BRIAN KENNY: Americans throw a lot of stuff away. I mean, more than people in other countries. Americans average 4.5 pounds of waste per day, compared with the global average of about 1.6 pounds per day. Now, four and a half pounds may not sound so bad, but it adds up. That’s 1,600 pounds per individual, and 6,500 pounds per family over the course of a year. All in, Americans produced 292 million tons of waste in 2018, according to the Environmental Protection Agency. So, where does it all go? Is one person’s trash really another person’s treasure? Today on Cold Call, we’ll sort through the waste management sector with professor Shai Bernstein and guest Nate Morris on a case entitled, “Rubicon Global.” I’m your host, Brian Kenny, and you’re listening to Cold Call, on the HBR Presents network.
Professor Shai Bernstein’s research focuses on financial issues related to startups and high growth firms, and the interaction of these issues with innovation and entrepreneurial activity. Nate Morris is the founder of Morris Industries, a Lexington, Kentucky-based conglomerate that is re-imagining the industrial economy. His passion to solve the environmental threats posed by global waste led him to found Rubicon, which is the subject of our case today. Thank you both for joining me.
SHAI BERNSTEIN: Thank you very much for having us.
NATE MORRIS: Thank you, Brian. We’re delighted to be here.
BRIAN KENNY: Yeah, it’s great to have you both. And part of the reason that we wanted to talk about this case is because I believe this is the fifth anniversary year of it. It’s been in the curriculum at the Business School for some time, and it still surfaces some of the issues that are most relevant today in business school curricula. Always fun to have the protagonist in a case join us as well, Nate, so I’m glad that you’re able to be here.
BRIAN KENNY: Let me start with you, Shai. I know you’ve taught this case in class. I’m wondering, how do you start off the class? What’s your cold call?
SHAI BERNSTEIN: Yeah. So again, Brian, thank you very much for having me here today. So, just to give a little bit of context. So, the Rubicon case is being taught in our entrepreneurial finance class, which is a second year EC course in which we are basically walking through the lifecycle of the firm, trying to think about different sources of capital that match the firms at the different stages of the evolution of the company. And in the first model of the class, we are specifically thinking about different characteristics of business models that make some firms more attractive to investors than others. So, a typical way in which we’ll kick off the discussion is to start with a fairly broad question, which is, if you were an investor in this company, how would you evaluate the company? And we will typically have this POCD framework in mind, which is focusing on evaluating the people, the opportunity that the company is trying to tackle, and the context, the environment in which the company is operating. So, typically, the students will start by trying to analyze the company along these dimensions. And that would be the opening question in the class.
BRIAN KENNY: I mentioned that it’s been in the curriculum for a while. Why do you think this particular case has aged as well as it has?
SHAI BERNSTEIN: Yeah, I think the case has remained, and I anticipate that it will remain on the curriculum for a long time going forward, because it touches on multiple really interesting and important aspects. The first of all, the case is focused on the waste management industry, which is not the typical venture-backed type of business. It’s not every day you will hear about these kind of industries when you’re following venture funding. Another interesting aspect here is that the industry has been essentially been operated with very large incumbents for decades. And here we have Rubicon that is bringing technology to the industry and trying to disrupt the industry with very different business model and very different approach, which makes this so interesting to see the collision between very different approaches to waste management. And then the other part that I would mention is that, at the end of the day, Rubicon, what Rubicon does is fundamentally important for our society. And thinking about sustainability, recycling, ESG, is a topic that really, at the heart of Rubicon’s mission, and also many of our students are really passionate about this topic. So, I think that also adds to the popularity of this case and to the interest of students in this case. So, I think overall, it’s a really interesting mixture of technology and industry dynamics and this sustainability issue that, you bring them all together, makes it a really interesting case.
BRIAN KENNY: Nate, let’s turn to you for a second. Again, I’m glad you’re able to be here with us today to give us your perspective as the protagonist in the case, but can I ask you to start, we’ve teased a little bit about Rubicon, but we haven’t really described it. Can you tell us what Rubicon does and how you came up with the idea for it?
