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  • Tom Szaky

Why I Turned Down $1 Million From Investors

When cash comes with strings attached, sometimes it's not worth it.

Financing tends to be at the top of the list of hurdles for entrepreneurs setting out to start their small business. But, when I started TerraCycle as a college freshman at Princeton University, our original business model of vermicomposting (converting garbage into worm poop fertilizer) came to me only after the Entrepreneurship Club's annual Business Plan Competition caught my attention with a grand prize of $5,000. After placing fourth (just low enough to finish without prize money), we used the next year to scrape together the money to buy a worm gin and get started.

Then, a random radio interview that summer elicited interest from our first investor, who after meeting with us and staring at our new worm gin wrote us a check on the spot. We used that to rent an office, so we had a place to work, and one thing led to another. Various injections of capital came from business contests (including reentering the Princeton competition), reaching out to angel investors and venture capitalists, and a classmate convincing her father to invest. As one would expect, those first days were thin on cash.

We had $500 in the bank when we submitted to the biggest contest of them all; the grand prize was $1 million. Making it to the top 20 finalists, we presented to a panel in New York where, to our surprise, we were announced the winner. A managing partner of the firm mentioned toning down the emphasis on garbage, but I didn't give it too much thought; the following Monday, TerraCycle opened the NASDAQ and interviewed with CNBC's Power Lunch. It was exciting.

But, in the following weeks, the investors' lack of interest in the environmental aspects of converting garbage into vermicompost remained. It was the opportunity in organic fertilizer that was their carrot, and when it came time to get down to it, the plans for investment became clear: I would be the public face of the company, but they would bring in their own team to replace the entire staff, as well as the garbage side of the business. They told me I'd be rich.

A CEO of a well-known communications software company once told CNBC, "Basically, when you take other people's money you owe them something. You either owe them money back or a business decision that is kind of no longer yours." I have to agree. As they say, money is money, but some funding options can be limiting and may come with strings attached. I'd advise entrepreneurs and young businesses to consider this when weighing offers for equity with their companies.

Needless to say, I turned down the $1-million prize money, kept the staff that had gotten TerraCycle to that point and worked hard on a plan to make money the old-fashioned way: by selling a product and getting paid for it. We eventually got an injection of capital, no strings attached, which helped us achieve lift-off and expand our offerings.

Taking the hard road early on ultimately made for better learnings and more creativity, which worked out for us in the long run. Necessity being the mother of invention, we got to trash-picking used soda bottles for packaging since we didn't have the money for new ones. We now had an entire product made out of garbage. In order to provide a supply of used bottles, we started the Bottle Brigade, our first collection program, which would provide the model for our sponsored-waste collection platform, which remains our largest and most profitable line of business today.

Thanks to our brand partners and the support of conscious consumers proving that sustainability does pay, TerraCycle is enjoying its most profitable year yet. But, capital does unlock the potential for our recycling and waste solutions to come to scale, and we're always looking for new ways to grow.

As you start up, a venture capital investment may seem like a dream come true, but consider the ways it is worth it to retain control of your business and grow it by other means. In those first days, we wouldn't have foreseen that working with waste would inspire us to eliminate the idea of it. But, by staying to true to our vision, TerraCycle maintained and continues to maintain a business model that has attracted a great deal of support and interest from the start, and grew it into a profitable, quickly expanding company that has evolved way beyond making a product out of trash, but still makes garbage the hero.

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