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FEED Resource Recovery CASE

It was the spring of 2006 and Shane Eten had just won a $20,000 sustainability award at the highly competitive Rice University Business Plan Competition. Shane was already thinking about how he would use the $20,000. This wasnt the first time his idea, Feed Resource Recovery (feed), had won or placed well in a business plan competitionhed finished second at the Babson College, second at the University of Colorado, and second at the UCBerkeley competitions. Although the prize money and services in kind were helpful, Shane knew that he couldnt successfully launch his business on prize money alone. Shane estimated that he would need $150,000$250,000 to build the anaerobic digester prototype and much more money after that to scale production and sell the system across the country. Where would he get the money? Based upon his success in the business plan competitions and through strong personal networking, Shane had talked to several venture capitalists and they all expressed strong interest in the business. Potential investors seemed to be coming out of the woodwork, but still Shane was uneasy. How much of the company would he have to give up if he was going to secure their investments? Even from his preliminary conversations with the venture capitalists, he knew that the valuation1 of the company was only going to be part of the problem. He was discouraged by the grim prospect of having to jump through hoops, answering the venture capitalists endless list of questions. He figured it would take at least six months of battling back and forth over equity and shares during which time the venture capitalists would be looking over his shoulder, and all this before a prototype was ever built. Furthermore, several of the venture capitalists were saying this is a great idea, come back when you have a prototype built, so Shane wasnt even sure if they were really interested or just talking. But what other choice did he have? How could he raise the substantial amount of funding that he would require to assemble a team and build a working prototype? And how could he accomplish all of this without giving up all rights to his idea? The task was daunting and the answers were scarce.

From Athlete to Entrepreneur: The History of Shane Eten Shane Eten was born in Philadelphia and lived in a number of places while his father attended medical school. The family eventually settled in Cape Cod, Massachusetts, where his father and mother started a family-owned medical practice. Living near the sea inspired Shanes father. My father built a sailboat in our back yard. He started when I was in sixth grade. He told me he was going to build a sailboat and sail it around the world. He was probably a little crazy, but he actually built a thirty-six foot trimaran.2 For as long as Shane could remember, his father had a dream of building the sailboat. He would wake Shane up early in the morning on weekends and make him help work on the boat, sometimes working 12-hour days. After several years of effort, they successfully launched it and saw it sail.

Although at the time I really hated working on that boat, looking back I realize that it was a very important part of my childhood because it taught me the importance of hard work and taking a dream you have and making it reality. Like many boys, Shane was more interested in playing sports than school. He always enjoyed the team aspect and the competitive nature that came with athletics. His goal was to play Division I basketball in college. Hampered by knee injuries but still wanting to pursue his dream of playing college basketball, Shane chose to attend Trinity College, a Division III school and play ball there. Unfortunately, his knees never fully recovered from a series of knee surgeries, so Shane never had a chance to play in college. At Trinity, Shane majored in psychology and graduated in 2000. Although he enjoyed studying psychology, Shane didnt want to pursue a career in the field, but he didnt know exactly what he wanted. I really didnt enjoy school and to continue down the psychology career path would require me going back to school almost immediately. I like getting out there and getting my hands dirty with real work. In the field of psychology, I would have been doing a lot of research and theoretical education-based work. I wasnt ready for that. I wanted to get out in the world and make something happen. After graduating from Trinity, Shane went on many interviews and eventually found a job working for an up and coming computer company, Angstrom Microsystems. Angstrom Microsystems built supercomputers from off-the-shelf components and Linux software. Shane loved working for this fast growing entrepreneurial company because his job was never the same day-to-day. He had the opportunity to work with many different aspects of the business. His original job was working with vendors. Then he moved his way up to product development, and finally he settled in customer account management. While Shane was with Angstrom, the company grew from $500,000 to $15 million in sales in his first eight months. With the hands-on experience he gained and the opportunity of being able to see how so many aspects of a company worked, Shane realized: Entrepreneurship is fun and, most importantly, competitive. Theres a real science to starting a company. It was at this time that I first started thinking about building my own company. Unfortunately, Angstroms success was short-lived as the market took a turn for the worse when one of Angstroms largest customers stopped growing. The CFO of Angstrom left for a position at a candle company. He called Shane and convinced him to come along for the ride. The position that Shane had been offered was 180 degrees different from his job at Angstrom and an opportunity to test his abilities in a new way. Although Shane liked the tech industry, he decided to give it a shot. So at age 24 he started as a manager of a candle manufacturing plant. It was a drastic change. Laurence Candle Company was a sixty-year-old, third-generation company, and I was managing people mostly older than mesome who had been working there for thirty years. He was forced to get on the floor and get dirty learning the process of making candles. The Laurence Candle Company was struggling because its product was very similar to another established brand, Yankee Candle. The company needed new ideas so Shane raised his hand and asked if they would give him a shot at designing a new line of candles. After doing a bunch of market research and going to trade shows to see what was out there, he launched a new line of candles made from a new type of wax made out of soy. Soy wax was environmentally friendly because the wax was made from an all-natural crop; it was considered

