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Hot Air
Wharton classroom venture aims to profit from others' emissions.
Media-savvy entrepreneurs and the reporters who cover them love to portray the process of starting companies as the product of eureka moments. In truth, it's often about toil and rumination.
Just ask Karl Ulrich, a Wharton professor of operations and information management and a serial entrepreneur. Ulrich invented the Xootr adult scooter and owns, with two partners, the Scranton, PA., company that makes and sells them.
He can't remember when exactly he dreamed up his latest venture, TerraPass, which aims to cut air pollution from cars by pooling clients' money and investing in "green power." He and the MBA students in his class, "Problem Solving, Design, and System Improvement" started the firm in the fall.
Maybe he settled on it during his daily bike commute to Penn's campus. Or maybe it was while driving in his gas-guzzling pickup truck back and forth to the land he owns in Vermont. He just knows he'd been pondering the problem — market solutions to pollution — for months, years even.
"For as long as I can remember I've advocated green taxes — carbon taxes, gas tax. And I got to thinking, ‘What's stopping me from paying a gas tax? I can pay that tax.'"
In other words, he could invest in technologies that offset the air pollution that he caused. He decided to buy wind power — many Pennsylvanians have that option — to counter the carbon dioxide that his activities pumped into the air. "I figured out that, for $65 a month, I could live guilt free," he says. "I could do all my air travel. I could use my air conditioning. I could drive my cars."
Ulrich then started wondering how to get other people to do the same thing. Most folks, he realized, wouldn't go to the trouble of calculating how much pollution they caused and figuring out ways to balance it. "But Americans do understand cars, and if you could make the idea simple enough, it might play."
Thus TerraPass was born. Today, the company sells annual memberships and then invests in wind power and other pollution-reducing projects. It aims to help people clean up the messes they make. Think of it as a "pooper scooper" for pollution.
In October, when Ulrich's half semester class began, he presented the idea to his 41 students and told them that their assignment for the semester was turning it into a business.
Tom Arnold, a second-year MBA in the class, remembers a titter of surprise sweeping through the room. "It was the initial shock of, ‘We're not actually going to launch a business in six weeks,'" he says.
A few students were even skeptical of the need for TerraPass. "I wouldn't characterize any of us as hardcore environmentalists," Arnold says.
Still, they embraced the idea. After all, it was an assignment. Plus, Arnold says, "It was real and entrepreneurial."
They split into teams to handle the obvious tasks — product development and pricing, marketing and sales. Ulrich provided $5,000 of his own money as startup funds; it's a no-interest loan, repayable whenever TerraPass can afford to. The students and Penn own the company, which was formed as Benven LLC.
On Nov. 23, TerraPass began selling annual memberships. Customers pay $30 to $80 a year, depending on how much carbon dioxide their cars emit in a year. Owners of gas-electric hybrids pay the least; owners of SUVs and trucks, the most.
"We really forced the launch, and it wasn't pretty, but we came out, had a test and got some nibbles," Arnold recalls. "Whereas a lot of entrepreneurial programs focus on crafting the perfect business plan. We did it backwards. We launched the business and then wrote the plan."
By the time the students made their final class presentation on Dec. 9, they'd sold 149 memberships, mostly to friends and family members.
Many class
projects would've been declared a success at this
point and dropped. Some of Ulrich's students decided to continue
to develop TerraPass. This spring, a group of nine, with Arnold as
coordinator, have pushed ahead.
By early February, they'd sold about 300 memberships and were aiming to
raise money from investors. They saw a flurry of purchases in January, when the
Los Angeles Times ran an article on the company.
Arnold hopes to raise enough venture capital that he
and at least one other student can continue to work
for TerraPass
after graduation. "Even if we can't,
I'll think about ways I can scrounge by," he
says.
In February, the company entered into its first pollution-cutting deals. It bought 359 megawatt-hours of power from a wind farm in Minnesota. That will prevent about 300 tons of carbon dioxide from being emitted by coal-fired power plants.
The wind power that TerraPass bought displaced coal power. That's because the country's nationwide electric grid operates like a giant reservoir. Utilities produce juice based on their estimates of their customers' needs and feed it onto the grid. But when customers, say, switch on their lights, they're not necessarily using the power that their utility produced. Instead, they're "dipping a cup" into the giant, shared pool.
TerraPass also has entered into a transaction on the Chicago Climate Exchange. The exchange matches companies that need money for pollution-reduction projects with investors. Some states require that a portion of their power be environmentally friendly. Rather than forcing utilities to make costly conversions of their equipment, they let them to invest in green projects elsewhere. Just like a stock market, the exchange facilitates these deals.
TerraPass' third investment went to a cow-manure digester. (Yes, you read that right.) The facility captures the methane that manure emits and burns it to generate power.
As TerraPass continues to sell memberships, more deals like these will come.
"I don't believe that any one of us can take an action that's going to result in a measurable change in the environment, to, say, reduce the temperature of the earth," Ulrich says. "TerraPass isn't going to do that. It's just too small. But if it starts to build momentum around a big idea, it could have a huge impact."
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