Financial Poise

A few minutes with…Ryan Caldbeck, CEO, CircleUp

Ryan Caldbeck of CircleUp

CircleUp is an equity crowdfunding platform, presently open only to accredited investors, which primarily features existing U.S. consumer products companies. Ryan Caldbeck, CircleUp’s CEO spoke with AIMkts about raising capital, their focus retail and consumer goods and CircleUp’s presence as an investment platform.

How have you seen technology change the world of the accredited investor?

Technology is changing the world for everyone, regardless of income. As an example, online marketplaces have helped to eliminate inefficiency in a variety of activities– from making restaurant reservations (OpenTable) to making small purchases (eBay, Etsy), and even dating (Match, OKCupid).

We are applying a similar approach to private investing.  Currently, SEC guidelines allow only accredited investors to use a site like CircleUp.  So in that case, our technology is helping to make it easier for accredited investors to invest in private companies.

CircleUp connects accredited investors with high-growth consumer and retail companies, and allows the investors to invest in and receive equity in those companies.  By lowering the cost (networking time, minimum investment, etc) to making these investments, we are expanding participation in the market.

What makes CircleUp unique?

First, ease of use.  Second, it’s run by professional investors. Third, our focus on the investor.

We’ve used our backgrounds as professional investors to design an easy to use site that provides investors the capability to complete the private company investment process online.

Another differentiator is our focus on consumer and retail companies, an industry largely ignored by the traditional venture capital community.  We don’t allow tech companies on the site for a few reasons, one being that we don’t want to compete against VC firms.  We also think they are harder to diligence.  Investors are able to experience the products the companies on our site produce, which we believe helps investors identify better with the companies on our site. The information we require, including financials, background checks, investor presentations, industry data, and management calls with investors, is all driven by our experience as private equity investors.

What are the benefits of investing capital on CircleUp versus investing capital the traditional way?

Again, networking time is eliminated.  It usually takes months to network into a deal.   Second, we provide more information:  we present investors with not only the investor presentation one would get in the offline world, but also industry data that angels typically can’t afford and transparency to see the conversations other investors are having with management.  The result is more information for the investor, which we believe improves decision-making.   We also facilitate lower minimum investments; our minimum check is often $1,000, which allows investors to diversify with a lower total capital than is typically possible offline, where minimums can be around $25,000.

How can a community of investors, backing a company individually and collectively, help a company grow beyond just the financial contribution? How does that differ from what PE or VC might provide?

This is another unique reason we focus on consumer and retail.  Having a group of passionate brand advocates invest in a consumer business helps in a way that it wouldn’t help, in, for example, a cloud computing business or healthcare company. Imagine 40 parents investing in a baby food company, or 25 pet owners investing in a pet business.  Now they are talking about the business not just because they love the product but because they are equity investors.

Another unique benefit of our vertical focus is that we attract sophisticated consumer and retail experts. Therefore, the companies on our site not only benefit from the capital contribution of our investors, but also their industry expertise.  This added value to the companies can benefit all the investors on our site since it can help makes the companies more successful.

Why does CircleUp target specifically retail and consumer goods startups? (Can you list some examples of types?) Will CircleUp expand beyond this area? If so, what could be next?

We focus here because for several reasons.  First, there is less adverse selection than an industry like high-tech.  In other words, there is no Sand Hill Road for consumer and retail.  This allows us to attract some of the most interesting investment opportunities in consumer and retail.  Second, the exit market for these businesses is massive. In 2012, the M&A exit market for consumer and retail was $91B, vs. ~$47B in technology.  Third, we think these companies are easier to understand and diligence.  We focus on companies with at least $1M in revenue- these are brands that are tangible and have an understandable operating history – as opposed to a pre-revenue mobile app that may have launched last month.  Investors are able to actually see the products on store shelves and experience the products personally.

Because of confidentiality concerns startups may have about sharing their specs online, how does CircleUp vet accredited investors who want to take a deeper look at the details?

We verify the identification of all investors. In addition, we have a team of Investor Executives that talk with investors when they join the platform to better understand their backgrounds and interests.

For an accredited investor looking for an opportunity, what sort of vetting process can they trust CircleUp has done on featured companies?

First of all, it is important to say all investors on Circleup are responsible for their own due diligence.  While we have a team of professional private equity investors to curate the dealflow, we highly encourage all investors to do their own work rather than ever relying on the work of other investors. We think that makes for better investment decisions by the individuals and ultimately results in a richer community on CircleUp. There is a heavy curation; we only accept 2% of the companies that apply (and the average company that is rejected has more than $1M in revenue and is growing at more than 50% a year).

You’ve been both an investor and an entrepreneur – based on that, what advice can you give an accredited investor who is scouting opportunities on CircleUp?

Take your time and do your diligence.  Ask questions.  Read through all the materials and do your own research, not just on our site but off of CircleUp as well. For example, we have a product locator feature that allows you to find the products in your local area.  Go check them out and compare against the competition.  Also, most experts would advise to diversify.  Early stage investing is a high risk, illiquid asset class.  Whether you intend to invest $10,000 into private companies or $10M, it could be a helpful to spread that across at least a number of opportunities rather than putting all of your eggs in one basket.

CircleUp was listed in the Top Crowdfunders of 2013 by Forbes, among other accolades – how has this visibility affected the startups/investors you work with?

Our community participants are incredibly proud and excited about being a part of CircleUp, regardless of the external attention.  We’ve been fortunate to get some attention in the media, but it doesn’t compare to the word of mouth buzz amongst the people on the CircleUp platform. To give you a sense, the average investor that has joined CircleUp in the last few months already has three friends on CircleUp.  The referrals from people on the platform is what means the most to us.

The positive public relations does help us attract new investment opportunities. We are becoming known as the destination for consumer and retail companies to raise capital. The higher quality companies we are able to source, the better for our investors.

What types of companies are trending on CircleUp right now, among accredited investors? Why do think this is?

Understandable, accessible and tangible businesses with recognizable brands.  First, investors see the potential of these companies. The average company on CircleUp has more than $1M in revenue and is growing at more than 70% a year.   Second, they are consumers and look for brands/products that make sense to them.  They know we don’t need another copy cat energy drink company. They look for strong brands with unique product lines that fill and interesting niche.  Finally, we’re seeing a lot of repeat investments.  A theme amongst our investors is that they aren’t just making one investment- they are looking for ways to diversify amongst several companies.

What influence do you think the JOBS Act may have, if any, on the amount of accredited investors that look to CircleUp for opportunities? What will it do for non-AIs?

It is really hard to say because the rules aren’t set yet unfortunately.  We hope the rules are written in ways that protect both the investors and companies.

Why might a traditional angel group or venture capital fund ignore opportunities that you feature and are ultimately very successful with accredited investors?

We actually have quite a few private equity and venture capital professionals on our site that invest in the companies on CircleUp.
But to answer your question directly, here are two thoughts:

First, angels and VC firms are typically laser focused on companies that could be the next Facebook or Twitter.   Consumer companies can do very well but they are unlikely to ever be $10B businesses- they would get acquired far in advance of that.  Second, angels and VC firms are part of an ecosystem, whether Silicon Valley, Boston, or New York that focuses on tech, health care and other businesses. The companies are started there because of funding, and the access to those companies leads to more investment. It’s a cycle.

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