If you had told me in June, 2011 that I would leave private equity to start an equity-based crowdfunding site, I would have laughed. At that time, I had just been promoted to Director at Encore Consumer Capital, a leading consumer-focused private equity firm, and, most importantly, I had never heard of equity-based crowdfunding.
After spending close to seven years at Encore and TSG Consumer Partners focused on private- equity investing in lower middle-market consumer products companies, I noticed a huge void in the marketplace. There were no institutional investors for small consumer brands. Almost every week, two or three consumer entrepreneurs would call me, looking to raise capital. For companies with revenues under $10 Million, there was nothing we, or any of the other funds I knew, could do. Because of this, each conversation ended the same way, with me turning them down without being able to give them another source to turn to, as they were too small for institutional equity and did not have sufficient assets to raise debt.
The turning point for me came when I spoke on a panel at a consumer trade show, the HBA Global Expo in June of 2011, where the topic was how to finance a small consumer brand. I sat there for an hour as the experts on the panel (myself included) could not come up with any viable financing options for the consumer entrepreneurs in the audience other than credit card debt. Think about leading a shampoo brand with two million dollars in revenue that has national distribution, a business that’s growing at 50% a year but has to take on credit card debt to finance the business. If you can’t imagine it, then you likely work for a tech company in San Francisco, because those are the only types of companies that don’t struggle to raise money. In consumer and retail, which is 20% of the economy but only 4% of angel funding, this is the reality.
At the same time, Rory Eakin, my co-founder of CircleUp, and a long-time public and private investor, saw that investors were becoming disenchanted with the public markets. Individual investors, no differently than large endowments, want diversification. For our parents, diversification meant stocks mixed with bonds, and maybe some real estate. But today, diversification means alternative assets like private companies. Together, we realized there was demand on both sides of the marketplace. Small consumer companies were frustrated by the inefficiency in the fundraising process and investors were hungry for alternative assets that could generate alpha. And given that angel investments in consumer companies generate an average return of 3.6x invested capital over 4.4 years (according to Kaufmann Foundation data), we realized that an aggregation platform that connected great sub-$10 million consumer companies with investors could solve a huge market inefficiency. The problem of solving that inefficiency, and helping millions of investors and entrepreneurs, was intimidating. And exciting. We made one of the biggest decisions of our lives- we quit our jobs and started an equity-based crowdfunding site, CircleUp (www.circleup.com).
As we began exploring online marketplaces, we quickly concluded that to succeed long-term, we would need to build a trustworthy marketplace; we knew that if this new marketplace were to succeed investors and entrepreneurs alike would need to trust it. And for them to them to trust it, they would need to understand it; and for them to understand it, it would need transparency.
So this is what we did. We took months to find the leading legal expert on crowdfunding to help us navigate regulatory hurdles. We also spent hundreds of hours going through broker-dealer registration so we could credibly and legally process securities transactions on CircleUp. While we continue through that process, we partnered with WR Hambrecht, a well-respected broker dealer with a long tradition of leadership in democratizing access for investment opportunities.
But while we had all our ducks in a row legally, we believed our platform, CircleUp, would need to provide value beyond capital to investors and entrepreneurs to become their investing marketplace of choice. The best investment platforms I’ve seen, including my former private equity firms, bring more to the table than just money. Here, we needed to add value to both investors and entrepreneurs.
For investors, we created a proprietary partnership with SPINS, the leading source of retail sell-thru data in the natural products industry. Now we can give third-party data to verify sales trends to our investors– for free. We found partners to run background checks, provide free samples of our products and offer a variety of other services for investors. For entrepreneurs, we recruited literally thousands of great consumer investors to be part of CircleUp and formed partnerships with leading consumer companies like General Mills, which can serve as a great exit option for many consumer companies.
We officially launched in April, 2012, and since then have raised equity for many small consumer companies. The investor demand has blown away even our expectations (and, admittedly, at times has resulted in great challenges). We have far surpassed our goals but we have a very long way to go. Walking away from a promising career in private equity wasn’t easy, but seeing the excitement from both entrepreneurs and investors around what we are building has absolutely made it worth it.
This post is the first in what will be a regular blog I will be writing on Forbes.com, where I will discuss issues facing investors in small, private companies. There are a host of publications out there for investors in the public markets, but very few that do a good job addressing issues like, “How do I evaluate a private investment?”, or, “What do strategic acquirers look for when acquiring a high-growth consumer brand?” I will address these issues, and more, in this space, and if there are any particular issues you want addressed, please let me know.
