How Much Wood Would WoodPellets.com Sell If It Had $11M in New Venture Funding?

8/31/09Follow @wroush

There are a couple centuries of progress separating wood-burning stove technology from MIT-bred logistics software. But the two are more closely related than you might think. In Goffstown, NH, a startup that just raised millions of dollars from two Boston-area venture firms is using the latest in supply chain management technology to build a national business around distributing wood pellets.

This lumber industry byproduct, made from wood waste that would otherwise decay and return methane and carbon dioxide to the atmosphere, is becoming an increasingly popular alternative to fuel oil or propane for home heating. And the startup, called WoodPellets.com, announced today that it has raised $11 million more to pursue the wood pellet market, in a Series B financing round led by Cambridge, MA-based Monitor Clipper Partners and joined by existing investor .406 Ventures of Boston.

Company president and co-founder Jon Strimling tells Xconomy that the cash, which augments a 2008 Series A round of $4 million, will help the company continue development of its website, which uses patent-pending software to customize the options offered to wood pellet buyers depending on their location. The company’s business model revolves around shaving a few cents off the costs of distributing the pellets to consumers; using advanced software to match stove owners with the most economical local sources of pellets allows the company to charge less and earn higher profits, Strimling says.

“I’m not going to say we invented the wood pellet—we didn’t. And I’m not going to tell you that pellets are high-tech—they’re not. But what we’re doing in logistics and distribution is significant, and that’s where we see the opportunity for huge efficiencies,” Strimling says.

Venture investors haven’t traditionally ventured into prosaic fields like home heating. But wood pellets are a unique commodity with a market that varies in several interesting and enticing ways from the markets for other fuels.

The pellets themselves are a small, dense, form of biomass, usually made from sawdust compacted into small cylinders resembling rabbit feed. The material was invented in the United States in the 1980s, but first caught on as a home heating fuel in Europe in the 1990s. Over the last few years, it’s been making new inroads in the U.S., where there are now several dozen manufacturers of home pellet stoves. Consumers like the pellets because they’re less expensive, on average, than cord wood, and because they are seen as greener, burning with greater efficiency and lower particulate emissions.

Most stove owners buy pellets in 40-pound bags at their local hardware stores or discount chain stores. Strimling’s company, which was formerly known as American Biomass and recently changed its main Web address from PelletSales.com to WoodPellets.com, is one of several that let consumers order the pellets online, but he says it’s the only one that can deliver to a variety of regions around the country. The company works with 25 pellet mills across the U.S., he says.

One of the unusual things about wood pellets, Strimling explains, is that the source material (sawdust) is extremely cheap, about $30 per ton, and yet the finished pellets are extremely dense, and therefore heavy and expensive to cart around. It’s not unusual for transportation to account for 75 percent of the pellets’ wholesale cost. “So managing logistics in this industry is not incidental—it’s the heart of it,” Strimling says. Things like the distance to the nearest mill, whether the pellets travel by rail or truck, and whether they’re delivered in bags or pneumatically blown into storage bins all make a big difference the final price WoodPellets.com has to charge, and in the amount of money it can make.

The company’s software, developed by a graduate student at MIT Sloan School of Management named Jie Wang, is designed in part to make sure that Web shoppers are presented only with pellet types and sources that can be delivered economically, based on their zip code. (The site can also auto-detect shoppers’ locations based on their Internet addresses.) “Unlike Amazon, where you would see the same book for the same price whether you log in from Seattle or Boston, we offer not only different pricing but completely different products—even between nearby locations like Boston, Waltham, Methuen, or Manchester,” says Strimling.

On the back end, the software also helps the company figure out how to price pellets by region, and how to predict regional demand and make sure there’s adequate supply. The software needs to be surprisingly sophisticated to manage both “inbound” logistics (from pellet mills to the company) and “outbound” logistics (from the company to end consumers). “Most retailers have inbound logistics but don’t have much in the way of outbound, since they have people coming into their stores,” says Strimling. “We are actually a delivery service, so we have an inbound and an outbound leg, and those two are not decoupled, which I think makes us unique.” The patent application that WoodPellets.com has filed on Wang’s algorithms contains more than 100 claims, he says.

The 40-employee company expanded its delivery business five-fold in 2008 and has continued to grow strongly through the recession, Strimling says. Its service area ranges from Maryland to Maine on the East Coast and inland to Pennsylvania, Ohio, and Michigan. On the West Coast, it can deliver to Northern California, Oregon, Washington, and parts of Canada. The company also partners with dozens of pellet stove retailers, directing site visitors to local installers, who in turn send their customers back to WoodPellets.com to buy pellets. “They want to sell stoves and we want to sell fuel, so the two go together like peanut butter and jelly,” says Strimling.

Liam Donohue, a partner at .406 Ventures who sits on the company’s board, says his firm was attracted to WoodPellets.com “because the core bet is on the successful application of a technology-enabled business model to a proven green technology.” He says the company’s logistics software “solves a surprisingly complicated quoting and distribution problem,” giving the company a big edge over other wood pellet distributors.

Moreover, Donohue thinks WoodPellets.com is poised to benefit from several long-term trends, including the increasing cost of fossil fuels, the drive for independence from foreign petroleum sources, and a combination of regulatory pressure and consumer desire to move toward renewable and carbon-neutral energy sources. “Driven by the same trends, only a few years earlier, Europe has rapidly adopted wood pellet heat—which we saw as a particularly compelling precedent market,” Donohue says.

Even if other suppliers were to catch up on the software side, WoodPellets.com is investing in product development that could continue to give it a (wooden) leg up. Specifically, Strimling says the company is designing storage and transfer systems that would allow consumers to store wood pellets in large bins connected directly to their stoves. Such systems would save stove owners from having to haul pellets around by hand, and would allow WoodPellets.com to deliver pellets more cheaply, by blowing them from trucks into the bins using pneumatic pressure.

The details of the company’s storage and conveyor designs are still secret, but “much of this has been piloted in Europe, so we have a great precedent to follow,” Strimling emphasizes. “The systems have been worked out and proven—it’s more a matter of adapting it to U.S. markets.”

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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  • russell barnes

    Saw dust maybe cheap but it is not in unlimited supply. Meanwhile sawmills a working hard to reduce the amount of sawdust they produce by using thin kerf saw technology. Sawmills make money producing lumber not dust. Forest residue (branches and tops) is not suitable for pellets. Pellets need stem wood which must be debarked in order to make a quailty pellet. this competes in some areas with the pulp mills. Pulpwood grade material is a byproduct of sawlog production. The point of all this is that the raw material for pellets maybe cheap now but it will go up.

  • http://www.woodpellets.com Jude

    Actually, you can make pellets out of all sorts of “waste wood” or “slash wood” including limbs and tree-tops (search Google for “wood pellets” and “slash” for abundant sources). Its a matter of drying your source material, getting the ash-content low enough, and BTUs high enough. If you can make an efficient pellet that meets the standards of the Pellet Fuels Institute – why waste all that biomass (see PFI Standards here: http://pelletheat.org/3/institute/standards/PFI%20Standards.pdf)? Otherwise, it just rots and releases gases into the atmosphere in landfills & dumps.
    Pellets are being made out of all sorts of materials including algae, coffee and nut shell waste – you name it. We’re all for it.

    Jude Augusta
    Director of Business Development
    http://www.woodpellets.com
    Wood Pellets Online Delivered Nationwide.

  • http://www.shopvacparts.com shop vac parts

    i know the amount of saw dust i collect in my workshop is pretty impressive. i wish there were a way to donate it so that it could be recycled into fuel. it’s a shame that it just takes up space in a landfill