NATE MORRIS: Absolutely. Waste is a topic that very few people want to talk about, let alone go into business. And most of the context around our industry revolves around a very popular television show, The Sopranos. A terrific show, very well done. And a lot of people scratch their head about, really, is that the industry that you chose? And I was immediately drawn to the industry for a couple of different reasons. I’m a Kentuckian, I grew up in Kentucky. Went to public school there. Was raised by a single mother in a working class home, and grew up in a union home as well. My grandfather was very involved in my life, ran a union and grew up around union workers. And so, the DNA and the grit of the industry really attracted me to the space. I also was very passionate about the environment, and as a Kentuckian, I always felt left out of the environmental discussion, that the decisions that were being made in California and New York didn’t seem to resonate with someone from my background, in a part of the so-called rust belt or working-class segments of America. And I felt like that waste was an issue that really everyone could agree on that is a big, big problem. And the way the industry was set up is, I learned as a graduate student, is that we are incentivizing our largest firms in the country to bury garbage in the ground in their landfills. And so, the big misnomer about the industry was that all the money is trucked and transported different places. And these are transportation and trucking firms, but these are actually big real estate companies that we see, the big firms that you see on Wall Street, that have made plenty of people lots of money, actually are in the business of owning these big real estate assets and filling them up with garbage and charging rent on that garbage every month. And as a graduate student, I thought this was absolutely crazy. How are we incentivizing people to bury garbage in the ground? And so, you put all these things together and there has to be a better way. And so, more technology would lead us to getting better data so we can make better decisions, but going back to another great Harvard alum, Clay Christensen, who had such a massive impact on so many entrepreneurs, including myself, this is classic innovator’s dilemma 101, is that if you have this burden of these assets, that you’ve got to use these assets to make your profit. And so, we came up with this digital, asset-light model, meaning we don’t own the truck. We don’t own the landfill. And we could take the other 50% of the market that’s available, that are not occupied by Wall Street, these are the mom and pop small businesses that make up every day Main Street America, and bind them together with technology, and offer a challenge to the big firms through this digital platform. Very similar to the way other platforms have worked, like Airbnb or Uber, really democratizing industry through products. And that really was the premise. And by being asset-light, not owning that truck or the landfill, we could be agnostic where material goes at the end of the lifecycle of waste. And so, as a result, we were able to put our business proposition in line with the goals of many of the Fortune 500 related to their environmental goals to keep material out of the landfill. As professor Bernstein said, the ESG components that are now critical, I think, to firms’ missions, even at the mid-level and even small businesses now. And we’re now able to track them and aggregate the data, but also, as a person from a union household, I love the idea of being able to empower these small businesses, because now we can get female haulers and veteran haulers and haulers of color, giving them opportunity to get into the game and to be able to take on the major companies and win business that they would never be able to win without a platform like Rubicon.
BRIAN KENNY: So, just to put a fine point on it, as I read the case, I was making the mental comparison to Uber. What you are allowing these independent haulers to do is be on your platform. And it could be a person that only owns one truck, but they’re allowed to be on your platform and to participate almost as a gig employee that way. Is that fair to say?
NATE MORRIS: That’s very close. And we also offer products to the hauler that helps improve their business. So, if that’s consortium buying, so buying aspects of the components that make up their business at a premium, so they can save money and run their business more effectively, giving them insights about their business and the way that it’s run, all these things help them run a better business. And also, the brands that we have access to. Many of the brands that you see like Starbucks or Walmart, Dollar General, that are on our platform today, if they win those, they then can go down the street to the independent business, and say, “I’m the preferred vendor for these brands.” And it almost becomes a catalyst for them to be able to win more business, almost a Good Housekeeping seal of approval.
BRIAN KENNY: Shai, let me go to you for a second. Nate mentioned platform businesses. I don’t want to assume that people know what that is. Can you tell us a little bit about what characterizes a platform business, and how does Rubicon meet that definition?
SHAI BERNSTEIN: So, a platform business is, essentially, you can think about that as a centralized marketplace, the different types of entities or businesses are able to come in and transact. So, Nate mentioned Airbnb or Uber. So, Uber essentially is a marketplace that allows drivers to meet customers, and Uber doesn’t own the cars. They just facilitate the meeting place. And in a sense, reduce the friction that is embedded in decentralized markets. So, it’s very hard for me, outside of the Uber platform, to find someone who might be willing to drive me from point A to B. What Uber does is basically allows me to find efficiently someone who might be interested and nearby to drive me from point A to B. And in many regards, that’s basically what Rubicon does. And I think one interesting feature of what Rubicon does is it basically allows independent haulers to cater to large chains, such as Starbucks. So, imagine Starbucks that have hundreds, if not thousands of locations that are scattered geographically in the US. Now, if I’m an independent hauler, I’m operating very, very locally. So, Rubicon is enabling independent haulers to cater large chains, such as Starbucks or 7-Eleven, these kind of chains that otherwise will not be interested in the services that are provided by independent haulers. And so, that basically, this aggregating the crowd of haulers is what’s so interesting, in the sense that this kind of platform is able to bring. I should also note that, on this platform, you have other entities that participate, in the sense there are the recycling facilities and even the landfills that are basically going to be stakeholders that are involved in the services that are basically being offered through Rubicon.
