This week’s Green Scene column in Crain’s Chicago Business: Vending machine entrepreneur offers healthier, local fare

A Chicago entrepreneur intent on bringing healthy, local snacks to students and workers is taking a page from industrialized food giants’ playbook by using vending machines to reach snackers.

T Hephner, founder and president of Healthy U, has been installing vending machines filled with nutritious snacks in schools and offices throughout the greater Chicago area and southern Wisconsin for close to two years. The alternative munchies to typical vending machine fare of Doritos and Cheetos, Pepsi and Gatorade include granola bars and baked potato chips, organic teas and vitamin water. His standards exclude any foods made with trans fats, partially hydrogenated oils, high-fructose corn syrup, or artificial sweeteners, preservatives or colors.

T Hephner

Mr. Hephner incorporates locally-sourced foods in his lineup. Some of his brands include baked cheese curls and cheese puffs from Michael Season’s, based in Addison, and granola bars from Nature’s Path, a Canadian company with operations in Wisconsin that blends local ingredients into its bars.

After 13 years of working on the business side of pharmaceutical clinical trials and witnessing people with escalating health problems related to obesity, Mr. Hephner decided to get on the preventive side of the health equation. He did research and discovered almost no one was offering healthier food selections through vending machines despite growing consumer interest in nutritious snacks.

In particular, Mr. Hephner wanted to target schools to encourage better eating habits among kids. His timing may be just right to generate interest among school administrators: Congress recently passed the Healthy, Hunger-Free Kids Act of 2010, which calls for schools to boost good nutrition for low-income students.

So far, he has signed contracts for 52 locations, with about 70% of them in workplace settings and the remainder in schools. Revenues from students have outpaced those from their grown-up counterparts: More than two-thirds of sales have come from schools, Mr. Hephner says. The company intends to have its machines in 100 locations by yearend and he expects revenue to double from the year before. Mr. Hephner hopes to be profitable by yearend.

Healthy U, based in McHenry, also is branching out into community-supported agriculture. He has begun delivering boxes of local produce from Chicago-based distributors, such as Goodness Greeness, to drop-off locations in the city and suburbs for consumers who want food from local sources conveniently delivered to their homes or businesses. This spring, Mr. Hephner hopes to begin working directly with McHenry County farmers as well.

Crain’s spoke with Mr. Hephner, 37, to find out more.

Crain’s: Why are you so keen about getting healthier snack choices out to people through vending machines?

Mr. Hephner: We’re passionate about bringing the message of how the industrialization of food is ruining our diets and contributing to health problems like diabetes and obesity. My wife and I started eating organic foods and we wanted our four young boys (aged between 5 and 11) and all other kids to have better food choices at school, since that’s where they spend most of their time.

We hit on this idea of vending machines because what’s in those machines at schools is industrialized junk food that’s bad for them. Kids are adaptable to eating healthier, so we wanted to put vending machines in schools with better quality foods. We hope school administrators agree with us. We think adults will make better food choices if they have healthier options at work, too.

Is it a tough sell convincing school administrators and company owners to replace junk food machines with your healthier options?

We don’t recommend they remove junk food machines. It’s better to give people an alternative and make them think about their food choices. We also do taste tests so they know what we offer.

We come in and talk to the human resource departments in businesses and to administrators at schools about the health benefits of our foods. We explain what we’re trying to do. It’s not just about bringing in good snack foods. We may be part of a wellness program that a company is implementing or expanding.

Don’t some vending machine contracts forbid proprietors from bringing in competing snack options?

We’re so different from other vending machines that the schools can make exceptions. Some started us side-by-side to the junk food vendor, then didn’t re-sign the junk food contracts when the existing ones expired. We can’t buy the schools new gym floors and score boards like the other vendors can, but we offer other benefits, such as revenue-sharing with some schools and non-profits.

Where do you envision future growth for your company?

We expect our major growth in the next couple years will be in colleges. College students in their early to late 20’s are the best market for these kinds of products. They’re educated and they’ve grown up with the organic, natural food movement. We see ourselves expanding beyond Chicago to Ann Arbor, Mich., and Austin, Texas.

Is it tough to be a green company when you have to use so much fuel to drive around and refill all those vending machines?

It’s true that we drive around a lot, but we’re exploring biodiesel fuel for our vehicles. We’re green in other ways, though. Our vending machines are energy efficient and Energy Star-compliant. They use one-eighth of the power of a regular vending machine because they have LED lights and high-efficiency compressors for refrigeration. We also give priority to local manufacturers and snack vendors.

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This week’s Green Scene column in Crain’s Chicago Business: Chicago startup aims to turn buildings into batteries

A local energy-efficiency technology startup is helping commercial property owners turn their buildings into batteries.

Chicago-based Clean Urban Energy developed a software platform that enables buildings to store excess thermal energy in their own concrete and drywall and then tap it later or push it back to the grid for utilities to use elsewhere.

