CircleUp Brings Crowdfunding, Of a Sort, to Non-Tech Firms

7/2/12Follow @wroush

A common complaint among technology entrepreneurs back in the mid-2000s was that there weren’t enough angel investors willing to help small startups get off the ground. Bootstrapping and “friends-and-family” funding would only take you so far, and if you didn’t already have a couple million in annual revenue, the venture funds just weren’t interested, creating an early-stage funding gap.

This problem has largely gone away in the tech world, thanks to three big changes: A huge increase in the number of individual investors happy to put $25,000 or $50,000 into a startup, especially in Silicon Valley; the proliferation of startup accelerator programs like Y Combinator and TechStars; and a new willingness at many venture funds to invest in early-stage startups.

But the funding gap has definitely not gone away outside the technology world. If you’re building a company in an area like food, beverages, personal care, pet products, sporting goods, apparel, or restaurants—and you’ve got between $1 million and $10 million in annual revenue—you’re probably too big for friends-and-family funding. And the banks, private equity funds, and venture firms won’t touch you either.

That’s the gap CircleUp hopes to fill. It’s a Web-based crowdfunding platform where early- to mid-stage consumer products companies can turn to angel investors for the equity-based funding they need to get to the next level, where they’ll presumably be able to attract institutional investors.

It’s a little bit like Kickstarter, Indiegogo, Rally.org, and other crowdfunding services in that companies have profile pages with videos and other enticements, and they raise money by aggregating lots of small investments. But the San Francisco-based startup is different in the sense that it carefully screens the companies it wants to feature. Also, the companies are selling actual shares, which means, under current SEC regulations, that only qualified investors are allowed to use the platform, which is password-protected. (A qualified or “accredited” investor is one with $200,000 of annual income per individual or $300,000 per household or a net worth of at least $1 million excluding real estate.)

Ryan Caldbeck, CEO of CircleUp

CircleUp debuted in April and is featuring only about 10 companies in its marketplace so far—but it has big ambitions. Co-founder and CEO Ryan Caldbeck notes that there are somewhere between 750,000 and 1.2 million consumer products companies in the U.S. in CircleUp’s target market—that is, the $1 million to $10 million revenue range. Consumer products “may not be as sexy as mobile apps, but they account for 20 percent of our economy and receive only 4 percent of the angel investing,” he says.

Caldbeck founded CircleUp with former Stanford Business School classmate Rory Eakin, the company’s chief operating officer, after the two saw how inefficient it was for companies below the venture and private-equity threshold to raise money. “Rory and I started kicking around ideas to help solve that problem, and we realized that there are a lot of great companies that are doing very well, and also investors out there who want access to a new asset class. So marrying those two made a lot of sense.”

The very first company to complete a funding round on CircleUp is Episencial, a Los Angeles-based maker of natural skincare products for infants. The company had raised $6 million in the past from angel groups, but on CircleUp it was able to collect about half of a recent top-off round of $500,000 in just 14 days, with far less time spent briefing individual investors, according to founder and CEO Kim Wells. “It costs time and money to raise money,” Wells says. “To be able to raise money in days instead of months and do it with conversations that last minutes instead of hours is an incredible benefit for a company with limited bandwidth.”

Both CircleUp co-founders come from the financial world: Caldbeck was formerly with TSG Consumer Partners, a private equity fund focused on consumer products and retail, and Eakin was at Humanity United, the social-enterprise wing of eBay tycoon Pierre Omidyar’s investing empire. To get the operation off the ground, they’ve raised $1.5 million of their own from Maveron, Triple Point Investors, and angel investors such as David Topper, a JP Morgan veteran. Like investment bankers, they keep a percentage of each fundraising round as a commission. “We don’t disclose publicly what … Next Page »

Wade Roush is a contributing editor at Xconomy. Follow @wroush

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