Deal to Watch: Seeking Trustworthy Partners in Recycling

Key Stats:

Summary

The Tradefox 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. 

Tradefox is aimed at tackling some of the greatest information and logistical challenges that traders in scrap are dealing with today, set up by Chris Yerbey, an industry veteran with over 22 years of experience in the recycling and waste business.   

Through its digital platform, the company is paving the way to creating a greater degree of stability in the space by offering a system that tracks the performance and honesty of players in the industry.

Problem

The recycling industry is significant in size, but with that size comes certain challenges.  One of these is that the players in the space, who trade with others for mutual benefit, have to worry about fraud, incorrect information, and all-around bad actors.  This is particularly worrisome when a trader goes to do business with a company it has never done business with before. What’s more, because scrap trading occurs on a global scale, even in instances where a bona fide case does develop the fact that so many counterparties operate internationally can make pursuing wrongdoers difficult, expensive, and time-consuming.  In one survey that Tradefox conducted in 2016, where it spoke with 187 buyers, sellers, and brokers/traders, it found that 80% of said parties said that it’s difficult to find trustworthy new trading partners.

Solution

To address these concerns, Yerbey founded Scrap Connections, dba Tradefox.  Working as an online platform, the company has created over 110,000 company profiles that its users can sift through.  Throughout 2019 alone, the business also downloaded more than 1 million shipments, worth over $30 billion in value, to its roster.  In each case, the firm keeps track of what gets shipped and through its system, it creates detailed “Trade Reputation” reports that its users can download.  Any bad actors, eventually, will get reported and other traders will see to avoid them in favor of working with companies with high trade reputations. One way Tradefox likened it to how credit reports work with consumers.  

The business model employed by Tradefox is relatively straightforward.  The company charges its users a $195 setup fee, plus it enrolls them in monthly plans.  All users, irrespective of plan, can look through all of the company profiles in the firm’s database, but the higher-tiered subscriptions offer a larger number of trade reputation reports that can be downloaded in any given month.  The Basic Plan, set at $55 per month, allows for 20 trade reputation reports to be downloaded every month. The Plus Plan, priced at $125 per month, allows for 50, and the Pro Plan, at $195, allows up to 100. All members also have access to a messaging app for connecting members with one another, and the firm curates industry news and events to keep the scrapping industry’s participants up to date on anything that’s noteworthy.

Moving forward, management does have plans for additional revenue streams besides the subscriptions.  In time, the company intends to offer access to trade finance partners in its service to make it easier for businesses to facilitate transactions.  The goal here is to collect a fee from these transactions of between 0.25% and 0.50%. When shipping arrangements are also booked through its platform, it intends to charge a 0.25% fee as well.  In 2020, Tradefox intends to launch its SureTrade System. Specifics have not been offered on this, but the company said that it intends to charge 0.10% on any transactions enacted through it.  

The Market

The scrap recycling industry is large and global in nature.  In 2017, the US alone exported 38 million tons of the 110 million tons of products and consumed 130 million tons of recycled end-products, ranging from scrap metal to paper, plastics, electronics, textiles, glass, rubber, and more.  The largest components on the consumption front happen to be iron and steel, accounting for 66 million tons, paper at 46.1 million tons, and 110 million tires.  Total economic activity in the US alone was worth $117 billion and the industry as a whole added $13.2 billion in federal, state, and local tax revenue to the US government.  

Throughout the US alone, there are estimated to be more than 8 thousand recycling facilities and each year the country consumes more than 130 million tons of recycled products, with over 80% of those consumed at home.  Recycling in the US is a great way to not only reduce mining and other similar activities but to reduce energy consumption and greenhouse gas emissions. Each year, recycling that’s done in the US is estimated to save the carbon dioxide equivalent of 410 million tons of emissions, the equivalent consumption of more than 43 million homes each year.  Since 2000, net exports of scrap from the US (with the largest destination being China) was responsible for an aggregate positive contribution to the US balance of trade to the tune of $235 billion.

On a global scale, the picture is even larger.  Each year, 800 million tons of scrap is recycled.  According to one source, in 2017 alone, the global recycling space totaled $265 billion in size.  By 2024, this number is expected to rise to nearly $377 billion, representing an annualized growth rate of almost 5.2%.  

