The landscaping industry is extremely physically intensive.  On average, 45% of the revenue that comes in goes to cover labor costs.  That alone is cause for companies to be on the lookout for ways that technology can bring expenses down, but that’s only the tip of the iceberg.  In addition to labor costs, there’s the fact that there’s a labor shortage in the market, with 56% of firms identifying quality labor capture as a factor that is hindering growth at a time when the overall demand for landscaping services has, in the five years ending this year, grown at a CAGR of 4.4%.

There are, of course, other factors as well that should make technological innovation welcomed by the industry as a whole.  47% of firms in the space have identified high fuel costs as a major concern today, and 44% of firms have listed competition from “low-ball” bidders as a problem.  36% of industry participants have said that they have difficulty raising prices, likely due to the other aforementioned challenges they are facing.

So bad has the problem of labor gotten for the industry that over the past three years, an estimated 24% of employers have had to resort to hiring workers coming into the US from other nations through the H-2B visa program.  It is worth noting though, that while this has created headaches for the operators in the industry, it has not stopped them from being profitable, if only marginally so.  In 2017, a full 87% of landscaping firms reported generating a profit for the year, but with a profit margin, on average, of just 7%.

Recognizing the opportunity in this space, founder and CEO John Vlay decided to start Graze, a company created with the expressed aim of building and selling autonomous mowers for the more than 500 thousand businesses in the landscaping industry.  In the image above, you can see the prototype of the device, while in the image below you can see the end product as envisioned by management.

This device, upon completion, will not only be autonomous as management described it, meaning that it will be capable of mowing lawns without human assistance, it will also be all-electric/solar powered.  In a hypothetical scenario where a particular job would normally require four employees, management insists that the unit will be able to replace two of those positions, leaving the two employees remaining to perform more detailed work like hedge trimming or weed-pulling.  The end result: a 50% reduction in labor costs.

The revenue model adopted by management is simple and straightforward.  According to the firm, it intends to sell its mowers at a price of $30,000 apiece, plus to offer the autonomous features through a SaaS approach at a price of $12,000 per year for each machine.  For each unit sold, and assuming the client agrees to a five-year contract, this translates to $90,000 in revenue per mower over the contract period.

Though this sounds like a tall order in a low-margin environment, most commercial mowers range in price between $5,000 and $15,000 apiece already, plus management touted potential fuel savings of between $3,000 and $5,000 per annum.  Assuming the high-end price for a competitive mower, plus the mid-point for fuel savings, this brings a customer to an excess cost over five years of $55,000. Split between two employees at the $14.90 per hour mean wage and the breakeven point for one mower would be reducing labor time by 370 hours per employee each year.

Already, management has succeeded in attracting some of the big players in this space.  Two of the top 15 companies in the industry, LandCare, and Mainscape, have already allegedly entered into LOIs (letters of intent) to acquire, in aggregate, 400 mowers from the company once it finishes development and prepares to ship them out.  If all goes well, it’s worth remembering that the two businesses own, combined, 1,400 mowers. While these current deals, under a five-year contract, are worth an estimated $36 million, meeting the needs of both of these clients for all of their mowers would be a $126 million opportunity.

The lawn care market was an impressive $93 billion last year.  This year, it’s expected to grow to $99 billion.  About 1.09 million individuals work in this space and with over 500 thousand companies operating here, it’s clear that the industry is highly fragmented.  Even the largest players comprise only a fraction of the industry. According to Lawn & Landscape, the top 100 firms in the landscaping space employed less than 9% of the applicable labor force and generated $10.2 billion in sales combined (or about 10.3% of all revenue brought in).  The largest firm, BrightView, was responsible for $2.35 billion in sales with around 22 thousand people employed under its banner.

As can be expected in a space this large, the significant number of small players has created a significant disparity between mean and median sales.  Median sales for the industry averaged only $287,000 in 2017 (no data is available for 2018 yet), while mean sales were an impressive $1.1 million.  Despite how fragmented the space is, a full 24% of participants brought in gross revenue last year in excess of $1 million, while another 14% brought in sales of between $500,000 and $1 million.  It is also worth mentioning that the companies that do perform well in this space often stay open for the long haul, with the average age of a company in the industry at about 19 years. A full 22% of businesses in the industry were more than 30 years old though.  The actual size of the commercial mowers market in the US is about $2.1 billion ($5.2 billion globally), but it, like the broader landscaping market, is likely to continue growing at a nice clip for the foreseeable future.  Strong growth is being propelled largely by two factors: an aging population and a populace of young professionals who would prefer to pay another party to do that work for them as opposed to allocating the 70 hours per year to yard work that the average American does already.  Though management has said that it will focus on the autonomous mower first, it expects to use that as a basis for an industry-changing platform that will be compatible with other landscaping tools like a leaf blower and snow machine add-ons, as well as an eventual tree-trimming device it calls a spider bot.  This will take the firm from the niche commercial mower space to the much-broader landscaping equipment space that’s estimated to be $12 billion in size in the US and $23 billion in size globally.

