August 28, 2012 | Nicola Kerslake

As an investor, there are few things more wretched than seeing a good business plan sullied by the phrase “pending regulatory approval”.  Though a handful of investors view regulatory reliant deals as a specialty, most see it as the cause of expensive delays and compromises.  For instance, regulation was long cited as a reason for the slow scale up of urban agriculture businesses, at least until entrepreneurs began to make progress in untangling the web of zoning codes in cities such as Philadelphia and Chicago over the past few years. As a consequence, business plans that require novel regulatory approval are typically passed over by investors.

One sustainable aquaculture firm, Long Beach, CA based KZO Sea Farms, has turned this issue to its advantage, viewing its recent regulatory approval to farm shellfish in federal waters as a substantial barrier to entry against potential competitors. The Army Corps of Engineers granted KZO a provisional permit to farm last month, leaving only California Coastal Commission approval as a hurdle to the start of operations. It plans an initial pilot 100-acre Mediterranean mussel and Pacific oyster farm, and hopes to expand operations to 1,000-acres over time.  KZO’s efforts are timely; local seafood is the zeitgeist, global demand for seafood is rising, and there are signs of a mergers and acquisitions revival in the industry.

KZO’s CEO is serial entrepreneur Phil Cruver, who first became interested in sustainable shellfish when he stumbled upon the USC Wrigley Institute of Environmental Studies while tooling around Santa Catalina Island on his boat around seven years’ ago. Chatting with Dennis Hedgecock, Cruver discovered that the USC Professor had developed hybrid shellfish varieties. “They grow to twice the size of regular stock in half the time,” he notes. This spurred the six-time entrepreneur, whose last Valhalla Partners-backed venture is now run by his son Wes, to take a closer look at the sustainable aquaculture sector.

Offshore shellfish farming has long been touted as a solution to the dwindling of natural stocks in the face of ever-rising global shellfish demand; the United States already imports over 85%[1] of the seafood that it consumes. Offshore shellfish farms are in operation in Japan, Canada and off the East coast, but obtaining the necessary regulatory approvals has never been an easy task for US entrepreneurs. In 2010, Marthas Vineyard Shellfish Group described the Massachusetts permitting process as an “unreal ordeal” for example[2].

KZO’s approach combined three factors: research, partnerships and patience. Working with his partner Debbie Johnson, Cruver established KZO Education, a non-profit that is restoring native Olympia Oyster populations in Southern California’s Jack Dunster Marine Biological Reserve. “It gave us great insight into current research on sustainability in shellfish populations,” noted Cruver. Through this work, Cruver came to know a quorum of the leading scientists and companies in the field, and eventually partnered with Santa Barbara Mariculture to create KZO Sea Farms. “They have a nine year history of successful oyster, mussel and rock scallop production and share our passion for open ocean farming,” added Cruver.

When NOAA, the aquaculture-focused government agency, issued a landmark report last year, KZO saw its opportunity to move forward. The group was prepared for a long, tough approval process. “Projects in Washington State and the Bay Area had each received over 25,000 comments, so we were prepared for an onslaught,” recalled Cruver. Their plan received the blessing of scientific, business, non-profit and political communities before it was submitted. In fact, the proposal received only one negative comment.

It likely helped that farming shellfish, especially in high tide areas, is a good deal less controversial than fish farms. Shellfish are, of course, “the grazers of the sea”, playing a vital part in a sea’s health by cycling nutrients. Their cultivation doesn’t require the additives common in fish farms. Developing greater local supplies means fewer food miles and fresher food. Given this, pressure groups that oppose fish farming, such as Food and Water Watch, are fans of offshore shellfish farms.

With the permitting process underway, KZO’s attention is now focused on its business model. The team is starting a fundraise of around $3 million, which will cover operations up to 1,000-acres. They’ve also begun discussions with distributors and boat manufacturers. “I have a dozen meetings set up with potential investors over coming weeks,” mentions Cruver, and he will be one of the few sustainable aquaculture entrepreneurs entering those meetings with regulations on his side.