It is worth mentioning that there are other players already in this space, but these are largely disparate players like shipping companies and other business data providers.  In the image below, you can see management’s plan is to aggregate the roles/functions provided by many of these loosely-connected companies and to offer their service as a comprehensive provider to the traders and other parties within the space.  

Terms of the Deal

The transaction being proposed by the management team at Tradefox is not too complicated, but it’s also not the easiest to understand.  The firm, at this time, is trying to raise up to $1.07 million, with a minimum close of $50,000 and a minimum investment per person of $200.  In exchange for an investment, participants in the deal will receive a SAFE, which is essentially a convertible note that bears no interest expense but that, in this case, will allow the units to be converted into ownership into the business at a 15% discount to the valuation the company receives at its next equity raise.  This is subject to a $7 million valuation cap, but for the first $150,000 contributed, the company will lower the valuation cap to $6.5 million.  

Instead of receiving common stock (which would only happen in the event of an IPO), holders of the SAFE will receive preferred stock in the company.  These units will not have any voting rights. Instead, the executives of the company will control those. Some special rights exist for investors making a commitment of at least $25,000, but those are customary for the industry and won’t, naturally, apply to most investors allocating capital to the firm.  All preferred investors subject to the valuation cap will also receive dividend rights, but the probability of the business, at this early stage in the game, paying out distributions is next to zero. At the time this article was written, investors have already committed $24,520 to the business as part of this raise, but there is still plenty of time to go.  The offering deadline is January 17th of 2020, and upon reaching the minimum threshold of $50,000, the business has the right to start collecting the cash pledged to it. 

Management

Chris Yerbey, Tradefox’s founder and CEO, has around 22 years of experience in the recycling/waste industry.  Prior to his time working on the concept (which he began in 2011 and continued to iterate with over time), he served as the co-founder and CEO of Trucking Jobs, a web-based job search engine for the US trucking industry.  Prior to that, from 1997 through 2007, he ran a company called Environmental Waste Consultants where, as the name suggests, he advised companies on how to handle waste and waste-related issues. The second major individual within the firm is David Kelly, Tradefox’s CTO.  Prior to his time at Tradefox, he worked as the Lead Developer and Architect at Give.it, a social gifting platform where he performed back-end development and, prior to that, he was a self-employed contract developer from 2005 through 2011. While serving his role at Tradefox, he is also the CEO of Futures Bright B.V., a company that works with other startups.

Rating

After evaluating everything provided by Tradefox, we have rated the company and its team as a Deal To Watch.  The company has an interesting value proposition with attractive prospects, should they get everything right, the industry is large, robust, and growing at a quick pace.  As economies become more environmentally-conscious, there should also be catalysts set up to encourage even more recycling than what occurs today and while we did not find any evidence supporting management’s claim that they can save recyclers/scrap traders, in aggregate, $200 million per year, it’s not hard to imagine that claim coming true if the company becomes large enough.  What’s more is that the software nature of the business opens the door, potentially, to strong margins over time.

There are, however, many risks that investors need to be aware of.  First and foremost is just how long it has taken the company to get up and running.  Founded in 2011, and having gone through different business iterations, it has been a slow start for the firm.  Over the years, the company has raised nearly $1.75 million, but it does not have a strong operating performance at this time.  As of the end of its latest fiscal year (2018), the firm had cash and cash equivalents on hand worth $337,154, meaning that it has some nice runway, but in that same year, it  generated revenue of just $16,172, up only modestly from the $9,960 in revenue generated a year earlier. Net losses in 2017 and 2018 were $209,220 and $410,203, respectively, and operating cash outflows were $301,078 and $423,840 over those same respective timeframes.  

Net losses should be expected for any early-stage, fast-growing business, but even as the company has worked to find itself a space in the market, sales as low as what has been demonstrated here is discouraging, to say the least.  Moving forward, management will have to ramp up its revenue to really warrant any meaningful valuation and become a viable company, and if this does not happen eventually, the firm won’t be around for the long run.  

Other risks in this space are numerous, ranging from economic volatility affecting the global trade of scrap to company-specific issues like an even better competitor arising.  Of course, this can be said of other companies in other spaces as well, but in any sort of software enterprise, the objective is to create a moat of clients that see the particular service as invaluable, and Tradefox has not achieved that kind of scale just yet.