renewable and therefore sustainable. The soy wax candle line took off. Not only was soy cheaper than traditional paraffin wax, but also it could be sold as all-natural for 30%40% more than traditional candles. Sales jumped instantly. It saved the company. There was a new consumer emerging at this time, and if you could say that it was all-natural, then you could say that it was sustainable or noble. This new brand of customer was willing to pay a premium for environmentally friendly products. Shane put in 60- to 70-hour workweeks developing the line of soy candles. He also started research on adding biodegradable plastic wrappers to the candles. It was at this point that Shane knew if he was going to put in this much time and effort toward an idea, the next time it would be for himself and his own company. Working for small companies, Shane had learned a lot about how the business world worked, but he knew that he needed a stronger foundation in accounting and working with numbers. If he was going to be successful in starting and managing his own ventures, he was going to have to go back for an MBA. At 28 years of age, he decided it was time to go back to school. Soon after he applied, Shane was accepted to Babson College.

With the wealth of interest by angel investors and venture capitalists alike, many new companies have hit the ground running and have found success. This explains the high interest that Shane has received from these investors. The CleanTech Venture Network estimates that over 240 CleanTech companies could be positioned for a liquidity event between 2007 and 2009.10 A small niche within the CleanTech sector known as waste conversion technologies is beginning to catch on. One such example is Converted Organics Inc. Converted Organics, based in Boston, is a development-stage company dedicated to producing a valuable all-natural, organic soil additive through food waste recycling. Started in 2003, Converted Organics Inc. is a five-employee operation that has just recently gone public raising $9.9 million in an IPO and has a market capitalization of $14.3 million.11 Other examples of recent transactions involving waste conversion providers are noted in Exhibit 11.3. EXHIBIT 11.3 Sample Investments into Clean Tech Companies BlueFire Ethanol, Inc. is established to deploy the commercially ready, patented, and proven Arkenol Technology Process for the profitable conversion of cellulosic (Green Waste) waste materials to ethanol. They acquired a $15,000,000 investment from Quercus Trust.12 Disenco Energy PLC, a UK-based developer of a revolutionary home power generating unit known as the Disenco Home Power Plant, closed their initial IPO for $2,750,000.13 Oakleaf merged with Greenleaf, which rents stationary compactors, containers, balers, and other waste management and recycling equipment to commercial businesses and haulers.14 Scotts paid $20 million last year for Rod McLellan Co., which focuses on naturally derived fertilizers.15 The Carlyle Group acquired residuals recycler Synagro Technologies for about $447.5 million in cash, including the assumption of $310 million in debt. Synagro operates at over 1,000 wastewater treatment plants throughout the country, providing operations and residuals management services. Many of these wastewater treatment plants employ anaerobic digestion. The company is using this experience to expand into the agribusiness market with its first operational facility, which was designed and built in Chino, California. This digester is designed for 225 wet tons of fresh cow manure per day. It employs dewatering and onsite cogeneration using Capstone Micro turbines.16 Lots of Interest Craig Benson, a professor at Babson, told Shane that the best way to attract investors was to go and talk to the biggest customer you could find. If you can find a customer for your product, investors will be more than willing to get on board, Craig noted. Shane started to make as many connections as possible. He called several grocery store chains in the Northeast, including Stop and Shop, Shaws, Walmart, and Whole Foods, but it was always hard get in front of anyone very high up in the ranks. He was always sent to someone who, even if interested, had no power to do anything about it. How could he get in front of the right person? The success of feed in business plan competitions was also bringing a great deal of interest to his anaerobic digester idea. Many of the venture capitalists and investors that were present at the competitions were serious about its investment possibilities. During the Rice Business Plan Competition in spring 2006 when feed won the sustainability award, Dow Chemical Venture Group showed an especially strong interest and said they could introduce Shane to Walmart. The Dow group flew Shane to their headquarters and put him on the phone with top executives at Walmart. Shane said the conversation went something like this: Does it have a 24 month payback time? I said no and they basically hung up. The problem was that Dow and most of the venture capitalists were looking for quick returns and proven ready technology. That meant that Shane had to figure out how to get customer payback down to two years. Moreover, once the investors realized that the final

product was still in the distant future, they were reluctant to invest the time and resources needed. This meant that Shane needed to build a prototype before the venture capitalists would be interested. Shane started looking elsewhere for the needed capital. Through the grapevine Shane heard about a Massachusetts Technology Collaborative (MTC) grant for onsite energy providers. To be eligible you needed to meet a set power output and find a buyer for the electricity that would sign on to the project. The MTC grant would then pay a certain amount of money for each kilowatt you could generate from the green energy method. Shane had a connection through a friend of the family at Ring Brothers grocery store, a small local grocery store on Cape Cod. Ring Brothers agreed to sign on as the company sponsor and feed won the grant for $195,000. The grant required that feed first run a feasibility study before it could actually start to build the prototype, and the grant provided $20,000 for the research study. So Shane took a look at how much actual food waste Ring Brothers produced and found that they werent producing enough waste to make the system feasible for the required energy output of 50 kw that was needed for the grant. Without the proper energy production output, they were forced to tell MTC that they were not going to be eligible for the $195,000 grant.

Preparation Questions 1. Is feed an opportunity? 2. Where can Shane raise the necessary money to build the prototype? 3. What are the implications on valuation for the different sources?