as “crowd funding for private equity.” The minimum investment will be set at $700, and the company says it has no expectation about what the share price will be. Investors can sign up at www.ownterracycle.com beginning in mid-November.

TerraCycle says that if it raises the $25 million it is looking for, up to 30 percent of the first $11 million raised will go to current TerraCycle investors, and the rest will be spent expanding the company: About $3.5 million will be used to hire more U.S.-based staff, $15 million for acquiring other companies, and $1.5 million to improve its Trenton headquarters.

As stated in its recent offering documents, TerraCycle’s mission is to eliminate waste in the context of a profitable business, and the company says it has achieved that goal over the last 12 years. TerraCycle has set up national collection platforms for waste streams, and these platforms are funded by consumer products companies, retailers, cities, manufacturers, distributors, and other small businesses. With many of these partners, the company even provides agency services, such as PR, social media, communications, and marketing. TerraCycle then uses a business model that creates value that goes well beyond the material value of the waste itself that was collected, thus allowing them to recycle just about anything and everything.

As Szaky explains in a brief interview following a tour of the company’s Trenton operation, TerraCycle really has three businesses. The first is waste collection itself and it addresses the question as to whether the item can be recycled. Szaky stresses the fact that this question has to be answered up front and the answer, of course, has to be yes.

The second business deals with whether that product itself can be made in turn from recycled materials, and once again the answer has to be positive. At this point you can see that the company has put a great deal of effort (R&D) into proving items recyclable that others would have thought impossible. TerraCycle can create its own business, to some degree, by simply developing ways of recycling what other companies would write off right away. “The company turns a NO into a YES with a great deal of innovation,” Szaky says, “something that others are not even willing to try.”

The third business is the most fascinating and deals with the question as to what are the most durable materials that are not disposables, such as plastics. For example, should cookies come in a tin as they did years ago, instead of disposable materials that are headed for a landfill? TerraCycle is working with partners to best answer these questions, and this business with more durable packaging will launch in 2019.

Will this third business put the other two out of business at some point? “That would be the optimum outcome,” says Szaky. “The success of this third business would more than compensate for the other two.”

As the preliminary offering brochure states, TerraCycle sees itself as part of the emerging “circular economy,” focused on “developing and implementing circular solutions for products and packaging where there are otherwise only linear options (landfill and incineration).”

One big need of the circular economy is the handling of what is known as “universal waste,” a term used by the Environmental Protection Agency to categorize regulated waste that is significantly less hazardous than traditionally hazardous waste. According to TerraCycle’s offering statement there are four types of universal waste: florescent lamps, batteries, pesticides, and mercury-containing material.

Federal and most state laws, says the company, “mandate that universal waste cannot be put into municipal solid waste; but rather, must be specially treated through an EPA registered universal waste processing company. As the vast U.S. community of users of these items is required by law to pay for treatment of these waste streams, the size of the market is large.”

Later this year the company hopes to open the TerraCycle Universal Waste division and acquire the assets of an operating universal waste company that both collects through pre-paid boxes and through “bulk collections at hotels, office buildings, factories, and other large users of these items,” according to the company’s offering statement. “Consistent with its practices in other operating divisions, TerraCycle does not intend to own and operate Universal Waste processing facilities; rather, all collected waste will be shipped directly to third-party EPA registered universal waste processing companies.”

#b#‘Storied’ Plastics#/b#

In addition the company sees opportunities in selling a wide range of recycled materials at premium prices. The key to this is establishing a story for the waste material. TerraCycle’s example, as described in the preliminary offering material, is “storied” plastic, which “carries a narrative about the material’s prior usage and thus generates special meaning to new products that incorporate those plastics. The best example of storied plastic is our ‘beach plastic’ initiative, which has been the genesis for our belief that a range of recycled materials from TerraCycle can be sold at a premium price.”

Starting in January of this year TerraCycle has collaborated with Procter & Gamble to use recycled beach and ocean plastics in Head & Shoulders shampoo bottles. As larger volumes of plastic are gathered from beaches and the ocean, P&G plans to use the “beach plastic” for its laundry detergent caps on bottles of Tide detergent. P&G is “incentivized” to pay a higher price for the collection of this waste because “inclusion of the materials generates significant media and consumer interest in the products.”

The company is not without its share of risks. As the preliminary offering states, among many other factors, the company “may not realize the synergies and growth opportunities that are anticipated from acquisitions,” TerraCycle has “a complicated business model,” and there is “one key executive upon which the company is highly dependent.”

That key executive, of course, is Szaky, who is described in the circular as “inspired, brilliant, and tireless.” While this description is written in the language of marketing, it’s no exaggeration to say that the company has been built from the ground up by its CEO, in the mold of Steve Jobs or Bill Gates.

Now 35 years old and living in Titusville, Szaky was born in communist Hungary, where both of his parents were medical doctors. When the authorities were distracted and border security became porous after the Chernobyl nuclear disaster, the parents packed two suitcases and put their then four-year-old son into a car and fled to France and then Belgium, before settling for three years in Amsterdam. Then they emigrated to Canada and Montreal.

Even as a child Szaky showed a proclivity for entrepreneurial activity. His motto, he told a reporter in a November 10, 2004, story in U.S. 1., was “if you are going to do it, do it big, and if no one helps, do it anyway.” In high school he produced a fashion show that ended up with a $50,000 budget. It managed to clear $10,000, but school authorities perceived it as a high risk event and declared that such an event would never happen again.

As a young entrepreneur guiding TerraCycle Szaky has had success from both a public relations and a business point of view. He participates as a social entrepreneur at the World Economic Forum and is the author of three books, “Revolution in a Bottle” (2009), “Outsmart Waste” (2014), and “Make Garbage Great” (2015). Szaky created and starred in TerraCycle’s reality show, “Human Resources,” which aired on Pivot TV from 2014 to 2016.

Szaky has also successfully raised private equity over the last 15 years, raising around $25 million in various rounds. Virtually all of that funding has come through Regulation D private placements, where only highly accredited (very wealthy) investors are allowed to buy in to the company. In addition the company has had a number of international partners who have bought into TerraCycle.

Given that track record, why hasn’t Szaky just done an IPO?

Szaky answers by saying that the company is in something of an in-between stage in terms of its fundraising. As he puts it, TerraCycle has come too far, at $24 million in revenue, for just continued Reg D offerings, but is not there yet in terms of doing an IPO. Szaky says that he would like to see the company at a revenue of more like $80 to $100 million before undertaking an IPO and all the complications that come with such an offering. So he sees a Regulation A offering as the most logical approach at this point in the company’s history.

At a time when even plastic trash washed up on a beach can have a story, it should come as no surprise that TerraCycle’s Trenton headquarters has its own story. The chairs in the lobby are upholstered with Kit Kat candy wrappers. Partitions are fashioned out of used soda bottles. And once a year the company hosts the Jersey Fresh Jam, the annual graffiti festival that serves the purpose of also dressing up the exterior walls of the courtyard.

There is nothing marginal or ambiguous about the TerraCycle story. It simply says “we recycle waste.”

TerraCycle, 121 New York Avenue, Trenton 08638. Tom Szaky, CEO. 609-393-4252. www.terracycle.com

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