When private equity veteran Ryan Caldbeck co-founded CircleUp (alongside Rory Eakin) in 2012, he set out to create an online platform to support direct equity investments from accredited investors to private consumer and retail companies. With an emphasis in consumer products, CircleUp has applied a crowdfunding model to help businesses with less than $10M in revenue raise capital. After raising their Series A round from Union Square Ventures, Google Ventures and Rose Park Advisors, CircleUp welcomes accredited investors to the online community. Ryan has been a FoundersCard Member since 2013.
1) Tell us a bit about your background and the path that ultimately led you towards private equity.
It’s difficult to pinpoint an experience that specifically led me to private equity. I can tell you, however, what experience led me to co-found CircleUp, which is an equity-based crowdfunding site.
I was in private equity for seven years after getting my MBA at Stanford. During that time, I worked in private equity at Encore Consumer Capital and TSG Consumer Partners where I focused on investing in lower middle-market consumer products companies. It was during that time that I noticed a huge void in the marketplace: There were no institutional investors for small consumer brands. Virtually every week two or three consumer entrepreneurs would call me for the same reason: they wanted to raise capital. Unfortunately, these businesses—those two or three a week—were businesses with less than $10 Million in revenues.
As a result, we would do what most every other private equity firm would do; we told them we couldn’t help them, and we couldn’t direct them to a source that would. They were simply too small for institutional equity. It seemed to make no difference that they were thriving. They were just too small. CircleUp addresses that market, and more.
2) Why do investors typically use CircleUp?
It’s our belief that investors use CircleUp for the purpose we intended: to participate in the growth of young and small, but thriving and growing businesses. We hope they use CircleUp because they’ve discovered that on CircleUp they find businesses that meet this criteria. Our goal on CircleUp is to provide investors not only with the financials of the target businesses that any diligent investor would require, but to make the process a transparent one. Questions that potential investors ask of the entrepreneurs are made available to all interested investors, as are the answers. Also, individuals contemplating an investment have access to the number of investors to date, and in many cases those investors may be experts. None of this, of course, is reason to invest, but it adds to the amount of information that helps a potential investor make a wise decision.
We have seen amazing demand from investors since we launched in 2012. Some investors have impressive backgrounds in consumer or retail, others are long-time tech industry veterans that are saying “I’ve got 90% of my net worth in tech, and I want to diversify by industry.” The most common thread among all of our investors is simply an interest in private market diversification. Investors are disenchanted with the public markets, and this is spurring the growth in alternative assets, which, of course, include the types of investments found on CircleUp. Investors are talking to their friends about CircleUp because we provide investors with the opportunity to invest in private companies without incurring fees from CircleUp. In addition, we provide the data and access to the companies that help streamline the investing process.
It is a testament to the quality of any business that its clients are satisfied and recommend it to their friends. CircleUp is fortunate that its net promoter score is excellent. It is a good sign that the average investor that joins CircleUp already has three friends who have joined. The investors who are joining the site are impressed with what they find, and then they tell their friends about it.
3) We constantly hear about new ideas being spawned and businesses receiving early rounds of funding. In your perspective, how has the funding landscape for startups evolved over the past decade, and how does CircleUp help facilitate that process?
I think it depends on the industry. In tech, particularly in Silicon Valley, the funding market has only become more efficient with the spawning of new venture funds, angel groups, incubators and other resources to help tech entrepreneurs raise money. As a result, it has actually become more difficult for early-stage investors to be successful.
In other industries, particularly within consumer products and retail companies, very little has changed until recently. There have been few dedicated funds or angel groups that would be willing to invest in early-stage consumer products or retail companies. As a result, these non-tech companies are typically forced to raise money from a dispersed network of individuals—often through their own contacts. That process is very inefficient and can often take a full year to raise money. We started CircleUp to provide the resources and support that great non-tech companies need to thrive. For example, on CircleUp the average fundraise takes 61 days.
The fact that the average fundraise through CircleUp is only 61 days speaks to how CircleUp facilitates the funding process. No longer, for example, does an entrepreneur seeking funds need to meet individually with potential investors—meetings that often entail substantial amounts of time and money. The requisite information is made available to a world of investors at once. Similarly, investors have available to them a stream of opportunities that in a sense “come to them,” and they are free to move on quickly from those in which they are not interested, to those in which they are.
4) What advice would you give to someone who’s looking to make their first private equity investment?
We don’t provide advice to investors on an individual basis, but a few thoughts come to mind. First, take your time and do your research. At CircleUp we try to provide investors with information they will need to make decisions, including third-party data. We strongly encourage investors, however, to also do their own digging. Second, ask questions. On CircleUp we provide forums and conference calls that allow investors to talk directly to CEOs and ask them questions. Finally, diversify. If you want to invest in private companies, recognize that it is a high-risk, illiquid asset class. It may make sense in your portfolio, but you should strongly consider investing in multiple companies, even if it means each individual investment is smaller. On CircleUp, the minimum investment can be as low as $1,000 (with no fees to investors)—which allows investors to get the diversification they need without paying fees.
5) What are a couple examples of small, startup consumer companies that have received funding through CircleUp?
There are many. We’ve helped raise more than $15 million in equity for the companies on CircleUp. Some great examples are Little Duck Organics (an organic kids snack brand based in New York), Bhakti Chai (a chai tea company based in Colorado), RAEN (a high-end sunglass and accessories business), Rhythm Superfoods and Eco-Me (a natural household cleaning brand). The common theme is that the companies are already on the shelf, typically with more than $1 million and revenue, and growing at a fast rate – the average growth rate on CircleUp is more than 70% per year.
6) How many companies are currently eligible to receive funding through CircleUp, and what is the minimum investment amount?
We’ve had over 1,000 companies apply to CircleUp, but we only accept about 2% of applicants. The initial screen is done by our team of consumer and retail focused private equity professionals. Only those that pass our criteria are put onto the site. At any one time there are usually 10-20 companies open for investment, but that number is growing. The entrepreneur sets the minimum investment amount but it is often as low as $1,000. Having said that the average investment is typically at least an order of magnitude higher – it’s a nice demonstration of the interest investors have in the deals.
7) You’re originally from Vermont. What sort of activities keep you active outside the office?
Many of the activities I love—skiing and travel, for example—have taken a back seat because of CircleUp. I spend most of my free time now enjoying it with my wife and, as often as possible, playing basketball.