BRIAN KENNY: What are some of the issues that platform companies typically encounter? It’s a very complicated thing, right? You’re trying to bring all these different players together in this ecosystem, all sort of sharing in pieces of the platform, but what are some of the issues that could come up?
SHAI BERNSTEIN: The multi-sided platform operates at scale. So, the more drivers on the Uber platform, or the more haulers on the Rubicon platform, the more attractive the platform is to me as a large chain restaurant, because I know that my waste may be removed and reallocated more efficiently. So, the key problem is, how do you get to scale? How do you get from the early days when you’ve just started the platform? How do you make any proposition that is valuable to these large chains when you don’t have the haulers yet? And on the other hand, what kind of value proposition can you bring to the haulers if you haven’t had the large chains signed yet? So, there’s this kind of problem for chicken and egg, that really makes platform businesses hard to scale in the early days. Now, once you get to scale, suddenly the platform is becoming much more attractive business. And then the attractiveness allows the platform to lower the customer acquisition costs, because suddenly, the value proposition that you offer as a platform is significantly higher, and therefore, it’s going to be much easier over time with scale. It’s going to be easier to recruit more participants to the platform. Of course, with scale the different types of challenges that may emerge are how do you maintain similar quality of service at scale? How do you mitigate potential issues that may arise because you have more limited ability to monitor the activity on the platform? So, how do you mitigate situations that might affect the reputation of the platform? So, these are different types of challenges once you get to scale. But I think that the fundamental difficulty of establishing platforms is the multi-sided nature of them, that you can bring one entity without the other, but the other entity wouldn’t be interested to come if the other is not coming to play as well.
BRIAN KENNY: That all makes sense. So, Nate, does this sound familiar to you? Are you having flashbacks to when you first started the firm?
NATE MORRIS: Absolutely. And I would also add, in addition to that, I know one of the interesting leaders that’s mentioned in the case that has been so transformational in my thinking as an entrepreneur is Marc Benioff. We’ve also created products alongside of our long-term contracts that are being offered to our respective clients. They’re now running adjacent to waste. So, these could be the various categories like pallets or cardboard. So, we’re now capturing more and more of the back of the industrial side of business that has been antiquated for a very, very long time. And what we see that’s developing out of kind of the core of what’s being described in the case is that there’s going to be a need for one operating system, if you will, at the back of the house, that’s going to be very similar to a Salesforce proposition for the industrial categories to be aggregated, to be procured and to be reported out, especially on ESG metrics. So, it’s really morphing into this SAS component of long-term contracts and product offerings as we continue to get larger and continue to get more and more scale.
BRIAN KENNY: Yeah. I know that one of your original intents in getting into this business in the first place had to do with sustainability and finding more responsible ways to deal with waste. And that’s been, I think, one of your differentiators. Do you find that as you scale, as the platform continues to grow, that it gets easier or harder to sustain that part of your mission?
NATE MORRIS: That’s a great question. And one of the things that has really helped us keep our North Star is the way that we built the business. I’m really proud of our culture. I always tell people, it’s not perfect, it’s a work in progress. We have a long way to go to continue to live up to the ideals that we have as a business. But I think we’ve done a lot of great things. Some of the early things that we did early on were becoming Certified B Corp, which is a certification that basically says that you’re a business for good, and that you’re going to be monitored and audited by a third party on how you’re stacking up related to the environment in particular, and other categories associated with ESG. We were just named a “Great Place to Work” four years running. And I believe that these are a reflection of those core values since the very beginning, beginning with that environmental mission that I think attracts the talent that we need to be able to innovate and to continue to push the envelope on driving tech into the space. One of the biggest challenges that I had is that, being Nate from Kentucky and going to Silicon Valley and New York, I didn’t go to Stanford or didn’t grow up in the Valley, and having a trash deal, it’s not the easiest way to immediately get the best and brightest to come to your endeavor to say, “We’re going to take on the waste industry.” But as I think professor Bernstein pointed out, is that many of the students that I’ve seen as I’ve gone back to class, that these industrial categories are really the last category to be disrupted or to be changed by technology. And I believe it’s giving so much opportunity to the students at Harvard Business School that come from the middle of the country by doing these kind of grittier businesses and being able to re-imagine them. And as a result of re-imagining them, you get great environmental outcomes. By being more tech focused, by being more data focused, and you can actually bring more environmental change than I think some other things that may be more in vogue or more fashionable at the moment.
