I didn’t really understand how Recompose, a service company with only $845,473 in revenue in 2022, could have a $76 million valuation. That gives it a steep 89.89x revenue-to-valuation multiple. So I asked founder Katrina Spade.

She explained that Recompose raised a total of $17 million over several rounds and several years. Recompose had to spend time and money lobbying for a few years before being legally allowed to operate. Still, $76 million is a very high valuation that is not attractive for investors. Even if the startup surely benefited from the valuation inflation during the COVID-19 pandemic, it would have been better to raise on a down round.

In order to evaluate this investment opportunity, investors must understand whether they can get a 10x on their investment. So let’s do some math.

Currently, Recompose has around 10 humans per vessel per month in its Seattle facility, which is the only one in the country. Each human takes one month to compost at a price of $7,000 per burial. Recompose generates monthly revenue of $70,000 and will need around 20 humans to break even at $140,000 in monthly revenue.

To get a 10x return at a realistic 5x revenue-to-valuation multiple, Recompose would need $152 million in yearly revenue. This means that the company would need to generate $12.8 million by composting 1,809 humans every month.

It is possible for Recompose to accomplish this if the company opens nine centers with 200-plus vessels each. There also are enough large cities across the country that would legally allow Recompose to operate. The company’s success will depend on whether Recompose can implement a good enough growth strategy to increase its traction faster than it has in the past.

Recompose is opening a new market. But in the death business, nobody can really increase demand (or that would require some serious police investigations). Jokes aside, being a startup with a brand-new offering that’s focused on a sensitive topic and generating fast growth is a tough challenge. But Recompose has a great climate-friendly and soil-friendly positioning that allows it to surf on market trends and take market share from the cremation market. In 2020, the U.S. cremation rate was 56.1%. In 2021, it reached 57.5%. By 2025, the cremation rate is projected to reach 64.1% in the U.S. and 81.8% in Canada. The projected cremation growth shows investors that there is a demand for cemetery-free funerals, which could help Recompose grow.

To understand the company’s market drivers, investors must look at Recompose’s typical clientele. I was pleasantly surprised to learn about the wide variety of reasons clients use Recompose’s services. Some clients choose Recompose to help mitigate climate change by sequestering carbon and preventing greenhouse gas emissions from cremation. Other clients who love the land, such as farmers, want to give back to the earth by improving soil health and biodiversity. Some simply choose Recompose as a way to freely choose their own funerals, move away from mainstream burials, and continue their anti-system ideas after death.

Recompose clients come from all over the country. Around 70% come from the company’s home state of Washington, while 30% are shipped to Recompose from the rest of the U.S. Human composting is allowed in only six states so far (mostly thanks to founder Katrina Spade’s efforts), but those states include large population hubs like New York and Los Angeles.

Recompose is well-positioned to be a strong, innovative, and beautiful alternative to cremation. Even if the human composting market is brand new and Recompose is a first mover, the company has strong potential to grow if it implements a successful marketing and growth strategy.

Recompose founder and CEO Katrina Spade impresses me. I like to find founders who are extremely passionate and committed to their startup. Their dedication to their mission usually helps them handle the ups and downs of leading a startup.

Katrina is a founder like no other, as you can read in her Founder Profile. She had the idea to launch a human composting funeral business before it was even legal in the U.S. To open the market, she found out that one of Washington state’s congressmen was setting up times for coffee chats with citizens. She met with him, lobbied, and Washington became the first state to allow human composting.

This is one of the best examples of scrappiness I’ve ever heard from a founder.

Katrina didn’t have any experience in the space, but she took it upon herself to learn, and the results are impressive. She not only grew an early stage startup, but also opened an entirely new market. She also has the right personality for the business that she leads. She is calm and respectful and gives a feeling of peacefulness around the sensitive focus of her business. In the death industry, it is important to build trust and ensure great customer service. Kristina is the right leader for Recompose.

Recompose offers a peaceful return to the earth while sequestering carbon, enhancing soil health, and allowing families to dispose of their loved ones’ bodies in a productive and regenerative way.

Recompose’s main competitors are common burial and cremation services, which can range from $800 to $12,000 depending on the location, the service, and the memorial. There is a service for every budget, and Recompose falls in the middle at $7,000. 

