Southern exposure for startups: The Cherokee McDonough Challenge

What do these four things have in common: 1) DNA that can track materials long distances and prove exactly where they came from – where a thimbleful is enough to trace fluid from 11 Olympic swimming pools; 2) extremely hip shoes assembled locally in minutes without plastics or toxic glue; 3) bricks literally grown by microorganisms; 4) a cheap, plentiful replacement for platinum catalysts.

Each is an innovation with potentially huge markets -- hundreds of billions of dollars, in at least one case. Each is harder to develop into a profitable, rapidly scaling business than your average web startup. And, they all could help save the planet.

These products come from four companies -- BaseTrace, Lyf Shoes, bioMASON and Platinix -- all part of the Cherokee-McDonough Challenge. Launched in 2012 by entrepreneur/ investor Tom Darden and his team at Cherokee, an environmentally focused investment company, the challenge is an accelerator based in North Carolina’s Research Triangle, designed to identify, fund and develop early-stage, high-impact environmental start-ups.

The challenge’s other portfolio companies so far are Sanitation Creations, JouleBug and HomeWellness. HomeWellness is a software solution, originally developed for internal use by a Fortune 100 company, which aims to help company employees make profitable improvements in home energy efficiency, while getting access to the best contractors and financial incentives.

JouleBug produces a mobile app that combines big data, gamification and social media to help consumers cut energy waste and save money -- and have fun doing it.

Sanitation Creations’ Dungaroo, a portable toilet that is waterless, odorless and cost-efficient, is a convenient solution for first-world boaters and RVers but could be potentially life-saving hygiene to the 2.5 billion people who lack access to adequate sanitation.

Unique from the top down

Darden and Bill McDonough, who joined the effort in 2013, are truly superstars in the environmental business community. Darden has been one of the foremost entrepreneurs and investors in environmental businesses since the 1980s. He and his team have raised over $2 billion in private-equity funds focused on the remediation and redevelopment of more than 500 brownfields. Separately, he led the creation of a number of environmental businesses and investments in more than 80 startups and venture funds over nearly 30 years. In recognition of his leadership, he won the 2010 World Presidents Organization Sustainable Environmental Business Practices Award and has been nominated for the Zayed Future Energy Prize.

McDonough needs no introduction to GreenBiz readers. He has reshaped the way the world thinks about sustainability, design and chemistry and influenced countless leaders in business, government and civil society. McDonough’s Cradle to Cradle: Remaking the Way We Make Things, co-authored with Michael Braungart, is one of the most important books in the sustainability canon.

Collaboration between Darden and McDonough goes back many years, with other breakthrough initiatives, including the Cradle To Cradle Products Innovation Institute. They also team up on Cherokee Gives Back, Cherokee’s philanthropic arm providing programs for education, leadership training and sustainability in the U.S. and Ethiopia.

A hybrid of start-up competition and accelerator

The Challenge process starts in a way that top researchers such as the Kauffman Foundation (PDF) and the U.K.'s National Endowment for Science, Technology and the Arts (PDF) find to be correlated with successful angel investment -- lots of up-front due diligence, deep experience in the industries of the ventures and active support through mentoring, coaching and providing leads.

It begins with a rigorous selection committee process to pick a small number of companies each year from among several dozen applicants. Selection criteria include uniqueness (stuff you have not thought of before), competitive advantage including significant proprietary intellectual property, the size of the environmental problem they address, team experience and expected returns at or above average angel returns for all industries. Applicants submit pitch decks and videos and the finalists selected are invited in to pitch the Cherokee staff live. Winners get $20,000 in seed funding, but the rest of the package is much more valuable.

The companies then enter a three-month accelerator phase working with the Challenge team, its Advisory Committee and top-flight communications and financial experts. “We build a community of support around the entrepreneurs and help them with corporate formation, fundraising (including grants, equity, debt and crowdfunding), go-to-market strategy, communications, intellectual property strategy and protection and making connections,” said Cherokee’s JT Vaughn, who heads the Challenge team.

Chris Wedding, Cherokee's Director of R&D and Sustainability, added, “Important outcomes include getting them to their prototype, a solid financial model and a really powerful pitch around a clear value proposition. We want them ready to engage customers, impress sophisticated investors and enter serious discussion with corporate partners.”

The Challenge doesn’t use a boot camp model of daily drills and countless incremental actions. The approach is more about creating a structured path plus strategic guidance to help the companies rapidly develop the core competencies and deliverables they’ll commercialize and scale up. BaseTrace CEO Justine Chow noted, “They kept us accountable for progress and really made sure we were keeping pace.” Entrepreneurs meet at least once weekly with the Challenge team to clarify product development paths, review pro formas, refine marketing documents, prepare applications for grant programs such as the NC Idea Fund, assess partnership opportunities and get communications training."

The companies also meet weekly over the summer with the full Advisory Committee. (Full disclosure: I am a member of that committee.) The committee includes two dozen top serial entrepreneurs, VCs, corporate executives, attorneys, strategy consultants and scientists. Advisory sessions go deep on topics such as whether the benefits of protecting IP with patents outweighs the risks of disclosing the special sauce at a point when no company has the money to defend a patent.

