Investing in Disruptive Sustainability

A new tech boom is underway. Not in Silicon Valley social media, but in capital-light sustainability. And Wharton investors are there.

By Mike McCullough, C’12, and Caroline D’Angelo, LPS’12

While the likes of Yelp, Groupon, and Facebook have sucked up massive amounts of venture capital and dominated financial news headlines with IPOs, sustainability has idled quietly in the background.

Bernard David, C’79, W’79, WG’82, a technology entrepreneur who has built and sold several companies, now focuses much of his time and many of his investments on sustainability. David explains that “sustainability-minded businesses … are competing for funds with more frictionless businesses, such as LinkedIn and Facebook,” where stakeholders are few, and infrastructure and regulation are light and pliable.

“In order for [sustainable-related businesses] to be candidates for venture capital or private equity, they have to show the potential for significant financial returns,” David adds.

Elizabeth Seeger, WG’05, sees real opportunities in merging the goals of sustainability-focused companies with the typical private-equity model.

“Private equity and ESG [environmental, social and corporate governance] are a good fit,” says Seeger, a principal at KKR.

Even leveraged buyout specialists like KKR have integrated sustainability into their single-bottom-line strategy. Private-equity takes a long view and active ownership in investments, while promoting “communities of practice” amongst a portfolio of companies, according to Seeger.

Bernard David, C’79, W’79, WG’82

David points out, though, that projects that look to tackle issues of environmental sustainability often have to overcome entrenched infrastructure and regulations that create governmental risk factors. These companies are also frequently “capital heavy,” also termed “asset heavy,” making them more difficult to scale than frictionless “capital light” firms.

“[Businesses that] are capital light and require no changes to entrenched infrastructure or regulations are the most viable sustainably-minded businesses,” David says.

He cites Rubicon Global as an example. Rubicon Global represents part of an emerging trend of high-tech, sustainability-focused platforms that provide an essential service—waste management—and the potential for sizable cost savings.

Bob Wickham, WG’03, a senior advisor to the company and principal equity investor through Rotunda Capital Partners, was impressed with both Rubicon’s business model and co-founder and CEO Nate Morris’ ability to build and learn from a mix of young innovators and industry veterans. Perceiving a major efficiency gap and the opportunity to make an environmental impact, Morris and his team applied high-tech platforms and innovative solutions to a stubbornly antiquated industry. The result is a stand-alone, technology-based service that provides huge cost savings for large companies with large waste streams. In addition to maximizing efficiency in the way that their clients handle garbage and recycling, Rubicon Global has developed a virtual marketplace where local waste haulers and recycling companies compete against national chains to win hauling jobs with large and nationally franchised retailers, construction companies, hospitals, restaurants and manufacturers.

Elizabeth Seeger, WG’05

Wickham points out that in an industry space still serviced by carbon copy contracts and notorious for “price creep,” Rubicon Global is able to leverage its “technology backbone to manage the procurement process and keep its haulers highly motivated around price and service.”

Morris and a childhood friend founded Rubicon Global on nothing more than a “$10,000 line of credit and elbow grease,” recalls Morris. No startup lasts on elbow grease alone, and the company was capitalized by QuarterMoore Capital, headed by Lane Moore. Moore, Rubicon Global’s current executive chairman and corporate advisory board member at Wharton’s Initiative for Global Environmental Leadership, is an innovative impact investor in the storage and waste industry space.

Rubicon Global’s success with investors goes a long way to illustrate why private equity can warm to the right sustainability-related businesses.

“We didn’t set out to be sustainability investors or clean-tech investors. It’s just a fundamental trend, and we seek to understand it and find companies that benefit from that trend,” Wickham says.

Bob Wickham, WG’03

Wickham explains that he got involved with Rubicon Global because he has a high commitment to sustainability. He doesn’t view it as a company responding to a trend. Instead, he sought a company with the model and technology to disrupt an industry.

“This was a use of technology that enabled a young company to upset the tables and turn a very traditional model of doing business upside down,” he says.

Others agree, including former U.S. Attorney General John Ashcroft, who serves as Rubicon Global’s advisory board chairman (and will coincidentally be giving the keynote address at next year’s IGEL conference, set for March 20, 2013). David Ayres, WG’96, the CEO of Ashcroft’s eponymous strategic consultancy, predicts that the company will maintain its innovative ways.

“They have a fantastic opportunity, not only to transform an industry, but to stay ahead of all of their competitors in the space,” he says.

Co-founder Morris describes the company’s value proposition as: “We save our customers money, and we do something more sustainable than putting garbage in a landfill.” Typically, Rubicon Global saves its clients 20 to 30 percent on waste and recycling fees through a multipronged approach. Rubicon Global looks primarily at the back-end of a company’s supply chain, finding ways to streamline efficiency and reduce waste, sometimes even discovering or inventing new uses for otherwise end-of-life products—shredded uniforms sold as filler for pet beds; unused pizza dough turned into ethanol.

Their approach to sustainability problems has allowed for wider market benefits. Historically, the waste-hauling industry has been fragmented and dominated by two major players. Customers have not experienced a competitive or transparent bid process. The solution to this market failure was to create a virtual marketplace. The platform, dubbed “Caesar,” creates a tool for waste and recycling vendors to compete against one another by offering progressively lower bids on a job until Rubicon Global selects a vendor based on price and quality. This innovation has empowered small businesses to compete for local contracts from national corporations.

To Wickham, who views waste hauling as an inherently local business, this only makes sense. “When you can identify and manage haulers on a market-by-market basis and stitch together a network, you create efficiency and competition. And competition drives costs out of the system,” he says.

A social equity component emerges as well. Clients who would like to award a certain percentage of their contracts to small or minority-owned vendors are able to do so.

Ayres is quick to point out the importance of environmental sustainability not just as a tool for clients to enhance their brand and check a box on their corporate responsibility scorecard, but as a key driver of a company’s long-term success. Like any long-view, private company, Rubicon Global thrives or perishes based on talent, which it is able to attract and retain because of its focus on sustainability.

“One of the things that is really exciting to me about the company is the level of talent they are attracting—a lot of young people who are very committed to sustainability and a lot of industry veterans who are very excited about this new approach. … It has the feeling to me of more of a cause than a business,” says Ayres. That feeling of common purpose and shared passion is essential for a company’s long-term prospects. When you have that, Ayres believes “people are able to commit to a company and understand that they are having an impact on the world around them beyond just taking a paycheck.”

With commentators forecasting the end of the social media boom, while the green economy and the high-tech startup economy converge, it may be time for venture capitalists to consider more sustainability-focused startups.

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