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“We’re an online investing marketplace that matches small investors with start-up companies in the consumer-retail space,” says Ryan Caldbeck, founder and CEO of CircleUp. After years of investing in consumer product and retail companies at private equity firms like TSG Consumer Partners and Encore Consumer Capital, Ryan got frustrated telling great companies they were too small for their portfolios and decided to do something about it. He started CircleUp, an equity-based crowd funding platform for consumer products and retail companies as a way to make funding available to these small and promising companies.
The company itself has raised $9.0 million in Seed and Series A funding led by Union Square Ventures and joined by Google Ventures, Maveron and Clayton Christensen’s Rose Park Advisors. Well known angels like Jerry Gramaglia (ex President of E-Trade), Elad Gil (investor in AirBnb, Pinterest and Square) and consumer and retail experts have also invested.Early-stage companies in sectors other than technology often struggle to locate the capital they need to build their brands. While venture capital firms invest in start ups, their predominant focus is on companies in the technology space, leaving other sectors out.
Typically private equity firms won’t invest in a consumer company until the brand reaches $15 million in revenue, leaving small businesses looking for alternatives. Founders spend a disproportionate amount of their time fundraising instead of building out their business. “Large institutions can only write checks for a certain size. Private equity can’t write checks and VCs typically only focus on technology companies. VCs focus on ‘home runs’. Out of 30 deals they underwrite, maybe 5 will be successful. They’re wrong 85% of the time. As result, they need to be billion dollar businesses pretty quick. Consumer and retail companies don’t get the attention from VCs, not because they aren’t successful–the average return for an angel investment in consumer is 3-1/2 times investment in 4 years (note: Source is the Kauffman Foundation)–but because the winners are not billion dollar businesses,” say Caldbeck.
By building an online platform to connect these companies with investors, CircleUp has been able to reduce the amount of time it takes these companies to raise money to an average of 61 days (a process that usually takes 8-12 months offline). One company, Rhythm Kale Chips, closed their round (almost $800K) in two weeks –bringing together strategic investors from across the country. By building a community of investors (there are over 1,000 registered investors on the platform) with experience in growing consumer and retail companies and forging partnerships with large consumer and retail giants like General Mills and Procter & Gamble, CircleUp also provides companies with access to the non-financial resources they need to grow. “We accept a very small percentage of the companies that come to us,” says Caldbeck.
“My co-founder Rory Eakin and I met at Stanford. I was on panel about how to raise money for companies in the consumer and retail space and for an hour no one in the room had an answer for how to do it. After the panel I began talking with Rory about it and we both figured there’s got to be a better way” says Caldbeck for how the idea for CircleUp started. “Before we launched CircleUp, we researched the regulatory landscape. We decided that we didn’t want a business model that required the regulations to change. We wanted a model that was consistent with existing regulations. As a result, we actually didn’t need the Jobs Act to be approved to proceed. But we did need to become a registered broker/dealer,” continues Caldbeck.
“Our mission is to help entrepreneurs thrive by giving them the tools they need to succeed. Investing is a core part of the story, but still only part of the story. We’re also working on developing education services for entrepreneurs and for investors. There’s no sign-up fee. We charge an investment banking fee that’s in the single digits, plus we get a small,single digit ownership stake. We don’t charge investors anything,” says Caldbeck. Ryan also contends that the company is creating a more efficient investing marketplace in a large market. “By lowering the cost to participate in the market, and by providing value added services, we are expanding the market itself. One reason investors have been attracted to CircleUp is not just because we make the process so much easier for them, but because of the exit markets for their investments. The consumer and retail industry M&A market is actually twice the size of the tech M&A market,” continues Caldbeck.
While it’s only been a little over a year since Ryan and Rory launched the CircleUp platform, they have already supported 30 capital raises to the tune of over $30 million. An important question to ask is how have these companies performed since raising money on CircleUp? The average company that has raised money on CircleUphas seen their revenue grow at 80% per year after they raised money on CircleUp, and their gross margins have expanded from 34% pre-CircleUp to 39% post-CircleUp.
“I was happy working in Private Equity, but I was looking for an opportunity to build something bigger–to have a positive impact on the world. My father is a Vermont Lawyer and risk averse. He was instrumental in helping me make the decision to start CircleUp. He summed it up in a way that became the tipping point forme to make this decision. “He asked me–’will you be more proud staying in PE or if you try to build CircleUp and fail?’ I didn’t want to sit on the sidelines,” concludes Caldbeck.
Bruce H. Rogers is the co-author of the recently published book Profitable Brilliance: How Professional Service Firms Become Thought Leaders now available on Amazon http://amzn.to/OETmMz