Deal To Watch: Eco-Friendly Cleaning Products

Key Stats:

Summary

SunState Laboratories 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.

Cleaning products may not be the first thing that comes to mind when one thinks of entrepreneurial opportunities because not only is the market fairly developed, it’s also littered with multi-national competitors. These firms already have a firm grip on the market, and their economies of scale make them true challenges to go up against. One firm that is undaunted by these hurdles, though, is SunState Laboratories. The company, through its founder, has created a new type of cleaning product. With this innovation, management hopes that it can establish the firm as an attractive niche player in the market.

Problem

Cleaning products are a necessity in this day and age, but they are not clean in every sense of the word. The vast majority of cleaning products come in single-use plastic bottles, and much of this plastic ends up finding its way to landfills or the ocean. When considering that these containers also require the oil-intensive process of creating plastics, the current method of storing and delivering cleaning products leaves a lot to be desired.

Solution

To address these concerns, the management team at SunState Laboratories has created a new type of cleaning product. Instead of pouring its cleaning solutions into single-use bottles, it sells dissolvable tablets which management calls Dazz Cleaning Tablets. These tablets are then placed in any container of choice (including a reusable spray bottle the company sells). Upon contact with water, the tablet dissolves and creates the same type of cleaning formula that’s used in everyday households.

Since its inception in 2012, the company has experimented with a variety of mixes, and it has three different products as a result. One of these is an all-purpose cleaning mix. Another one focuses on bathrooms only, and the third is meant for use on glass. According to management, SunState Laboratories has another seven offerings in development, but the timeframe for their completion is currently unknown.

At one point in time, the company managed to get its products on the Home Shopping Network, resulting in the sale of 12,000 units in under 11 minutes. With the average cost of manufacturing the product being $0.10, it might seem like landing sales is a cinch, but this has not always been the case. In 2017, the company’s revenue totaled just $16,491. In 2018, this actually shrank to $10,623. Over that two-year period, net income in aggregate was -$62,181, while operating cash flow was -$45,988.

Though the past has been tough, things look to be improving for SunState. Although financial results for 2019 have not yet been provided by management, the company did say that as of January of 2020 its monthly revenue was averaging $4,300. That figure would translate to $51,600 in annual sales if nothing changes moving forward. At the same time, though, the company’s monthly cost of goods sold are averaging $1,032, while operational expenses are averaging $4,395. Taken together, these numbers bring SunState to an annualized loss of $13,524.

A Mature but Steadily Growing Market

The market that SunState operates in is quite large. According to one source, the global market for cleaning products stands at $31.1 billion. Furthermore, it’s estimated that between 2019 and 2025, the annualized growth rate in the space will average 4.4%. This rate implies a market size of around $40.2 billion by 2025. Though market size estimates vary, this growth rate is largely consistent with other sources as well. One source, for instance, estimates that between 2019 and 2024, the global market for cleaning products will expand by $15.7 billion, which translates to an annualized growth rate of 5%. Of the growth experienced, 40% will come from APAC (the Asia/Pacific region). Another source pegs the market today at about $20.2 billion in size. It forecasts annual growth of around 4.8%. The surface cleaners subcategory should grow even faster at 5.2% per annum. That same source believes that the global market for the industry will expand to $40.7 billion by 2025. Growth in the US will be fairly slow at only 3.7% per annum. In China, however, annualized growth will be more than double that at 7.6%.

To further distinguish itself from the competition, management has emphasized its e-commerce sales. It sees this direct-to-consumer strategy as a logical differentiator. For starters, only between 5% and 6% of sales in this space are direct-to-consumer. The rest are conducted through brick-and-mortar, which is dominated by a few large participants. As the world becomes more digital, it stands to reason that direct-to-consumer will become more vital. The fact that market penetration here is so small is telling. However, it also represents an opportunity for the appropriate players to shake things up. SunState’s innovation may make it the right horse to bet on here.

Terms of the Deal

The deal being transacted by SunState is fairly straightforward. In exchange for cash, the company is issuing preferred units to individuals. These units are priced at $5 apiece, but the minimum investment per participant has been set at $100. Capital is being raised at a $5 million pre-money valuation. The firm’s goal is to raise between $100,000 and $1.07 million from this initiative. As of this writing, the business has far surpassed its minimum target. Total capital commitments currently stand at $589,460.

An Eye on Management

There really is only one founder behind SunState: David Shahan, the company’s CEO. Prior to his time working on the product, he served as the Regional VP of Jani-King, a cleaning company. Before that, he was an Owner-Certified Master Dry Cleaner for Press XPress. 

There are, however, two other integral members of the company. The first of these is Randall Hartman, who serves as SunState’s Director of Marketing. He is also currently the Interactive Director and founder of Groundwrk. Previously, he worked as the Director of Business Development and Accounts at Bhuv Designs, and prior to that he was the Director of New Business and Accounts at a firm called Zenman. 

The other top individual is Curtis Elliott, the company’s Brand and Design Manager. He is currently employed as the Senior Art Director at ChappelRoberts. Before that, he worked as Owner/Designer at Curtis Elliott Design and as the Art Director of eBay North America for Triad Retail Media.

The Rating: Deal To Watch

Upon reviewing SunState Laboratories, our team has rated the company a “Deal to Watch.” Its development and branding make a great deal of sense, and it is likely that management is onto something here. Although the cleaning product industry is mature, it’s still growing at a decent rate, especially internationally. The decision to compete using a direct-to-market model is logical and already helps to set the business apart from the competition. These are all excellent things, but there are some issues to consider as well.

The biggest thing here is just how slowly the company has grown until now. Founded in 2012, it has taken a while for the firm to approach $50,000 in sales annually. That slow growth makes the valuation for it tough to swallow. Another issue is that this is a very competitive market. The industry is controlled by a small number of large players. The prevalence of large companies might make SunState an attractive buyout target, but only if the firm can muscle its way into relevancy. All in all, SunState may face a tough outlook, but that doesn’t necessarily mean that investors shouldn’t consider it. If anything, now might finally be the time that it can achieve relevancy.