The three entrepreneurs who launched CUE figured the rising cost of electricity would inspire commercial building owners and managers to seek out their service as a way to better manage energy costs, says Rich Earley, executive chairman and one of the co-founders. Mr. Earley, 42, had a string of prior hits in taking several information technology software businesses from concept to commercialization.

CUE was awarded $75,000 and first place at the Clean Energy Challenge earlier this month at the Polsky Center for Entrepreneurship at the University of Chicago Booth School of Business. The event was co-sponsored by the Polsky Center and the Clean Energy Trust, a Chicago non-profit that identifies promising young companies and scientists working on new ideas with commercial potential in the clean-tech sector. A panel of judges, including mostly Chicago-based venture-capital funds and other investment advisers, heard pitches from a handful of companies in the start-up stage before making its decision to pick two winners in that category. The cash prize was provided by the Clean Energy Trust as part of a three-year, $1.05-million grant it was awarded by the U.S. Department of Energy.

Vince Cushing and other founders, family and friends raised the initial $1 million for CUE to pursue the research and prove out the concept of the technology, explains Mr. Earley. The company then raised $975,000 in a second seed round from the same group of investors, plus added two Silicon Valley seed venture funds. From there, CUE turned the technology into a product.

Clean Urban Energy tested its technology on 12 buildings in downtown Chicago (for a combined total of 12 million square feet) in 2008 and 2009 and found that it was able to achieve energy savings ranging from 20% to 30%, says Mr. Earley. Since then, two of those buildings have converted into paying customers. CUE is on track to post $5 million in recurring licensing fees by the end of 2011, with projected growth to $80 million in revenue by fiscal 2014, he says.

The company is now in the midst of raising $5 million from venture funds to build out the team and scale things up, he adds.

Crain’s caught up with Mr. Earley between financing pitches to learn more about the company.

Crain’s: How is CUE’s technology poised to solve significant energy-efficiency problems in the U.S. today?

Mr. Earley: Every major U.S. city has two major energy problems: high-priced electricity and a shortage of grid-level storage. For building owners, if you can cut their electricity bills by 20% to 30%, and for utilities and ISOs (International Organization for Standardization), if we can provide them with grid storage at $20 per/kilowatt installed, then we’ve helped relieve two of the biggest challenges caused by urban grid transmission and distribution congestion.

Rich Earley (photo credit Chris Bentley / Clean Energy Trust)

Crain’s: Can you briefly describe how the company’s technology works?

Mr. Earley: Our platform integrates building operations with grid operations and markets. We do this integration via our predictive optimization engine, which considers real-time market inputs like forecasted electricity pricing and weather and key building inputs like how its thermal mass holds energy to drive an optimal building operating strategy.

In essence, we turn buildings into batteries by harnessing a building’s inherent ability to hold energy in its concrete, its drywall and use it as storage and then determine the optimal time to charge the battery by pre-cooling or pre-heating it at the optimal market price and conditions. This capability drives 20% to 30% energy savings for buildings and delivers a low-cost storage capacity to grid operators, all without capital expense or impact on tenant comfort.

Crain’s: What is your target market?

Mr. Earley: We’re targeting buildings in the top 20 U.S. cities, representing 5.4 billion square feet in all downtown major metropolitan areas combined. Chicago is just a start. We already have customer prospects in the pipeline in New York, Miami, Houston, Los Angeles and San Francisco.

We also have two of our biggest deals in Beijing and Riyadh. They found us, we didn’t look for them. The problem is much bigger overseas because the price of electricity there is much higher than here in the U.S. They need these solutions more than we do. We already have a channel partner in Saudi Arabia, and we plan on using joint-venture partnerships elsewhere. We’re really focusing our efforts in the U.S.

Crain’s: Do you intend to keep your company’s headquarters in Chicago if you get more venture-capital funding from California?

Mr. Earley: We’ll keep our headquarters here. Many Silicon Valley VCs want you to relocate the company closer to keep an eye on their investments. You can counterbalance that with some investment money in Chicago.

It’s essential to keep companies like us in Chicago. As the Clean Energy Trust has shown, Chicago certainly has the infrastructure, laboratory research and venture support to build these clean-tech companies right here.

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AWJ Panel Discussion: Lara Logan and Media Under Fire

Great Association of Women Journalists panel discussion tonight: Lara Logan and Media Under Fire. Valuable insights from foreign correspondents on the front lines in the Middle East and elsewhere, telling stories at great personal risk. Terrific perspective from Sharmili Majmudar, head of Rape Victim Advocates. Glad some of my Columbia College journalism students were there too — real world stuff, nothing sugar coated. Cheryl Corley, national correspondent for NPR and AWJ president, moderated tonight’s discussion.

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This week’s Green Scene column in Crain’s Chicago Business: Angel investors nurture local-food seedlings

Seven Chicago angel investors — mostly former derivatives traders and entrepreneurs — have formed an investment network to create financing opportunities for small businesses and startups in the local, sustainable food distribution system.

Members of SLoFIG, short for Sustainably Local Food Investment Group, intend to loan money to small businesses within about a 250-mile radius of Chicago that participate in growing, processing, delivering, selling or serving local food. Each participant has committed to invest $25,000 a year for three years.

