I read an interesting article from Venturebeat about CircleUp, 3 Reasons Crowdfunders will hit Consumer Products First has it's ups and downs and the most challenging is raising capital to establish the business or growing it to the next level. That's where I think many foodpreneurs will go in the future. If you have not heard of crowdfunding, this is a web enabled way for smaller companies to get funding vs. traditional angel or venture funding. The new JOBS act is facilitating this and it will be seen if this helps the crowds of foodpreneurs looking to expand their businesses.
Why Crowdfunding for entrepreneurial food businesses?
- Few capital sources exist for sub-$10 million consumer products businesses.
- The "crowd" understands consumer products best… because we shop!
- Consumer based products companies hit cash flow faster than most other businesses.
CircleUp - A New Way for Consumer Products Funding
(CircleUp) is an online social marketplace that supports direct equity investments from individual investors into privately held consumer and retail companies. Food and Beverage brands are part of the consumer products sector. Ryan's experience in private equity exposed him to many great consumer and retail businesses that were too small to obtain funding through the customary private equity channels. That "too small to obtain funding through the customary private equity channels" is something I hear from client and readers frequently.
I interviewed Ryan Caldbeck, founder of CircleUp. What is CircleUp you say?
How does CircleUp Work? Is it providing an equity position or is it just a "donation" like Kickstarter?
I asked Ryan about this since a startup tech company, Pebble, which seeks to create high tech wristwatches that can display information from an iPhone, raised $7 Million through Kickstarter. However I heard that is was really raising money as pre-orders vs. selling equity.
Ryan explained that "A group of individuals may seek to contribute towards a company or a cause. So up until recently, crowdfunding meant people are "donating" to companies or projects without an exchange of equity. CircleUp is an equity-based crowdfunding platform that supports direct equity investments from individual investors into privately held consumer and retail companies."
So Ryan, What is the Market Problem you saw that lead to Circleup's focus on consumer goods?
"I worked in consumer focused private equity and saw most investor firms are not that interested in funding consumer companies with revenues less than $10 Million. However I know there is an enormous pool of national brands with several million in revenue having difficulty raising capital."
So Why are Consumer Foods Perfect?
"There is a huge need for this type of funding. People understand consumer products… they can touch and feel many would be proud to be an investor in the business." I also see an aspirational side of this in addition to making an investment purely for an economic return on investment. Ryan says "There are the psychic benefits as well in investing in a great brand… there is something special about participating in something bigger than one's self." In addition to individual investors Ryan says they get many professional investors come on to the site.
What are CircleUp's Standards for Accepting Companies?
"Companies need to be +$1 Million in revenue and have a great brand. Some questions we post immediately: Is the company gaining market share? Is the valuation reasonable? Is there a clear path to a much larger entity" (I call this scalability)
Ryan added that "CirlceUp does extensive research on the various food & beverage industry segments, for example comparing industry growth vs. the company's growth. We have the ability to more easily understand consumer businesses with our partners who keep an eye on food trends as well". Some of their partners with deep food industry are Tony Olson, the founder of SPINS and Brendan Synnott, the founder of Bare Naked Granola.
What are the things that absolute stand out in prospective companies?
Negatives - "Someone raising more money than they need, an example was a company that came to us with $1Million in sales and wanted to raise $3Million for national TV. For a company that size you just don't need that much capital". Let's face it, a $1 Million company is a niche player, so this is a red flag for me since TV is mass marketing… the entrepreneur needs to do their homework on the customer segments and brand positioning . Another example he gave was a food brand doing $1 Million in sales and valued themselves at $15 Million. "Clearly they do not understand where they are in their life company cycle" according to Ryan.
Positives - "A brand that has clear focus (bad focus would be a $1 Million with 15 product lines). If the company has an interesting niche it does stand out for us as well as the larger brands. (larger brands are a natural exit strategy and strategic buyers for the right company). "I can tell if the brand has truly indentified the market problem… we know that the market does not need another Vitamin Water knockoff" says Ryan.
The current JOBS act changed the general solicitation of investor capital so when future food deals close, Ryan and I will chat again about some specific deals.
There is truly a great need for viable food entrepreneur funding and the fact that Ryan has had over 300 consumer and food companies reach out to them is a validates this!