It is important to keep in mind that while the market opportunity here is attractive, Graze isn’t exactly the first-mover.  The company says that it is providing one of the world’s first, fully-autonomous, electric mowers, but the key words in that are “one of”.  Though most of its rivals do not seem to be focused on the commercial side of the industry, for now, there are a number of robotic mowers, like the Worx Landroid, the Husqvarna Automower 450X (and other versions under that brand), and others, that focus more on the residential side of the equation.  One model worth mentioning is the BigMow which, unlike the residential models that consistently mow between one-fourth of an acre and a couple of acres in one go, is capable of handling five acres.  iRobot, the maker of the Roomba, earlier this year announced its own take on the robotic mower, the Terra. The bottom line is that there are several competitors in the space, all moving in one direction, but the firms that can tackle the demands of the commercial side are all still racing to establish themselves in a rather sizable market.

Having a quality management team is of the utmost importance in order for most startups to succeed.  This holds true especially for a technology-reliant firm like Graze. The firm’s founder and CEO, John Vlay, led Jensen Landscape as its Chairman, CEO and President for 11 of the 35 years he worked there.  He also designed/built one of San Francisco Bay Area’s first green roofs at The GAP headquarters and oversaw the iconic California Academy of Sciences two-and-a-half acre green roof in Golden Gate Park.

After Jensen was acquired by Monarch Landscape in 2016, Vlay oversaw safety for Monarch’s six rollup companies and worked with that firm’s CEO on acquisition prospects. He also has extensive experience in consulting.  The only other individual listed to be working at the firm today is Roman Flores, Graze’s CTO. Flores was recruited out of high school to work for NASA at the age of 17. He was tasked with designing extraterrestrial exploration vehicles and technologies, including for both static and dynamic landing platforms for the Curiosity Mars Rover.

After more than a decade with NASA, he went into other engineering, establishing a reputation for himself over 20 years in custom mechanical engineering design and racking up more than 10 patents under his name in the process.

The terms of the Graze deal are relatively straightforward.  In exchange for a cash investment (with a $1,000 minimum per investor), participants will receive shares of Series A Preferred stock.  Each share will entitle its holder to the same vote that a common share would entitle them to. In all, the company is looking to raise at least $2 million in funding, but the target they hope to achieve is $10 million.  Irrespective of the amount raised, management has set a $25 million pre-money valuation on the business. In this raise, it has not been revealed how much has already been committed, since the company is in the stage of accepting reservations from prospective investors.

The team at Graze has been granted a rating of “Deal to Watch”.  The opportunity, as expressed by not only the significant market size but the impact the firm’s innovations could have on the industry, is compelling. It’s hard not to like the opportunity, given the growth rate experienced in this space, the fact that labor is constraining expansion, and that the product and service offered by Graze would very likely help to improve this low-margin space while creating a reliable stream of income for shareholders.   Having said that, there are certain risks investors should be cognizant of.

For starters: while management has touted two large LOIs with industry-leaders, there are no guarantees as to their terms and/or if they can be backed out of.  LOIs’ are rarely binding. Another risk investors should be aware of is that Graze isn’t truly a first-mover, even though the way it tackles the space might be unique, competition is always a threat and some of the firms out there that could compete with their offerings are far larger than they are.  Add to this the goal expressed by management to move from the prototype phase today to shipping out final versions of the product next year, and while that isn’t impossible, it does provide a short period of time during which the business is expected to finalize its current round.

Though not illegal, there was a major red flag that flashed during the due diligence phase that investors should be aware of: loose hands by management with cash.  Of the more than $300k contributed to the business by Vlay, a loan was made by the firm in the amount of $250k to Wavemaker Partners, the firm’s lead investor that has over $335 million in AUM under its belt.  Initially, the loan was slated to be short-term, payable in October of last year, and it bore an interest rate of 6% per annum. Management claimed it did not need the capital at the time and extended it to be due (with interest accruing but uncapitalized) in October of 2020.  However, in 2019 so far, the company has received loans in the amount of nearly $200k from a related party (perhaps Wavemaker, perhaps some other business or person affiliated with the business), with an annual interest rate of 3%.

Financially, this is a wise set of moves to make since it will permit the firm the ability to effectively arbitrage on the basis of interest rates.  However, it is extraordinarily rare for a start-up to lend money and not to need cash at any given time. Add to this that, while it is perfectly fine for a business to receive a loan from its investors/insiders, the opposite is illegal for publicly-traded firms and is frowned on with private businesses because when assets become commingled with an insider’s, it can lead to fraud quite easily.

Analysis written by Daniel Jones on September 18, 2019.