24 May 2023 |

Soldiers of circularity


69% of Americans don’t know that plastics come from fossil fuels. But, as a reader of this newsletter, when you hear the term ‘circularity,’ you probably think about plastic recycling and how, if we did a better job, there’d be less trash polluting ecosystems and less demand for oil to make virgin plastics.

Or maybe, like me, you live in New York, where everyone’s always dressed to the nines, so circularity calls to mind shopping for clothes secondhand and upcycling old textiles.

Or you’re excited by the energy transition, and when you hear circularity, you think about the need and opportunity inherent to recycling solar panels, wind turbines, and EV batteries. 

Building more circular systems for organic waste might not be the first thing on your mind. 

There’s a reason for that. As a society, we strongly prefer to keep this form of waste out of sight and out of mind. I get why we mind plastic pollution less. It’s more ‘anesthetized.’ It doesn’t decompose, which is a problem, but also means it doesn’t rot like trash on a Manhattan sidewalk in August.

That said, organic waste is one of the most pernicious forms of waste around us. Food waste is the largest single input to landfilling in the U.S. That’s both a significant challenge and a substantial climate tech opportunity.

One company we covered earlier this year is Divert, a wasted food diversion company that uses organic food waste to make renewable natural gas.

Today we’ll cover another company that wants to take advantage of organic waste and commercialize a waste-to-value processing technology. It’s just a ‘technology’ that has been around forever. Let’s acquaint ourselves with Chapul Farms and the black soldier fly. 

When waste isn’t waste

Here’s the thing. Very rarely is waste really ‘waste.’ Whatever it is, odds are there is a use for it. Even spent radioactive fuel is often repurposed for more energy generation

There are several waste processing technologies to reclaim value from and prevent organic waste from ending up in a landfill, lest it turn into a “methane volcano” (in the words of Chapul Farms CTO, Michael Place). 

Insects are one such waste processing ‘technology.’ Black soldier flies, in particular, are the core solution that Chapul Farms harnesses. 

Over the full lifecycle of the fly (which only lasts a few weeks), it devours waste vociferously, leaving nothing but larva (protein) and frass (insect excrement and exoskeleton), which looks like compost. Both insect protein and frass are valuable, so the benefits of using black soldier flies are threefold:

  1. Process organic waste (including wet waste)
  2. Create quality, locally-sourced proteins and fats (larva)
  3. Create products for use in fertilizer and soil treatment (frass)

Chapul Farms is building a tech stack with Hermetia illucens at its center. At the highest level, on a recent podcast episode, Michael described Chapul Farms’ work as follows: 

We’re pulling from the playbook of nature… [Insects plug directly] into the entire carbon cycle, they bring a ton of efficiency without external energy requirements. We harness their ‘management’ capacity across a variety of areas.

This is important work. As we’ve established, organic waste can turn into methane in landfills. 15% of all methane emissions in the U.S. stem from landfills. Diverting organic waste from landfills, whether for processing in an anaerobic digestion facility or, in the future, in an insect farm, is a great way to reduce emissions. 

Chapul Farms wants to build insect farms across the U.S. to systematize organic waste processing. Part of the rationale behind building many facilities is to reduce the distance waste has to travel. Most food waste I produce in New York gets sent to West Virginia or South Carolina by train.

As it builds its facilities, Chapul Farms will need to continuously perfect the environment for its flies. While many insects’ natural habit is processing waste, their preferred habitat is pretty specific. Chapul breeds the flies, offers them a specialized diet before they’re ready for waste processing, and does significant work to manage the insects’ microenvironment. They monitor humidity, temperature, and optimize everything to the insect’s lifecycle to keep them happy and eating. It’s insect paradise.

Another important factor is preparing organic waste for processing. Waste sources can vary broadly between different types of food waste or spent grains (e.g., from ethanol production). Steering factors like particle size and moisture levels to perfect them for black soldier flies is something Chapul Farms spends a lot of time perfecting. When I pressed Michael on which components of the business strike him as most defensible, he zeroed in on the team’s experience here. 

At the end of their waste-consuming days, the insects themselves are a source of fats and proteins for sale into several end markets. Notably, the energy-to-protein production ratio here is low, not to mention the value of the waste processing. Markets include:

  • Pet food ingredients
  • Poultry feed 
  • Aquafeed

All of the above-listed markets could be big for Chapul Farms. One of my ‘favorite’ statistics I’ve learned over the past three years of studying climate tech and the many systems they target is that if all the pets in America organized as their own nation, they’d be the 5th largest country in terms of meat consumption. U.S. pets eat more meat than the 1.4 billion people living in India. 

