TerraCycle (August 2020)

Deal Abstract

https://www.startengine.com/terracycle

Profitable, double sustainable (financial and conservation) company that is raising money. Has been around for 14 years, and recently paid out an annual dividend of $2 on $100 purchase price. Confusing business model, but worth considering for anyone really passionate about recyclables.

Shoutout to J.V. for the tip!

Decision

Pass.

Why Investing/Passing

  1. It Isn’t Growing Fast Enough: It took 14 years to reach $13MM in sales with a $188k in profit in 2017. Revenue allegedly was $20MM in 2018 with $1.1M profit in 2018.
  2. I Don’t Understand the Business’ Core Growth Levers: “We have a complicated business model. Our business model is an aggregation of several types of business. We engage different parties at various stages of the production and consumption cycle. Part of our work resembles that of an agency, in that we seek out and contract with clients (the majority of which are consumer packaged goods companies) that make products (brands) and help them implement sustainability initiatives as part of their marketing objectives. At the same time, we engage a network of collectors who earn charity awards for their efforts in collecting wastes to be shipped to our processing partners’ facilities for recycling. In addition, we are an operations and logistics company and manage hundreds of thousands of pick-ups, check-ins, sorting, warehousing, recycling and delivery of recycled materials nationally. As we focus on many kinds of waste materials that are not commonly recycled (because they generally have not been economical to recycle), we also conduct robust research and development activities to evaluate waste streams and the cost of recycling before we price a collection/recycle program for a given waste stream. Our complex business model requires a high level of coordination and could expose us to operational risks.”
  3. Not My Lunch: Seems like a fine business for anyone who is building a green portfolio. That said, paying $2 dividend on a $100 share means 2% return, which doesn’t pass the return hurdle rate of low-fee index funds.

The 6 Calacanis Characteristics (91 161 18)

CheckPass/Fail
1. A startup that is based in SVFail: Trenton, NJ
2. Has at least 2 founders Fail: (1)
3. Has product in the market Pass
4. 6 months of continuous user growth or 6 months of revenue.Pass: 2018 revenue 602k and 2019 was 1.8MM.
5. Notable investors?Fail: None. Not just notable, but no mention of any investors.
6. Post-funding, will have 18 months of runway Success: The company is profitable and doesn’t need funding.

The 7 Thiel Questions (ETMPDDS)

  1. The Engineering question:
    • Good: the product seems to be good enough to turn recyclables profitable.
  2. The Timing question
    • Uncertain: I feel like the time to start green enterprises was the late 2000’s. That said, the business was founded in 2003,
  3. The monopoly question
    • Uncertain: Not sure how scalable this business is.
  4. The people question: 
    • Good on CEO, Bad on Team:We have one key executive upon which the company is highly dependent. We depend primarily on the skill and experience of Tom Szaky, our founder and CEO. If we are not able to call upon him for any reason, our operations and development could be harmed. Our parent company has a $15 million key man insurance policy in place for Tom, which would certainly support the company in finding one or more people to fill his big shoes.”
  5. The distribution question
    • Uncertain: See the timing question.
  6. The durability question
    • Good: boring businesses tend to be pretty durable.
  7. *What is the hopeful secret?: 
    • Now is the time to scale a green eco business model while acquiring businesses with complementary business models.

What has to go right for the startup to return money on investment:

  1. Omitted since I decided to pass.

What the Risks Are

  1. Omitted since I decided to pass.

Muhan’s Bonus Notes

The company seems like a fine portfolio for someone building a green/recyclables portfolio. But otherwise, it seems like a business that doesn’t need my capital and returns seem modest at 2%.

Financials (References)

  • Current Fundraised: $4.1MM in crowdfunding, $13MM in combined raise.
  • Will be worth $24MM with $20MM raised if maximum reached.

Updates

This is where I’ll post updates about the company. This way all my notes from offering to post-offering updates will be on one page. Also, somewhat of a dearth of materials (whose the team? where are the comments? why are the financials so opaque?)

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

Notice trends in how you think

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