After crowdfunding $10M for a dozen consumer product companies, CircleUp raises its own $7.5M Series A
Not all crowdfunding is created equal. The first generation of this peer-to-peer fundraising concept centered around incentive-based campaigns, where users of platforms like Kickstarter and Indiegogo receive rewards and recognition for supporting worthy projects. The second wave, made popular by the headline grabbing JOBS Act which passed congress last year – but still awaits final approval from the SEC – introduced the concept of equity crowdfunding, under which investors get small ownership stakes in the companies they back.While most of the equity crowdfunding headlines have gone to discussions of startup fundraising, it’s a platform that is backing growth-stage consumer product companies that today announced the largest Series A raised of any company in the category. CircleUp has raised $7.5 million in a round led by Union Square Ventures, with participation from Google Ventures, Maveron Ventures, and Clayton Christensen’s Rose Park Advisors – adding to its $1.5 million Seed round raised in April 2012.
CircleUp is unique in its category in that rather than raising early-stage capital for nascent businesses, the platform focuses on providing otherwise difficult to come by growth financing to established mid-size consumer and retail brands. The issue for these companies is that they are often too small for private equity, too large for commercial banks, and too moderate in growth for venture capital. But for sophisticated individual investors with industry experience looking for an alternative to the stock market and real estate, they often represent a less risky and more easily quantifiable option than technology startups. And the highly active M&A market in the CPG sector creates a natural path toward liquidity.
“CircleUp helps exceptional consumer and retail brands find the capital they need to grow from our private network of strategic investors,” says CEO and co-founder Ryan Caldbeck.
The crowdfunding platform curates both the deals and investors allowed on its platform, looking for strategic alignment in on both fronts. Crowdfunding companies typically have a minimum of $1 million in revenue and distribution in national chains. The growth in the company’s investor base has been largely organic, with the average new member having three social connections already on the platform upon signup according to COO Rory Eakin. The company registered more than 1,000 individual investors in the first three weeks after opening its doors. Due to the current regulatory situation, CircleUp is available only to Accredited Investors.
Since launching in April 2012, CircleUp has helped 12 companies raise more than $10 million, with that sum split nearly evenly across the dozen deals, according to Caldbeck (early highlights here and here). Approximately 70 percent of the deals that were listed on the platform successfully completed their fundraising, which compares favorably to Kickstarter’s 44 percent figure. The average number of investors in a given deal is roughly 25, but can vary depending on the wishes of the company, among other factors.
Companies fundraising on CircleUp get to set their own investment structure, including the type of security offered and number of investors, although the CircleUp may provide templates or insight into market valuations. Investments are processed on a first come, first serve basis, and investors become direct stakeholders in the fundraising business, rather than holding their interest through a single special purpose vehicle as is the case with some crowdfunding platforms. One key difference with CircleUp’s companies, compared to other early stage startups, is that this is often their final private fundraising, serving as a bridge to a private equity buyout or a M&A event.
Recently, CircleUp entered strategic partnerships with both Procter & Gamble (P&G) and General Mills where the consumer packaged goods conglomerates will provide resources and mentorship to CircleUp companies post-funding. This is one of many strategies employed by the platform to ensure that both its companies and its investors succeed.
CircleUp is not a broker dealer itself, but it has partnered with an existing broker-dealer, WR Hambrecht, to enable it to collect commissions on capital raised while remaining compliant with all securities regulations. CEO Ryan Caldbeck is intimately familiar with the financial sector, having worked in private equity at TSG Consumer Partners and Bain Capital before that.
The new financing will be deployed to grow the company’s technical product team, with the goal of building out its underlying software platform. One of Caldbeck’s primary goals is to allow investors to connect with companies more easily and efficiently, both to encourage investment, but also to facilitate information sharing among investors with experience in the retail and consumer sectors and the companies listing on the platform.
Crowdfunding is still in its infancy, and as such there are too many fundraising platforms to even count. This is a familiar environment for one early CircleUp investor, former e-trade President Jerry Gramaglia, who sees parallels between the rise of online brokerages in the 1990’s and today’s emergence of crowdfunding.“Crowdfunding is going to be Wild,” Gramaglia says. “There will be a lot of entrants and a lot of noise, and things will get messy, as they always do when a category is just getting established. But I see CircleUp as different in its focus on the higher end of the customer service value chain, in terms of the ease of its tech experience, its ease of use, and even its decision to focus on established consumer and retail companies.”
Prior to CircleUp, it could take upwards of two years for a traditional consumer products company to raise $1 million in capital. In its first 12 months, the average CircleUp deal has been fully subscribed in 61 days. In such a scenario, the company obviously wins, but so too does the sophisticated investor with industry experience who is looking for an attractive place to put their money to work.
There are many people who expect carnage from the crowdfunding category. Investors aren’t sophisticated enough to evaluate and manage these deals, the thinking goes. And the platforms are thought to be ripe for fraud. CircleUp’s curation of both experienced investors and premium dealflow should help alleviate these concerns to some extent, but they also stand in the way of achieving scale. In fact, its biggest risk may actually be out of its hands, in the potential for less scrupulous competitors to encourage a negative stigma around the industry as a whole.
“These guys have a vested interest in making sure that their investors find success,” Gramaglia says. This means that in addition to curation, investor education is critical. Eventually, as equity crowdfunding grows, it’s likely that the industry will attract ancillary service providers like ratings agencies and research analysts to help even the playing field. There also exists the opportunity for alternative investment structures, such as themed or diversified portfolios of transactions, equivalent to a crowdfunding mutual fund.CircleUp was rewarded today for identifying an opportunity to apply the crowdfunding concept to an otherwise traditional industry. By bringing true value to both growth stage companies and individual investors, the company has the opportunity to build a sustainable platform. The challenge will be to maintain its commitment to quality and exclusivity amid the inevitable pressure to pursue growth.