On the poultry side, feed is one of the largest line items for chicken farmers. Plus, as we explored in another deep dive on methane-abatement products for cows, farmers think incessantly about better ways to feed livestock. Insect protein could slot in nicely; high-quality protein is expensive and hard to come by. For this reason, aquaculture is a vibrant potential market for insect protein, as well. 

From a business model perspective, Michael noted protein sales will be Chapul Farms’ predominant revenue source for some time. Eventually, they may get paid for waste processing, too. For now, they’re content fostering strong relationships with partners with waste to offload and getting free food (waste) for their insects.

The third product / service Chapul Farms may be able to develop more over time pertains to sales of the flies’ frass. This theoretically has applications in fertilizer production and in promoting soil health. There’s a lot of climate impact to make on that front if it comes to bear; nitrous oxide emissions from fertilizer are a significant (and under-discussed) greenhouse gas, and nitrogenous runoff from fertilizers on farms is a major pollutant of waterways worldwide.

Based on conversations with the team, frass sales aren’t as much of a focus in the near term as proving the waste-to-protein model is.

Systematizing the waste-to-value soldiers

OK. This is a grand vision. What needs to happen in 2023 to bring it closer to reality?

As we’ve explored, some core challenges for scaling insect farming include technical factors like temperature, environment control, and pre-treatment of waste streams. 

Scale is the other obvious elephant in the room. The insect-based waste management industry in the U.S. is still in its infancy. Operations are further along in China, Singapore, Malaysia, and Indonesia, though they’re often lower-tech. Activity is brewing elsewhere, including in France, where Ynsect, a company focused on cultivating mealworms, has raised significant capital.

The challenge with the nascency of the industry in the U.S. isn’t so much about interest though. It’s about precedent, regulation, and fundraising. There are no regulations specifically governing the use of insects to process organic waste in the U.S. And getting to industrial scale is hard; if you’re working with spent grain waste from an ethanol producer, odds are they want partners who can process massive amounts of waste. Daily. 

Similarly, financing the build-out of more facilities won’t be easy. There aren’t clear-cut incentives in the IRA for insect farms like there are for EV battery manufacturers. Nor is there exactly a robust history of other insect farms in the U.S. to make the pitch more bankable.

Chapul Farms operates one facility in Oregon, which serves as its research and innovation center and sits on a 600-acre regenerative farm. They’re using that site as a sort of mid-scale insect farm pilot to prove their thesis around using black soldier flies to process waste and turn it into high-quality protein. Elsewhere, they want to build many more ‘farms’ at full-scale co-located with waste streams (e.g., near bourbon distilleries in Kentucky or ethanol producers in the Midwest.) 

To build more facilities, they’re actively raising their Series A

Series A is a tricky stage for many companies, to say nothing of the current fundraising environment. Investors want to see significant revenue (seven figures). But often, companies still need more capital post seed-round to get to a point where they’re generating that revenue (live facilities, in Chapul Farms’ case). 

This can lead to a bit of a standoff between investors and companies. It’s one I’ve watched several times, where, even if the path to the revenue for the company seems relatively clear post-close, investors don’t want to pony up money until the revenue starts flowing. 

There are other routes besides raising cash in exchange for equity. There’s project finance. There’s debt. But those playbooks also depend on the availability of relevant comparisons or track record. Sometimes companies still fall into capital stack gaps. Sometimes they flounder there forever. 

The net-net

Using insects to process organic waste and then also using their protein and frass makes too much sense for us as a society not to do it. 

As I wrote last year:

…insects have miraculous waste conversion capabilities. They’re not just protein. They’re waste-to-protein transformers that can process organic matter that otherwise rots on farms and landfills and produces emissions.

Unfortunately, whether things make sense for the planet doesn’t always translate into business success. Whether Chapul Farms can get their A done is a big open question. Whether, post-raise, they can build and replicate successful insect farms across the country is another. This isn’t just a story about building insect farms. It’s about building new infrastructure. And a lot of it, ideally.

Still, this strikes me as one of those solutions where, if it doesn’t ‘work’ economically, it’ll be more of an indictment of our societal systems than the solution itself. The whole calculus would look very different if we could properly value the impact of not landfilling organic waste alone. Whether or not we wisen up and use them, black soldier flies wait in the wings for our waste processing needs.