Halfway through, the companies make their second practice pitch, followed by “constructive critical feedback” that to one entrepreneur felt like “getting roasted in a hot oven … but it was what we needed.” The companies give a second practice pitch two weeks before the finale and the feedback is no less “constructive.”

That tough love pays off, apparently. According to HomeWellness CEO Colby Swanson, “The pitch we developed for the Challenge Finale got us into the Triangle Startup Factory,” a highly selective commercialization incubator that provides $50,000 plus a three-month boot camp in exchange for 7.5% of the company.

Unique in other ways

Part of what sets the Challenge apart is what it’s able to leverage in the Research Triangle:

  • Talent. Brookings Institution research ranks Raleigh-Cary sixth highest in education among U.S. metropolitan areas, while US News & Report cites Durham-Chapel Hill residents as having the highest percentage of doctorate degrees in the country.
  • Innovation. Raleigh-Cary and Durham rank seventh and ninth in University of Toronto research on number of patents developed and concentration of high-tech companies.
  • Strategic partners. The state is home to major arms of agencies including the EPA and National Institutes of Health, several huge military installations and technology innovation divisions of many major corporations such as Siemens, ABB, Cisco, IBM, BASF, DuPont and Duke Energy.

Another distinctive aspect of the Challenge is its primary focus on innovations that don’t appear to be capital-light. Their portfolio companies aren’t just coding cool apps to entertain millennials.

Said Vaughn: “To address the big problems out there today, you have to be willing to invest in startups that may ultimately require significant amounts of capital in order to succeed, because many of our environmental problems are derivatives of past bad design decisions on a very large scale -- our energy economy based on central station coal fired power, transportation infrastructure designed for the 1950s, a landscape of outdated, inefficient homes and buildings … the list goes on.”

Most Challenge companies have technologies that will require many years and major capital investment -- potentially billions of dollars -- to deploy at scale. However, the Challenge team and advisors excel in devising unconventional fast tracks to profitability and scale. The Challenge helps entrepreneurs with licensing, strategic partnerships with large corporations, innovative small-scale distributed manufacturing and other strategies to monetize the value of innovations without raising multiple expensive rounds of venture capital and private equity.

Compared to most accelerators, the Challenge is more about people than just technology. “In addition to the success of the venture, we’re also focused on the entrepreneur and their personal and professional development. We invest in entrepreneurs as well as their ideas,” said Wedding. BaseTrace CTO Jake Rudulph said, “They helped me grow as an individual and helped me realize how that fits with growing as part of a broader team."

“It’s also about helping the entrepreneurs make connections,” Darden pointed out. “Between Cherokee, McDonough’s team and our advisory committee, we can open up relationships for them with any of dozens of investors, entrepreneurs, customers and channel partners around the world.”

After only two years, the Challenge portfolio is shaping up as a community of environmental entrepreneurs. Several alumni of last year’s class took an active part in advisory council sessions with this year’s class. BaseTrace’s Chow said, “It’s been wonderful getting to know this year’s class. We’ve had the chance to work with BioMASON, which like us is located at the First Flight Center, a RTP-based technology incubator, and we’ve helped Platinix determine its minimum viable product.”

Results so far

Two years in, there have been no exits (company acquisitions or IPOs) yet, so it’s too soon to tell for sure. But some companies have made significant progress.

Three of the four companies in the 2012 class are already post-revenue and shipping product. BaseTrace has gained a major customer outside the market it initially targeted for its engineered DNA that can be used to track fluids and other materials geographically. “We had initially gone after the fracking market,” said Chow, “but our first customer is a nuclear power plant operator.”

BaseTrace thinks it is nearing a first sale to track fracking fluids. Lux Research projects that water used in fracking globally may reach 260 billion gallons a year by 2020. By that date, a significant percentage of oil and gas companies may deploy tracers in fracking fluids to prove safety of their operations, either voluntarily to avoid liability and reduce insurance premiums, or due to regulation. Other applications BaseTrace is pursuing include stormwater and runoff tracing, water rights and closed loop industrial contamination tracing.

The 2013 Challenge class is also making progress. BioMASON has garnered so much attention through winning $670,000 in the Dutch Postcode Lottery Green Challenge, chaired by Sir Richard Branson, that CEO Ginger Dosier declined to be interviewed for this article. She cited an overwhelming inflow in the last few weeks of inquiries and orders for the company’s biologically grown bricks and other masonry. When word spread of a company that can make a structurally sound substitute for bricks and cement with almost no greenhouse gas emissions -- traditional fired-clay masonry units are responsible for more CO2 emissions annually than the global aviation fleet -- the phone started ringing off the hook.

‘The essential work of our time’

McDonough spoke almost poetically about why he teamed up with Darden on the Challenge. “Concern for the future can represent the worst of our fears and greatest of our hopes. What I love about the Cherokee McDonough Challenge is that everyone involved celebrates the greatest of hopes for principled human innovation. The Challenge makes things exciting because entrepreneurs can rise to high occasion with their brilliant business and technological solutions to urgent human and natural needs. This is the essential work of our time and it's not just nice to see, it's delightful to support."