Crowdfunding, though new in its technology-and-internet-centeredness, is really a throwback to an earlier era, when people invested in companies they liked and believed in, before Wall Street turned into a casino in which people and hedge funds bet on fluctuations in stock price.
CircleUp, one of the largest crowdfunding sites, vets startup consumer goods businesses and provides an investor relations-style site that encourages online investors to invest in companies whose products they like. Investors typically spend $1,000 to $15,000. The site provides full financials, growth projections, competitive landscape, biographies, a forum in which investors can ask questions of the CEOs, and conference calls. Investors can also request free samples of the products. CircleUp opened for business last April and so far has crowdfunded eight consumer goods companies. (It has received applications from about 650.)
The startup companies are $1 million to $15 million private companies, too small to interest private equity firms, according to Ryan Caldbeck, CircleUp's CEO, who dropped by yesterday to chat. And venture capitalists are only interested in tech companies, he points out.
"There's a universe of attractive companies that are underfunded by the capital markets, and individual investors who are tired of the stock markets," he says. "Connecting them together is what we do." Private investing is a $25-$50 billion market, he estimates.
A partnership with General Mills has been helpful — the consumer foods giant acts as a mentor to the startups, hosting incubator days and answering questions in an online forum.
Tuesday, CircleUp announced that Procter & Gamble will be taking a similar role. "P&G is always on the lookout for innovation, and they see what we're doing as innovative," he says. "The process we go through is interesting for them." CircleUp's team of 10 staff members evaluates the companies that apply for investment and accepts about 2% of applicants.
"P&G can talk about the supply chain, marketing, and branding issues," Caldbeck says. "We pick the companies, and P&G talks with us about what they find interesting and talks with the companies on our site about their challenges, the competitive landscape, and the path toward success."
Procter & Gamble will hold its first incubator day this spring in San Francisco. It will bring in topic experts to talk about growth and innovation.
Caldbeck has every intention of helping CircleUp's investors profit. "This site doesn't exist in five years if investors don't make money," he says. According to a Kaufman Foundation poll of angel investors, returns of early stage fundraising for consumer retail companies yield 3.6x returns in 4.4 years.
CircleUp considers itself a disruptor to the investment banking industry. "There aren't a lot of industries that haven't been disrupted by technology," he says. "Investment banking is one of the few." In the offline world, the companies CircleUp features would take 12 months to raise money, these companies average 61 days.
Some investment bankers have invested in CircleUp because they want to see the information about these up-and-coming companies that may one day want to get bought or go public. "Their number one problem is deal flow," Caldbeck says.
Most of the startups make food products. One company makes granola bars. Another markets peeled dried fruit — that business is growing 100% per year, Caldbeck notes. A third, Little Duck Organics, grew sixfold last year.
CircleUp's is the first crowdfunding site to allow the entire process to take place online, Caldbeck says. "You go to the site, you find the deal you want to invest in, you sign the documents on our site," he says. "All other private investing sites force you to go offline."
In one feature of the site, the investor can click on anyone's name and see how they are connected to that person — this happens through integrations with LinkedIn and Facebook. "We show you where in your town or city the products are sold, you can go to a local store and find the product."
CircleUp does not compete with banks, Caldbeck explains. "In the consumer world, whether you're doing well or poorly, banks don't make sense," he says. "A company needs working capital. Tomorrow it may get an order from Walmart, it can't buy $1 million in inventory if it has debt. The way these companies have traditionally gotten money is through friends and family."