Knightscope is conducting a Regulation A+ raise at this time. However, the company’s valuation for this round is set at $447 million. This is an extremely high valuation that is not justified by the company’s past revenue. In fact, that works out to nearly 148 times Knightscope’s revenue for 2019. With such an unjustifiably high valuation, investors may want to look twice before participating in this round.

The market opportunity for the global security market is sizable and growing. According to one source we found, the market will be worth about $102.4 billion this year. With an annualized growth rate of 10.3%, it should reach $167.1 billion by 2025. A second source pegged the market at $110 billion, with growth of 6.5% per annum pushing it to $171 billion by 2027. These both come close to the $165 billion market Knightscope expects the industry to grow to by 2025. However, a case could be made that the actual market for the firm is smaller.

Instead of looking at global security in a broad manner, we looked also at the global security robots market. This space is considerably smaller. According to one source, this year it should be worth just $2 billion. With an annualized growth rate of 8.56%, it should reach $2.37 billion by 2022. A second source we found pegged it at $2.45 billion this year. With growth of 7.93% per annum, it’s expected to expand to $3.59 billion by 2025. This niche market sector — where Knightscope clearly operates — is much smaller than the general security market. This limited market will also limit the company’s ability to grow and meet or exceed its overly high valuation amount.

The team running Knightscope is extensive in size. At the head of the business is its Chairman and CEO, William Santana Li. He is most definitely an industry expert. Previously, he was the Chairman and CEO of Carbon Motors, a company that built a specialized vehicle for law enforcement. There, he raised $50 million in financing and negotiated financing of around $540 million. Before that, he was President and CEO of Build-to-Order, an OEM provider in the build-to-order market. Another role he held was as President and CEO of Model E Corp. There he focused on building the Tritanium concept vehicle, and he pioneered the ‘subscribe and drive’ business model. A role he held before that was as Founder and COO of GreenLeaf, a company that became the second largest automotive recycler in the US. And before that, he was the Director of M&A at the Ford Motor Company. It goes without saying that these capital-raising and managerial roles for vehicle businesses make him a solid leader for this team.

Li is not the only relevant person at Knightscope. Another key person is Stacy Stephens, the business’ Chief Client Officer. His most relevant experience was as the VP and Chief Marketing Officer of Carbon Motors. In addition to him on the team, the company also has Mercedes Soria, Knightscope’s Chief Intelligence Officer. At present, she serves as a Technical Advisor for the Board of Autobound.ai. She has also had interesting roles at the US Department of State and on Forbes Technology Council. At the former, she was in the US Speaker Program, and at the latter she was an Official Member and Contributor. She also has an MBA from Emory University and she studied AI at MIT. These experiences with communications and AI makes her a solid CIO for a startup like Knightscope. 

Next in line is Aaron Lehnhardt, the Chief Design Officer for Knightscope. In the past, he served as the Owner of Lehnhardt Creative. That was a company that focused on the design, 3D modeling, and visualization of automotive and other projects. He was also the Chief Designer for Calmotors, as well as Senior Designer for Build-to-Order. This extensive design experience in a relevant market clearly qualifies him for this position. The final person worth mentioning on Knightscope’s team is Mallorie Burke, the business’ CFO. She has served as a financial executive and strategic advisor, both, for private and publicly-traded companies over the years. While employed, she has worked on M&As, turnaround projects, and more. 

Knightscope has a highly qualified team with many useful past experiences. This team is definitely one of Knightscope’s main strengths.

In evaluating this startup, it’s difficult to say that there is much differentiating it from some of its peers. That is not to say that there are no differentiating factors — they are just few in number. For instance, SMP Robotics also offers security robots. However, five of its six models are designed for gas leaks and perimeter inspection activities. This is as opposed to the wide range of crime-fighting activities Knightscope’s units are used for. Another competitor is Singapore-based OTSAW. This firm does have a four-wheel vehicle like Knightscope’s K7, and it does focus on crimes more generally. In addition, unlike Knightscope, OTSAW’s offering has a built-in drone that can be deployed for various reasons. The existence of these firms really leads us to conclude that the differentiation for Knightscope boils down to two things. The first is its focused portfolio for law enforcement. This is more extensive than what other competitors offer. Second would be that its products appear to be further along in development and generally more sophisticated than other offerings out there. However, these differentiators are not particularly impressive, especially considering there is ample room for another competitor to overtake Knightscope in either technology or the appeal to law enforcement.

For a company with a pre-money valuation of $447 million, you would expect a strong showing when it comes to performance. In some ways, this has proven to be the case. In October 2020, for instance, the company landed its first federal US contract. This particular contract is with the Department of Veteran’s Affairs. The company has done well to land other tests and contracts over the years as well. However, from what data is available, none of this has resulted in significant growth. Back in 2018, Knightscope generated sales of $2.94 million. In 2019, this grew just 2.9% to $3.03 million. Even with revenue doubling every year, this would be an expensive investment. But with such slow top-line growth, it’s scary. 

On the bottom line, things are in some ways worse. In 2018, Knightscope generated a net loss of $13.39 million. This did narrow some to a loss of $11.96 million in 2019. But that’s still a massive loss. What’s worse is that a sizable portion of these losses are expressed as cash outflows. Operating cash outflows for 2018 were $13.17 million. Last year, the figure was $8.52 million. As sales grow, the hope is that the business can capture economies of scale. But with growth coming in as sluggish as it has been, it could take several years before Knightscope achieves profitability. 

Though Knightscope has been around for years and has demonstrated its technology to be successful, there’s a lot to be bearish about. The valuation is unacceptably high. This is especially true when you consider its large net losses and cash outflows. Knightscope’s business model does seem to be sensible. Though even with the low cost of using one of its machines, it remains to be seen whether law enforcement budgets can make room for this new technology. In addition, the industry the company operates in is small and growing at a fairly slow pace. This will ultimately limit the company’s upside, especially for shareholders. 

Although there are a lot of negatives baked into Knightscope, there are some positives as well. Most clearly is the firm’s stupendous management team. The qualifications of each member cannot be understated. Add on the fact that the company does appear to be quite far along compared to the competitors that are out there, and it does have some things going for it. Revenue in excess of $3 million also is not something to scoff at, but relative to the firm’s valuation it is modest at best.

On the whole, Knightscope is an interesting company for sure. Long-term, the company does appear to have potential for growth, especially as a market leader. But when you consider all of the negatives associated with the firm, it’s difficult to be too flattering. It is because of all of its shortcomings that our team was forced to rate the company as an Underweight Deal. Because of this, it clearly warrants significant contemplation before investors decide to jump in. The upside could be there, but it comes with a great deal of risk attached to it.

For questions regarding the KingsCrowd staff pick or ratings for this company, please reach out to support@kingscrowd.com. 

Analysis written by Daniel Jones.