The idea for the investment network was developed by leaders at Fresh Taste and other local food-oriented organizations who saw a funding gap for businesses in this niche. So says Karen Lehman, director of Fresh Taste, a funding collaborative of seven foundations (including the Chicago Community Trust), and the city of Chicago’s Department of Housing and Economic Development. Fresh Taste focuses on improving the local food system around Chicago and access to good food.

Inspiration also came after Ms. Lehman and others met with Woody Tasch, a longtime venture capitalist and famed author of Slow Money, a financial guide to investing in regional food networks. Teri Lowinger, one of the angel investors, is heading up the new investment group.

SLoFIG will make its debut next week when some of its investors show up at the three-day FamilyFarmed Expo at the UIC Forum at the University of Illinois at Chicago March 17-19.

In anticipation of a business plan competition session slated for the financing day at the expo, SLoFIG invited local, qualified businesses to submit applications and promised to help groom two finalists to present a polished business pitch at that event. The investment group has received 17 applications and has been working with the two it selected to prep for the challenge next week, Ms. Lehman says. SLoFIG so far hasn’t invested in any companies, according to Ms. Lowinger.

While a good return on investment is an important criterion for businesses that receive loans from SLoFIG, another critical measure is how these entities contribute to the strengthening web of the regional food distribution system around Chicago, Ms. Lehman says. Investors could potentially see a higher rate of return if they placed bets on companies in more traditional industries, but they chose to participate in the fund because of the high value they place on a durable local food system that reaches a wide swath of the population.

Crain’s caught up with Ms. Lehman this week to learn more.

CRAIN’S: Why is there a need for this kind of investment network? Can’t these businesses get bank loans to grow?

Ms. Lehman: From the very start, the founders of Fresh Taste realized we have to rebuild the infrastructure for local food and we wanted to get the investor community involved. We knew it might have to be a different kind of investor who invests in some of the businesses that banks may shy away from. Banks understand corn and soybean out in the countryside but may be unfamiliar with community-supported agriculture. Banks also may be unwilling to take the risk of investing in some of these companies.

Karen Lehman

SLoFIG investors are concerned about risk, too, but because they’re looking at the social return reward, they may be willing to take a risk that a bank might not. Also, lots of farm-based businesses require patient capital. And some of these businesses are less concerned with selling their business later. So how does an equity investor make money? You have to be really creative about how you structure the deals.

Who are the investors in this emerging angel network?

These are people who are former derivatives traders, entrepreneurs and consultants who came to this out of a real passion for food. Sometimes it happened because there was a health issue in their family like food allergies or illness, and others came to this because they realize the way you live a good quality life is to have access to good local food. They don’t just want this to be for upper-income individuals. They want to make sure the local food system serves all kinds of folks, their food preferences and needs.

They are willing to forgo some financial gain for the right business because of the role it’s playing in the food system. They’re balancing their interests between social return and financial return.

What kinds of businesses qualify to apply for loans from SLoFIG?

The businesses are generally part of the greater Chicago food shed within a 250-mile radius, including parts of Wisconsin, Michigan, Iowa, Indiana and Illinois. The investors aren’t buying farmland, but they’re interested in farm-based businesses that represent some kind of expansion of the business model on the farm. For example, a goat farm selling its milk to others might start making its own farmstead goat cheese.

Other businesses might include food hubs or food processing plants for meat, produce or dairy. There could be restaurants that source local food or caterers that supply meals to schools, companies that develop new food safety technologies or retailers that develop food product lines sourcing local ingredients. With urban farming there has to be an enterprise that comes off the land.

Do the businesses have to be engaged only in organic food or is there a broader criteria for who can apply for loans?

They’re not saying everything has to be organic, but there are general questions asked about whether a company is doing things to be environmentally sustainable. Also, are workers being treated fairly? Does it seem that this business will potentially help the food system reach people who really need the food? Maybe not now, but it could be a business that helps build a structure that can eventually lower costs. A lot of what we’re trying to do is develop enough infrastructure efficiencies in the system so that ultimately costs get lowered. Right now, much of the local food is pretty expensive. Farmers also have to get a fair price for their product.

Is the fund looking for more angel investors who might want to get in on this new trend?

The initial group is expected to grow and just added a new member to total eight. They’re definitely looking for new members. Investors who join have to agree to invest $25,000 a year for the first three years. They also have to be accredited investors.

You emphasize that SLoFIG is forming at a critical moment in time. What’s so important about now?

The demand for local food is so strong right now. We really need to build the infrastructure that can satisfy it so people don’t get disappointed if they’re looking for local food. We have to continue to grow with that demand. Without the kind of private investment from groups like SLoFIG in some of the key pieces of the infrastructure, it will be more difficult to satisfy that demand.

SLoFIG is one piece of the spectrum. USDA (U.S. Department of Agriculture) and Rural Development (which provides business loans within USDA), community development finance institutions and banks are important, too. Getting everyone lined up to recognize this opportunity and figure out how to invest in it is an important piece of work right now.

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