Deal to Watch: Carbon Sequestering through Rewards

Key Stats:

Summary

The UCapture team has been selected as a “Deal to Watch” by KingsCrowd. This distinction is reserved for deals selected into the top 10%-20% of our due diligence funnel. If you have questions regarding our deal diligence and selection methodology, please reach out to hello@kingscrowd.com.

Problem

Climate change is real, and it is going to have a noticeable impact on our ways of life. What society does about it over the next several years will have big implications for those who come after us. Many companies are seeking unique and value-adding methods to address these challenges while staying profitable. Established companies may find it difficult to change their practices, but environmentally-conscious consumers are increasingly seeking to see green behaviors. UCapture is seeking to unite these customers with online retailers to offset carbon and foster a winning situation for all parties involved.

Solution

At its core, UCapture is a simple company operating with a simple concept. Many consumers are already aware of rewards/loyalty systems. According to one study, back in 2015, 84% of businesses in the US offered some form of reward or loyalty system to their customers. For consumers, the end result is more bang for their buck. For companies offering the reward/loyalty services, the end result is more traffic from happy customers.

Instead of offering a traditional reward/loyalty service, UCapture is adding a twist. When users shop online using its browser extension, partner sites grant customers special deals. A commission payment is made to UCapture for every purchase completed on one of their partner sites. Two-thirds of that payment, then, is dedicated to verified carbon offset projects. As of this writing, management claims to have arrangements in place with more than 25,000 online stores, including familiar names like Expedia and Target. The current platform also enables users to directly invest in carbon offset projects of their choice.

Browser extensions are only the first phase for UCapture. In the future, it intends to launch an app that will allow mobile ordering with the same model as their extension while also offering an arcade of mobile games. Furthermore, the company plans to launch a system allowing users to link their physical debit/credit cards and benefit from the UCapture model in more than 20,000 brick and mortar retail locations. Another source of revenue which UCapture wants to pursue is white-labeling its services for partners, and they have already signed a contract with EnergyAustralia for this goal. UCapture claims that this will lead to 30,000 signups initially, bringing in annualized sales of $100,000 alone. At some point in time, the business also hopes to launch a rewards credit card, as well as other payment services, that it should be able to monetize. The rewards credit card feature is already in development with Bankia FinTech accelerator.

Since its inception, UCapture has seen growth, but not much of it. In 2018, the company’s sales were just $9,284, and it generated a net loss of $172,582. Its operating cash flows were even worse, coming in at a negative $194,672. Last year, the picture did improve some. For 2019, sales totaled $26,610. Net losses for that period were $137,327 while cash outflows were $85,727. This bottom-line improvement is excellent to see, but investors are unlikely to be happy with such slow revenue expansion.

A Niche Market

The market in which UCapture operates can be difficult to assess. According to one source, back in 2015 the global market for customer loyalty was estimated to be worth $90 billion. This evaluation was for non-cash rewards, with travel being the largest category at more than $14 billion. Non-cash rewards can be a simple expense for businesses to cover because deals negotiated between providers are often at discounts to the retail value of those services.

From a cash-back perspective, the data is a little inconclusive. One source pegs the market at about $6.8 billion for 2019. That same source stated that the growth rate in this space is forecasted to average 10.1% per annum through at least 2024, when it should reach around $10.9 billion in size. Another source, meanwhile, implies that we’re dealing with a much smaller market. It places the global industry at $1.99 billion for 2019. The customer loyalty segment of this is $1.33 billion in size, or nearly 67%. Though this is incredibly small compared to what the other source estimates, it is estimated that the industry is growing at a rate of 16.9% per annum. If this holds true, then by 2025 the market should reach $6.96 billion in size.

Terms of the Deal

In order to raise money to continue growing, the management team at UCapture is trying to close the sale of some convertible notes. According to the firm’s filings, it’s accepting investments of $1,000 or more per participant. In exchange, investors receive a note that will carry a 5% interest rate per year. These notes have a term of 36 months, and they convert into equity subject to a valuation cap of $4.75 million and at a discount to the next incoming equity of 20%. The minimum the company must receive in the way of commitments is $200,000, but its target raise is a full $750,000. As of this writing, the company has $106,655 contributed to its raise.

An Eye on Management

At the core of the UCapture team are its two founders: Avery Michaelson and Mark Siadat. Michaelson serves as the company’s CEO. Prior to starting the business, he was a founding partner of Longitude Solutions, a consulting firm focused on longevity risk hedging solutions. Before that, he worked as a Senior Marketing Manager at CRYPTALGO, a cryptocurrency trading platform. Siadat, meanwhile, serves as UCapture’s CTO today. He, too, once worked at Longitude Solutions, but only as an Associate. Prior to his time there, he was a Software Developer at DriveTime, and before that he held the same post at TIPSY.

Rating

Since its founding, UCapture has done well to generate some level of success as measured by sales. The company’s social mission is inspiring, and its overall concept is attractive. For all of these reasons, the firm has been rated a Deal to Watch by our team. Sales growth from 2018 to 2019 is part of the reason for this rating, as is the interesting and dynamic business model. Factor in social pressures that could lead to widespread adoption down the road, and it’s hard not to like what management is making here. That said, there are some negatives that need to be taken into consideration.

The first of these is just how much money the company is still losing. Though losses have slowed compared to 2018, they are still significant, especially in relation to sales. Another hurdle to overcome is the commitment for two-thirds of funds to be allocated toward carbon offset projects. Any company that pledges to give away the majority of its revenue is already placing itself in a tough spot. Revenue is vital early on in order to grow and cutting off a stream of sales for a social mission is a tough sell. Even so, the good here appears strong enough that the business at least warrants some real consideration from investors.