In the environmentally friendly funeral niche, green burials are a widespread method of burying a body in a biodegradable coffin in a dedicated spot of natural land. Costs range from $3,000 to $10,000.

I could find only one company that does human composting like Recompose: Return Home, which sells its human composting services for a base price of $4,950 in Auburn, Washington. However, the company has many fees for additional services that some could consider essential and that could easily bring the bill up to $7,000. For example, Return Homes charges a $500 fee for services offered on the weekends and a $1,000 fee on holidays. According to Recompose founder Katrina Spade, some Return Home customers decided to use Recompose because they were not satisfied with Return Home’s prices. It’s not hard to imagine why. In the time of grieving a loved one, having to calculate a hefty bill can be overwhelming.

Therefore, Recompose has real differentiation in the American funeral market. It allows its customers to pay at the time of death or reserve their service by paying during their lifetime. Recompose deposits the cash from prepayments in a trust. This is a smart model to allow the company to grow and can hopefully bring the company far.

Recompose’s current revenue growth is limited. Its revenue grew by just 13% between 2021 and 2022 to reach $845,473. But this doesn’t account for its overall sales.

Recompose composted only 260 people so far but has 1,300 members in its prepaid death care plan. So the company is accumulating cash until the day customers die, at which point Recompose will execute its service and recognize its revenue.

Because Recompose’s traction has been slow so far, Wefunder’s capital will be critical to grow the business.

Recompose is raising at a valuation of $76 million, which is too high for a company with $845,473 in revenue and $16.2 million in assets. In order to give a 10x return to investors, the company will have to develop human composting services in at least nine cities. This will require a lot of capital, which poses a funding risk that adds to the adoption risk. Human composting is a new business concept, so customers must be educated and states must be convinced to change laws before the company can really grow nationally.

One of the company’s biggest risks regards the founder’s exit strategy. Katrina Spade is passionate about her business, but maybe too passionate. Even if she wants to give a return to investors, she wants to grow her company as much as possible without an IPO or an acquisition. She envisions allowing investors to resell their shares on a secondary market, which so far is not developed. Therefore, investors should know that their funds risk being blocked in Recompose for a dozen years or more even if the company grows.

Recompose founder Katrina Spade has a well-thought-out and somewhat unusual plan for growth. So far, Recompose has been advertising in the obituary section of The Seattle Times. But Katrina wants to open the company’s facility to the public to demystify the process and raise the interest of curious customers. She wants to organize facility visits and more joyful events like music festivals. There’s no guarantee it will work, but I believe that at the very least, this approach will attract attention to Recompose’s solution.

In the longer term, Katrina plans to break even in Seattle, which could be achieved with 20 vessels every month and a monthly revenue of $140,000. After that, she wants to open a 200-vessel facility, possibly in Denver, and is exploring licensing options. This strategy makes sense and gives a direction to the company. I looked at the company’s financial model myself. It is well-thought and shows that Recompose has a long-term and stable vision for growth.

Despite Katrina not being interested in exit opportunities at the moment, Recompose is so capital-intensive that an exit would be one of the most efficient ways to grow. And the funeral industry actually has a few large companies listed on the New York Stock Exchange. Service Corporation International, a company providing death care products and services in North America, has a market cap of $10.7 billion as of April 7, 2023. The funeral market has large enough players that could have the funds to buy Recompose, and an IPO at a high $760 million valuation is possible based on the current benchmark.

Opportunities to invest in innovative death-related businesses are pretty rare. The space simply lacks innovation. Companies are usually not incentivized to innovate since while everyone is a potential customer, no one can be a repeat customer. 

But times have changed. The percentage of the American population with no religious affiliation increased from 16% in 2007 to 29% in 2021. These are potential clients for Recompose as they are more likely to choose non-traditional funerals than those following the funeral guidance of their religious beliefs. Customers are also more inclined to choose solutions that help mitigate climate change as 64% of Americans are “somewhat” or “very worried” about global warming.

Recompose is unconventional and well-positioned to take advantage of the eco-conscious values of Americans. So far, its founder Katrina Spade has been an impressive leader. While the investment opportunity has a few flaws, investing in Recompose is a way to back a company like no other.

Report written by KingsCrowd Senior Investment Research Analyst Léa Bouhelier-Gautreau on April 9, 2023.