Kapsul is on a mission to reinvent the concept of air conditioning.  It aims to offer premium smart products that monitor and control the temperature, humidity, and quality of air in your home

 Think of it as the Dyson of air conditioners. They are bringing high end design to an element of the home that has been disregarded for years.

Air Conditioning units have largely remained the same for the past 50 years in terms of size, technology, and design.  They are bulky and require multiple people to install the devices. They are noisy, outdated, and eyesores to their users.

Kapsul has worked to attack this problem by developing products that are sleek, quiet, and simple to use.

As demonstrated in the photos above, Kapsul products are about half the size of traditional models and much more modern than its competitors.  Moreover, the units are easily installable, controlled by a single knob, and are capable of connecting to Smart-home devices such as Amazon’s Alexa and Google Home.

The team at Kapsul has filed 8 patents to date and continues to explore ways to improve future models.

1.Market Opportunity

 As this graph highlights, the demand for air conditioners has gradually increased in recent years.  These positive trends can best be attributed to the continual increase in newly constructed houses/apartments as well as the need to replace existing units.  In addition, rising global temperatures have further bumped demand for air conditioner units. This market is incredibly large and offers great opportunity to the manufacturers of air conditioning units.  

Moreover, revenues in the smart home market are projected to grow immensely in the upcoming years. Advances in all aspects of home technology, from entertainment to lighting to security, suggest that great value can be extracted from these fields. As the benefits of network effects and integrated controls continue to grow rapidly, demand and revenues will match the growth pace.

Kapsul is uniquely positioned at the intersection of the air conditioner and smart home markets. With the promising outlooks in these markets, Kapsul can take advantage of being an early mover to really carve its role in the marketplace. As many young adults continue to move into urban areas with old apartments (especially rental ones), the market opportunity for Kapsul products is attractive. It is incredibly difficult to install central air conditioning in old buildings. 

2.Targeted Customer Base

Currently, the Kapsul product sells for $499.  The company projects that it will be able to obtain margins of 60% and retail margins of 40% when it is fully producing at scale — both are very healthy measures.

Kapsul understands that its more expensive products will not appeal to all participants in the markets presented above. A desire for low cost units and a reluctance to change will deter some customers from purchasing Kapsul products.

Thus, Kapsul has analyzed, and found, its targeted customer base.  Because its products are more expensive and design-centric, Kapsul aims to sell to affluent, urban, professional millennials.  The founder describes Kapsul customers as those who “have an affinity for brands such as Apple, Audi, Dyson, and Nest.”

 This customer base is willing to pay the premium for the better designed, smart product — 9,200 units were pre-sold by Kapsul directly to customers. These units were sold on Kickstarter, Indiegogo, and kapsulair.com. In the future, Kapsul plans to sell directly to customers through its own website and Amazon. Kapsul will also sell through third-party retailers including Home Depot, Bed Bath & Beyond, and Lowe’s. In addition, this customer base is likely to continue to grow in future years as more millennials and Gen-z’s enter the professional world.  

 Students and young professionals today grew up with ever-increasing smart technology and thus will continue to look for smart products in multiple aspects of life. Products that do not have smart features will grow stale. This narrow customer-base also enables Kapsul to be more effective in its advertising measures as the company only has to tailor its materials to this specific group of young adults.

While Kapsul faces stiff competition from companies like Frigidaire and Dyson, it is unlikely that these giants will devote immense resources to this small section of the market. In addition, the “smart” models of these companies still have the same appearance as the units from 50 years ago with the only addition being a wifi module.

3.Experienced Leadership Team

 The three main leaders of Kapsul bring years of experience and expertise to the company. Kurt Swanson, Founder and CEO, is a mechanical engineer who worked at Boeing and Likuma Labs.  Through these experiences, he cultivated his skills as an engineer in designing and envisioning products.  

Don Pancoe, CTO, specializes in connected device architecture and systems designs and he developed his skills after years at Amtrak and SEPTA. Chris Myers, COO, possesses over 20 years of experience in bringing new technology products to market and acquiring customers. He has transformed his work at Nordstrom and Best Buy into a 13X return on advertising expenditures for Kapsul.

In addition to these three leaders, the Kapsul team has highly capable engineers and employees that further aid in the design of products and the ability to transfer insights from the community into upgrades to the products. 

4. Acquisition Upside

If Kapsul can demonstrate its distinct advantages over competing products, the giants like Frigidaire and Dyson could be incentivized to acquire Kapsul. This would help provide a buffer for these companies that would allow them to innovate into the future while maintaining their firm grasps on traditional air conditioning units.

It would ensure that they do not fall behind while more technologically savvy competitors take advantage of the benefits of moving early.

 Dyson has already displayed a commitment to expand into new technology sectors as it put over $1.5 billion aside for future tech investments in 2014, acquired Jake Dyson’s LED lighting company, and has worked to develop “automatically smart” products.

In addition, smart home companies in other sectors like Nest Labs or Amazon could be incentivized to acquire Kapsul in order to more fluidly integrate home processes. Amazon has already ventured into smart-home acquisitions with its $1 billion acquisition of Ring, a startup that creates camera-equipped doorbells.

Samsung acquired SmartThings for $200 million, and the invested capital multiple was 12.9x. These acquisitions would serve as an advantage as customers prefer to have control under one system and the companies could share ideas across products. 

With large acquisition sizes and strong investment multiples we think Kapsul will be positioned well to capitalize on a large acquisition by appliance incumbents looking to compete in the rise of the smart home.

There are still concerns for Kapsul.  To begin, the company must comply with multiple regulations and standards. As mentioned in this article, difficulties surrounding energy-efficiency standards have already impacted Kapsul’s operations.  

These will likely continue to impede Kapsul’s success. Moreover, Kapsul has incurred losses greater than $2 million since the company’s inception. 

If the company cannot generate positive cash flow, and continue to bring on additional capital it is likely that the company will not be able to survive.

However, with most of these cost being related to R&D in order to go to market with a perfected product, our concerns around this issue are dampened. Finally, since the products have long economic lives (around 10 years), Kapsul will have to prove that it can continue to bring new customers to purchase its products and attract users to its software platform.  

The big question is, how big is the high end market for window unit air conditioners? We think there are several drivers such as more young professionals moving to urban centers where old buildings don’t contain central air, and the growth in ownership of smart home devices that will make it an attractive market, but questions do loom around upside potential nonetheless.

Recommendation: Deal To Watch

Kapsul offers a significant upgrade to current air conditioning units in terms of design, functionality, and technological advancements, and if the success of a company like Dyson is any reflection of the type of demand that can be driven by good design, we like the prospects of the business.

It presents great upside for investment as Kapsul can interrupt the market for air conditioning units with its targeted high-end smart home approach. However, Kapsul still needs to prove that it can overcome regulatory challenges and generate positive cash flows by making a strong go-to-market push.

 For these reasons, we think it is an attractive investment but still has some work to do in proving out customer demand.