Deal in Review – Entomos Banks On Beneficial Bugs, Bacteria –

GAINESVILLE, Fla. – When entrepreneur Jim White talks about his company’s interest in bugs, he is not referring to software glitches or the infectious diseases pharmaceutical companies try to cure. White is talking about actual bugs. Ladybugs, to be precise.

White’s company, Entomos L.L.C., sells ladybugs, formally known as pink spotted lady beetles, to nurseries and greenhouses who use them to guard against other insects that damage plants. Ladybugs can eat several hundred aphids or several thousand mites in their three-to-five month working lifetimes and often serve as alternatives to pesticides. Ladybugs also are used when pests have built a resistance to chemicals, White said.

Entomos is expanding its target market to include home gardeners and will use the $ 1 million of venture capital raised in November from Advantage Capital Partners to fund field research for new potential markets and work on other product lines. Advantage Capital has promised another $1 million in milestone payments tied in part to reducing the cost of ladybugs to buyers, thereby increasing potential sales.

White anticipates Entomos raising roughly another $7 million over the next three to four years to get the company’s revenues up to $20 million to $50 million a year, enough to fund some of Entomos’s growth, including development of other predatory bug lines and pest-fighting agents.

White expected 1999 revenues to be about $40,000 and 2000’s revenues to be $500,000 to $1 million. The company sells its products through distributors, and clients include Walt Disney World and organic grape grower Pavich Family Farms, White said.

Entomos charges $12 to $15 for a carton of 250 larvae nationwide, except Florida, where a carton costs $15 to $20 because of extra costs associated with state regulations. One ladybug covers about one square foot of plants.

Entomos is not the sole distributor of ladybugs, but to White’s knowledge, his is the only company that breeds and distributes them in larval form at Entomos’ scale. Growing ladybugs in a controlled environment, an “insectory,” avoids problems other approaches bring. Some companies gather and sell adult ladybugs that are in hibernation for the winter, but those ladybugs prefer to sleep rather than to munch on other pests. Also, Ladybugs gathered from the wild often carry parasites.

Entomos currently harvests some 40,000 to 50,000 larvae a day and expects to increase that figure by 10- to 20-fold over the next few months. Most are sold as larvae, although the company also sells adult ladybugs raised by the company – at three times the cost of larvae.

But raising ladybugs is expensive.

Ladybug larvae favor dining on moth eggs, a costly culinary treat. “We were paying 75 cents a gram, which doesn’t sound like much, but that’s $750 per kilogram,” White noted. So Entomos performed reverse engineering on moth eggs to determine their makeup, and the company concocted a substitute using cheaper ingredients. Entomos has applied for a patent on the moth-egg-like food, which costs about $8 a kilogram.

Although he could not say precisely how much ladybug feed Entomos uses, White did note that the largest conventional producers of beneficial insects go through several hundred kilograms of moth eggs per month, White said.

Even with cheaper eats, ladybugs still cost a lot more than chemical pesticides, so Entomos is concentrating its efforts on reducing the cost of these “beneficial bugs.” The cost of using beneficial insects can run 10 to 20 times more than conventional pesticides, depending on the crop being treated, White acknowledged.

Because of the lofty price tags, beneficial bugs are used almost exclusively on pricey plants sold at nurseries or vegetable crops sold for human consumption. White expects to drive the cost of ladybugs down far enough to go head-to-head with pesticide companies in five to eight years.

Meanwhile, Entomos generates a modest revenue stream from the sale of The LadyBug Changing Room, a clear plastic cup containing ladybug larvae and food. The kit is used by elementary schools to show children how the bugs mature over the course of one-and-a-half to two weeks.

In addition to its ladybugs, Entomos is developing a bacterium to kill nematodes, round worms that harm plant and tree roots.

The current chemical of choice for wiping out nematodes is methyl bromide, an extremely toxic fumigant applied to fields before planting. Methyl bromide is classified as a primary depleter of ozone and is slated to be phased out completely by 2015. The fumigant had been scheduled for retirement in 2001, but the date was pushed back because of a lack of alternatives.

The biological agent being developed by Entomos is known to be among the most promising agents to attack nematodes, but prior to White and a co-inventor, no one could grow the bacterium without a nematode host. Entomos licensed the technology, and White expects the nematode product to eclipse ladybug sales in three years.

A key advantage to using a targeted bacterium over methyl bromide is that methyl bromide kills everything and cannot, therefore, be used on perennial plants and trees, such as citrus trees, White noted.

Tim Cockshutt, senior vice president at Advantage Capital had followed Entomos’ progress for several years while working at previous venture firms, neither of which was interested in the bug company. But when Cockshutt became manager of Florida operations for Advantage a year ago, he saw an opportunity to invest in Entomos through the venture firm’s $82 million Advantage Capital Florida Partners. Funded with insurance money through a certified-capital company (CAPCO) program, the fund must invest at least half its capital in early-stage technology companies in Florida.

Cockshutt said it took some salesmanship to sell his Advantage colleagues on Entomos; first he had to overcome “the giggle factor.” Then he resorted to what he called “grotesque promotions,” including having White send The LadyBug Changing Room kits to each partner with voting rights on the investment and to everyone in the firm with children.

Cockshutt, who previously backed organic grocery store chain, Whole Foods Market Inc. and organic baby food maker, Earth’s Best Baby Food, sees two opposing trends that Entomos can seize upon: the growing demand for organic foods and the increasing use of bioengineering.

While organic farmers do not have an interest in bioengineering and developers of genetically altered crops are not devotees of organic farming, both groups are interested in controlling crop-damaging pests with minimal chemical use. Indeed, a key goal of bioengineering is to produce crops better able to resist insect damage without heavy pesticide use. Entomos’ ladybugs could help farmers who use either a genetically altered seed or organic methods to raise crops, Cockshutt said.

Ideally, the venture capitalist would like to see the day when a farmer could spot-treat a specific area of his field after identifying pests by sight or satellite.

Entomos eventually will have to bring in more venture backers or corporate investors to expand its operations and markets, Cockshutt said, and the variety of products the company is working on and their differing development timelines will be key to attracting those backers. Also working in its favor, Entomos does not have a high burn rate, he noted.

Entomos had funded its efforts with federal research grants from the United States Department of Agriculture, attracting a total of $590,000 between 1995 and 1999, White said. The company also got support from the University of Florida’s Sid Martin Biotechnology Development Institute, an incubator. Entomos spent three years there and in late 1998, securing backing from an angel investor interested in local economic development and moved out on its own.

White founded Predation Inc., Entomos’s predecessor, in 1993. Predation’s venture backer, Advantage, preferred its portfolio companies be limited liability companies rather than corporations so Entomos L.L.C. was created last fall, and Predation, a corporation, ceased to exist except as a limited partner in Entomos, he said. Each major Entomos product line will have its own L.L.C.

The advantage of L.L.C.s is they allow potential corporate investors to take equity stakes in particular product lines of interest rather than in the entire company.

Advantage’s Cockshutt expects the company ultimately will yield a strong return for his firm, on the order of 10 times the investment. “It’s not going to be in six months, it’s not an Internet deal,” he acknowledged.

But Entomos does have an e-commerce angle. While the company distributes its products through distributors, Entomos is working on a Web site to sell its products. At first, only The LadyBug Changing Room will be available to consumers online. Distributors also will be able to place orders at the Web site, but Entomos plans to eventually offer all products directly to customers over the Internet, White said. The site will be launched in February or March.