Kevin Davies was passionate about converting food waste from restaurants into organic “craft compost,” but could he convince investors to buy into his dream?Houston Peschl
THE CHALLENGE
Kevin Davies' vision was to create a scalable business model that enabled high-end restaurants to become 'zero-waste'. Given the explosive demand for local organic food, Mr. Davies saw an opportunity to convert food waste from these establishments into organic "craft compost" that he could then sell to local organic farms and individual gardeners.
However, Mr. Davies entrepreneurial endeavour was not without its challenges. The composting industry had few barriers to entry and existing competition already held a significant amount of the market.
Mr. Davies' was passionate about the project, but lacked the operations and financial means to bring it to fruition. The situation was further complicated by the fact that securing HotRot Organic Solutions cleantech, an integral part of the composting process, was almost impossible.
HotRot cleantech was of strategic significance as it could compost food waste in 10 days and reduced greenhouse gas emissions by 10 million pounds annually. Could Mr. Davies' passion convince the energy savvy investors in Alberta's to finance the future of his vision, Hop Compost?
THE BACKGROUND
Mr. Davies gained a strong understanding of the recycling business from his first venture, Green Start, which stood out from the other competitors through grassroots community involvement and impact reporting that allowed clients to validate their recycling's benefit on the environment. Green Start was not capital intensive and was able to run successfully through cash flow and bootstrapping. Mr. Davies earned his entrepreneurial experience through quick failings and rapidly iterating his business model to create a leaner and further differentiated competitive model.
His interests expanded to composting after his family dog was poisoned by conventional fertilizer. Developing a business model for an organic alternative, he used his network as a member of a buy local sustainable business network called REAP to gauge the demand.
This network put Mr. Davies in touch with potential clients, from high-end restaurants to garden centres. He also started significant research in the municipal composting policies across North America and discovered that while a few cities that were starting residential composting programs, there were a few that offered commercial composting. The competitive landscape was dominated by traditional "windrow" (a row of cut hay or small grain crop) composting approaches that were slow and had unreliable quality.
The ability to provide access to networks and mentor social entrepreneurs is one of the best ways to contribute to a resilient and sustainable economy. We hear terms like "diversification" and "divestment" of investment strategies, but there are few alternatives for investors that are scalable and provide reasonable risk. Mr. Davies began to connect with a network of experienced people and organizations, including Alberta Government's Agriculture and Rural Development Group, who support innovations like Hop Compost and whose investors are comfortable with startups.
Mr. Davies built a team and began to refine the business model based on feedback from potential customers segments and address potential investor concerns.
Initial feedback from investors was apprehension regarding insufficient demand for the product, and whether Mr. Davies could secure the licence to the HotRot cleantech that would essential to creating a competitive advantage for Hop Compost.
THE SOLUTION
Bricolage is a term coined by Levis Strauss that captures the entrepreneurial action of "making do with what you have." Mr. Davies' vision and sense of purpose, combined with the guidance of his mentors, attracted the interest of 20 of Calgary's top food merchants to sign letters of intent with Hop Compost prior to it being fully operational. Mr. Davies' leveraged these commitments and secured the exclusive right to the HotRot cleantech for 11 major North American cities. Finally, he worked with a Calgary city councillor to rezone an urban warehouse space to manufacture compost.
Mr. Davies next set out to differentiate his business model from his competitors by creating a closed loop certification for Hop Compost's clients. He developed a third-party group that would verify the certification, allowing clients to create added value over competitors by being part of the organic local food chain. This closed loop local food chain is powerful in creating measurable impact to the community and the environment.
Through perseverance and leveraging available means, Mr. Davies was ready to start his initial funding round. With 20 contracts in hand and an exclusivity agreement for the HotRot cleantech, Hop Compost was well positioned to raise the $500,000 needed to get operations up and running.
THE RESULT
Having interacted with Hop Compost's clients and partners, Mr. Davies mitigated the risk of the investment by creating a solution to his client's problems. Accessing the network that his mentors provided resulted in an oversubscribed first round of financing.
With money in the bank, Mr. Davies charged ahead with ordering the HotRot cleantech and securing warehouse space. He negotiated better terms on the technology, saving significant capital, and personally renovated the 7,000 square foot space.
Hop Compost's reputation was growing fast and it attracted volunteers who wanted to help with everything from soil testing to local media. The cleantech is now installed and producing high quality organic compost for the 2015 growing season. With results continually beating expectations, Hop Compost completed a second investment round of $275,000.
The next step is building the business to create closed loops for local food in other cities across North America, beginning with Vancouver in fall 2015.
Houston Peschl (@houstonpeschl) is an entrepreneurship instructor at the University of Calgary's Haskayne School of Business (@haskayneschool).
This is the latest in a regular series of case studies by a rotating group of business professors from across the country. They now appear every Tuesday on the Report on Small Business website.
Follow Report on Small Business on Pinterest and Instagram
Join our Small Business LinkedIn group
Add us to your circles
Sign up for our weekly newsletter