BRIAN KENNY: Well, I think we also know we’ve got a generation of students who care a lot about what their organization stands for, and purpose driven organizations I think rise above. If you’re looking at all your possibilities coming out of school these days, you’re probably more inclined to migrate to a business that you feel like has a mission or a purpose at its core. Is that fair to say?
NATE MORRIS: Absolutely. One of the first things that we begin every all hands with, and if you walk into our headquarters, we have a giant sign that says, “To end waste,” which is our mission. And that means to end waste in all of its forms. So, that’s wasted energy, wasted time, certainly the waste that we throw away, but it is really a compelling mission that really drives all of our behavior. And I think continues to re-orient the business around why we’re doing what we’re doing. And if we continue to solve against that mission, we’re going to have phenomenal outcomes.
BRIAN KENNY: So, Shai, let me come back to you, and I want to go turn back to the case, where Rubicon, at the time the case was written, had already been around. I think it was 2014 when the case took place. And Nate is now thinking about the next stage and looking for investors. And I want to ask you, what is that process like as an entrepreneur who is taking their venture from this first stage of growth into the next stage, and what do they need to be thinking about as they look for investors?
SHAI BERNSTEIN: To a large degree, this is what our class is about. So, trying to understand what is the right match between the investor and between the entrepreneur and how incentives are aligned, both in terms of the mission and the belief about the business, but also in terms of alignment, in terms of how do you structure the deal, and what are the objectives that the investor is trying to achieve within the fund, and career-wise, and how much, and it can think about the time horizon of the investor, and how much is that aligned with what the entrepreneur is trying to achieve and the strategy going forward. So, these things really need to be aligned here. The other aspect that I would mention in terms of the finding the investors is also thinking about how do you structure your business in a way that it’s attractive to investors. And I think that here’s another interesting aspect that is worth mentioning in the case of Rubicon, which stands in such a contrast to the incumbents in the waste management industry, which is that Rubicon, being built as a platform, is incredibly asset-light, in the sense that they don’t own the haulers, they don’t own the landfills. And what this means is basically that growing the business is fairly cheap for Rubicon, because of the low asset intensity, relative to thinking about businesses that do own the landfills and the hauler. So, there, the capital expenditure needed to grow the business is much more intensive. So, this kind of asset-light businesses are also becoming much more attractive to investors who want to maximize the return on their capital. I would also mention another aspect of the business that is attractive is this notion of subscription-based businesses, SAS businesses, that allows you in some sense to get cash in advance from customers before you actually provide the services. And that’s also very attractive, because it allows you to minimize or lower the amount of external capital that you actually need to raise. And that’s another feature on top of the further predictability of this cashflow. It’s another feature that is fairly attractive to outside investors. So, I think that together, these kinds of things make the business much more attractive to investors. And this is kind of the features that we like to highlight when it comes to Rubicon.
BRIAN KENNY: Nate, I want to turn back to you and ask, you were going through this process, you heard what professor Bernstein just said. What were some of the things that you were thinking about as you were looking for investors?
NATE MORRIS: Well, I think it always begins with alignment on our values, our mission, where we see the world going, and we were very fortunate, and I think the case points out that we were able to find investors that could really change the complexion of the business based on their expertise, their knowledge, but they also were in alignment that this industry must change, and that there had to be a better way to do things. And I think that finding an investor, I tell students a lot, it’s very close to a marriage. You’re going to be stuck with investors a very long time, and you better be certain that you’re going in the same direction and that they share your values, because it can be a very tough road if not. And we’ve been very fortunate that we’ve had very patient capital, we’ve got terms that are conducive to allowing founders and management to really see the vision through. I think there’s also a view by some investors that, let’s go and give this firm three years. And then after three years, we’re going to harvest this deal, regardless of where they are, and we’ve got to get onto raising our next fund. And regardless of what’s happening with this deal, we just have to make some profit and sort of move on. And those were not the kind of investors that we wanted. This was too big of an opportunity, a once in a generation opportunity and we had to do it right. The growth in the waste industry is typically very slow. So, you look at the big firms that we were competing against and really offering a different path. They grow at one to three percent, and that’s typically through acquisition and price increase, not through organic measures. So, we posted very eye-popping growth for many years, but by venture standards, they were very typical on what any venture capitals would expect. I think that there was also a needed patience to really see through the opportunity, see it till the end and see it to fruition.
BRIAN KENNY: So, did you find, and Shai, I would open this question up to you as well. We’ve actually had a couple of Cold Call episodes about ESG funds that are opening up. We’re finding that investment firms are more and more looking at ESG as part of the area that they want to invest in. Did you find a lot of receptivity to what you were doing? Despite the fact that it was in the waste industry, did people still seem more receptive to what you were pitching?
