Ryan Caldbeck and Rory Eakin founded CircleUp, their equity-crowdfunding portal, in 2011, before the word "crowdfunding" would be printed in news without definition, and long before the U.S. Securities and Exchange Commission would debate how to shape regulations necessary when one attaches to it equity stakes.
Three years later, the company has carved out an impressively strong niche--connecting accredited investors to consumer-facing product companies--and is showing strong traction toward making those investments pay off for both parties.
A new slate of investors, including Canaan Partners, and Rose Park Advisors, agree. They and others are adding $14 million in funding--the largest equity-crowdfunding investment to date--to CircleUp's existing $9 million in venture capital investment from Google Ventures, Maveron, and Union Square Ventures, among others.
Bright Spot in Equity Crowdfunding
CircleUp has helped more than 30 companies raise over $30 million in growth capital in the past two years. The amount invested using the platform grew by five times in the course of last year, and currently the site is hosting more than 60 projects--it hopes to get all of them funded.
If it seems a little meta for a company that helps other companies find investors was just itself seeking funding--it sure is. What's interesting here is that while CircleUp is following the trajectory of a fast-growth San Francisco tech start-up, it's actually structured as a traditional broker-dealer, not as a funding portal, which would potentially subject the company to new regulations from the SEC.
Even before those regulations are completely hammered out, an abundance of new platforms for raising money online are establishing themselves as places for investors and startups to meet. There is an array of business models equity-crowdfunding companies are following, including acting as an online venture capital firm, as is FundersClub, or Crowdfunder, which is an investor community that manages microfunds for investors. Another site, Earlyfund, can act as either a broker-dealer or a special fund manager. All these accept only accredited investors.
CircleUp stands out in that the companies using it to find interested investors are typically making consumer products one could find on retail shelves and hold in a hand; say, a certified-organic granola bar, an artisanal hard cider, or eyewear. The companies behind the products already have revenue, but need a hard-to-find boost of funding to scale faster.
This is where CircleUp comes in: to help these consumer companies, in industries that sprout plenty of "lifestyle" businesses, start to resemble the fast-growth Silicon Valley model. And by design, they'll all be seeking significant exits.
"We don't have any companies on the site who are looking at it as a lifestyle business," says Eakin, CircleUp's co-founder and COO. "Most typically these companies will exit to a private equity fund or strategic acquisition. One of the screening questions we ask our companies is where do you see an exit?"
Despite that the data is thin because CircleUp is so young, according to Eakin, the average company that's raised funding using the platform has grown 80 percent in revenue in the year following their raise. And companies' gross margins have expanded 5 points, to 39 percent, on average.
Plenty of companies want in; according to Eakin, CircleUp accepts and posts only 2 percent of projects that apply for listing on the site.
Over the next few months, CircleUp--which now has 24 employees--will be using its new cash infusion to bolster its product team, and, as Eakin says, "making it easier for investors to have everything they need to conduct their diligence. Given the sizeable transactions that we support, it's got to be a significant investment on our part."
Investors describe the niche CircleUp fills--funding companies that make tangible goods and are seeking $500,000 to $5 million--as extremely promising.
"Unlike tech investing, where angel networks are well established, this is a nascent funding ecosystem," says Dan Levitan, who is a partner of Maveron, which he co-founded with Howard Schultz, the chairman and CEO of Starbucks. "As an ex-investment banker, I used to get pitched by a lot of these businesses that are too small for my firm, but that are looking for money. The need is definitely there."