One man's rubbish is Terracycle's bounty

May 13, 2011: 11:32 AM ET
Tom Szaky, 29, is founder and CEO of Terracycle

Tom Szaky, 29, founder and CEO of Terracycle

FORTUNE -- Where other people see trash, Tom Szaky sees raw materials. An empty yogurt cup is a plant pot for a nursery. A juice pouch is fabric for a backpack. Disposable plastic cups? Park benches, naturally.

Szaky, 29, is founder and CEO of Terracycle, which sells consumer products made from recycled waste. The company launched in 2001, selling worm castings (poop) as fertilizer, and they did good business with retailers like Home Depot (HD, Fortune 500) and Wal-Mart (WMT, Fortune 500), growing sales from $75,000 in 2004 to $3.3 million in 2007.

That year, Szaky received calls from two leaders in the "green" consumer products world: Honest Tea's Seth Goldman and Stonyfield Farm's Gary Hirshberg. Both had heard about what Szaky was doing with worm poop. So they asked him to help them find a way to reuse packaging for their unrecyclable products.

Szaky immediately saw that there was a much bigger opportunity for converting waste into cash. Six months later, Kraft (KFT, Fortune 500) signed on as a partner and other consumer packaged goods (CPG) giants followed suit. "Today, we work with most CPG companies that do more than $3 billion a year in annual sales," Szaky says.

Those companies, like Nestle and Colgate Palmolive (CL, Fortune 500), pay Terracycle to oversee waste collection programs, which provide the raw materials for the company's products. Any person or group can form a collection brigade (60% of schools in the U.S. have one) and they receive two cents for each item collected that can be donated to the cause (or school) of their choice. Today, more than 19 million people around the world collect trash for Terracycle, saving about half a billion pieces of waste per month from ending up in landfills.

Pursuing a fortune in vibrant, dynamic... Trenton?

Szaky's unique business approach isn't limited to how he manufactures his products. There's also his decision to keep Terracycle's home base in Trenton, N.J.

Young entrepreneurs don't tend to congregate in Trenton the way the do in, say, Silicon Valley. Trenton, the capital of New Jersey and a city of around 85,000, was a buzzing metropolis during the first half of the 20th century. Today, it struggles with high crime and unemployment. Nearly a quarter of the city's households are living below the poverty line, according to the most recent U.S. census data (from 2009).

Szaky located the company in Trenton because it had the closest manufacturing facilities to Princeton, where he was a student before dropping out to run Terracycle full time. He has stayed in Trenton partly for practical reasons: the rent is cheap and, he says, "it allows us to be a lot more flexible than if we were operating in a major city where we'd have a lot more hoops to jump through." Unfortunately, according to Szaky, there are few government incentives for doing business in the inner city.

But being in Trenton is also integral to Terracycle's culture. Every Monday, when Terracycle employees arrive at work, their building looks different. That's because the company allows its walls to be used as a canvas for as many as 150 graffiti artists from the community. Their work has included portraits of Barack Obama and tributes to icons like Michael Jackson. The only rules: no gang symbols, nudity or profanity, since schools often visit Terracyle's offices.

This summer, Terracycle will plant a garden in their office courtyard and invite the community to take part. And Szaky says that as the company expands abroad -- they are now in 14 countries -- they always aim to put their offices in the inner city, whether in London or Buenos Aires. The company has around 80 employees in Trenton and 20 employees in offices abroad.

"I always describe Terracycle as a social and environmental cause trying to be profitable, versus a profitable company trying to be green, and the inner city fulfills that."

Impressive growth and big plans for trash alchemy

This year, Terracycle has been selected as a member of the Inner City 100 (IC100), a ranking of the fastest-growing inner city businesses by the Initiative for a Competitive Inner City (ICIC), a not-for-profit organization that focuses on improving the economic image of America's urban economy.

Thanks to Terracyle's booming growth, the company debuts on the IC100 in the no. 4 slot. The company's five-year compound annual growth rate, on which the IC100 rankings are based, was 102% as of 2009. In 2010, revenue hit $13.3 million, up from $7.5 million in the prior year, and Terracycle turned a profit for the first time.

Terracycle and other honorees will attend a summit in Cambridge, Mass. this week, where they will meet with major companies and learn how to secure procurement contracts, i.e. big orders that can help them maintain their rapid growth.

Szaky knows just how crucial such deals can be. While it's key to continue building partnerships with brands -- like Old Navy (GPS, Fortune 500), which is collecting used flip flops and turning them over to Terracycle to be converted into playgrounds that will be donated to four lucky communities -- it's just as important to lock in demand and distribution for the products Terracycle creates.

Terracycle makes 1,500 products, only 5% of which are "up-cycled," where the material is used for another product or purpose without being fundamentally altered (think of Skittles candy bags made into a kite). The balance of the company's products is made by recycling things that were never recycled before and using them as true raw material. Terracycle scientists have actually invented five ways to recycle a potato chip bag, such as turning them into plastic pellets for use in plastic injection molding, which go into products like coolers or luggage.

Now that Szaky has hurdled some of the early challenges of running a company --manufacturing, logistics, partnerships -- he's focused on making sure Terracycle, which currently has a monopoly on the market, maintains its competitive edge. "We need to continue to innovate around how... you convert garbage into unique things and how... we grow the collection program," he says. "We need to keep going to companies and try to get them to use waste in their existing products."

To companies that are concerned that doing so might be cost prohibitive, Szaky explains that because the raw material is "garbage," production costs for Terracycle products are the same or less as new items. "I've never seen us do a premium product to date," Szaky says.

And to the naysayers claiming that the energy used for recycling cancels out the benefits? Szaky says such people are "totally out to lunch." Based on analyses that Terracycle has done with independent agencies, Szaky says, "the primary carbon cost of any product is extracting the materials it was made from, from the earth, and you don't do that when you recycle."

So ask yourself the next time you enjoy a treat from the vending machine: trash or Terracyle? To top of page