NATE MORRIS: Absolutely. And what I found so interesting is that, no matter someone’s politics or where they came from geographically, I continue to receive the same question. It’s like, “I always wondered where all the garbage went. I had no idea the industry worked that way.” A lot of people would say things to me. “I always wanted to be in the waste business. I never understood how I could get in.” One of the things that Warren Buffett always talks about in his investments are moats. And the waste industry traditionally has a very, very aggressive moat that has kept out people for generations. And we were able to overcome that, I believe largely because of the vision around ESG. Some of the brands that we were able to win early on when we were relatively small in comparison to our competitors was because our vision for the future and how ESG encompassed that. So, I believe it’s been a catalyst to our growth and it’s allowed us to attract people to our mission that would never think about the category before. So, I’m very happy to be doing what we’re doing. I think it’s the best time in the world to be in the space and to be focused on the environment, and especially from a free market context. I mean, what I love about what we do is that there’s a lot of ESG propositions, but we actually can make money, and it’s not going to be 50 years from now. It can be very quickly. And that’s few and far between on many other projects that I’m seeing today. And I think this is steeped in sort of middle America values about grit and hard work and how technology can change the country and change the world. And so, that’s been a message that’s been very receptive to really investors of all stripes.
BRIAN KENNY: Shai, are you seeing any kind of movement in this direction as more firms start to open up funds that are looking at ESG-based operations?
SHAI BERNSTEIN: ESG has taken a front and center place to many, many organizations. What’s interesting in the case of Rubicon is that you are basically using the technology and a business model that allows you to address sustainability issues, while at the same time, provide cost savings and profitability to your clients. So, I think as basically climate change is becoming increasingly more and more integrated into our daily lives, we’re going to have to find more opportunities along these lines, that basically allows us to align perfectly the incentives of businesses with the environment. And the only way to align incentives is by allowing businesses to be profitable off their actions that also benefit the environment. So, I think that Rubicon is such an example where the technology and different way of thinking about an old industry enables to marry these two things together, both profits and sustainability. And I think that this is going to be front and center in terms of thinking about innovation, along the lines of ESG and sustainability, that allows us to make sure that firms truly internalize these important topics through the bottom line.
BRIAN KENNY: This has been a great conversation. As we start to wrap up here, I have one more question for each of you. Let me start with you, Nate. You’ve had an opportunity to visit when the students have discussed the case. And I got to think that’s kind of a weird, it’s got to be cool, but also a little weird, as they’re talking about your situation and you’re listening in. What has that experience been like for you? And have you learned any new ideas or different ways of thinking about things from the conversation?
NATE MORRIS: Oh, it’s a wonderful experience. And I feel so privileged to come back and get to learn from some of the best and brightest students in the world when it comes to business and entrepreneurship, and especially get to talk to professor Bernstein to get their thoughts, because they’re really on the ground floor of the business discussions in our country and in our world. I always learn new things. I always get new insights, get new ideas. It keeps me fresh as an entrepreneur. It is sort of surreal in a way to kind of re-examine these decisions. And you sort of think, “Well, could I have done that better? Or could this have been a little bit different?”
BRIAN KENNY: And Shai, let me ask you to wrap up here with telling us if there’s one thing you hope the students walk out of the classroom remembering after you’ve done this discussion, what is that?
SHAI BERNSTEIN: I think that the one message would be how one could leverage technology to serve really important missions in our society. And I think that, in many regards, I think that’s really the takeaway that students have when they see this waste management industry, which is really an outlier in the universe of cases that we’re teaching in our class. And in many regards, they find it really surprising that we’re discussing this industry, but then when you see how you can leverage technology and marry that together with important issues such as sustainability, it really kind of provides, I think, interesting and inspiring message for the students and what can be done and what’s feasible, and how you can think about important problems in creative and interesting manners that would align everyone’s incentives and hire everyone to work on these important issues and problems.
BRIAN KENNY: I want to thank you both for joining me on Cold Call today. It’s a great case and I’m glad we had an opportunity to discuss it. So, Nate Morris, Shai Bernstein, thanks again for being on Cold Call.
SHAI BERNSTEIN: Thank you very much.
NATE MORRIS: Thank you, Brian, very much.
BRIAN KENNY: If you enjoy Cold Call, you should check out our other podcasts from Harvard Business School, including After Hours, Skydeck, and Managing the Future of Work. Find them on Apple Podcasts or wherever you listen. Thanks again for joining us. I’m your host Brian Kenny and you’ve been listening to Cold Call, an official podcast of Harvard Business School brought to you by the HBR Presents Network.
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