Leveling Up

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Ryan Caldbeck wants to level the playing field. After spending years in private equity investing in consumer and retail, he saw a disparity between the amount of companies that were getting money and those that should.

So, he and his co-founder Rory Eakin set out to change that. Together, the duo created CircleUp, a Marketplace Investing platform that focuses on angel investments in consumer product and retail companies. At the crux of the platform is the Classifier, a program that assesses companies based on data, thereby leveling the playing field for hundreds of entrepreneurs with great businesses, but no connection to venture capital companies.

We talked to Ryan about the process of starting CircleUp, how they’re turning traditional venture capital on its head, and changing the way consumer and retail startups get investments.

How did you get your start?

I was working in private equity (at Encore Consumer Capital and TSG Consumer Partners) and was incredibly fortunate to be in a really nice position, financially. Work-life balance was great. By most accounts — it was a dream job, but I left each day feeling very unfulfilled. Eventually, I came to the realization that, for me to be happy, I needed to be proud of what I was building and its impact on the world around me. Private equity didn’t do that for me.

That was my motivation for me to build something bigger — and became the idea for CircleUp. I saw that in consumer-focused private equity (investors interested in consumer products) that there were hundreds and hundreds of investment firms around the country that love consumer and retail, but almost all of them only invested after a company hit $10 million in revenue. They couldn’t invest below that level because the search costs in such an inefficient industry were too great to economically invest into smaller companies.

We would consistently find these great companies that were just too small for a private equity firm to invest, so my co-founder Rory Eakin and I wanted to build something to help spur innovation in consumer and retail to help those entrepreneurs thrive.

Rory and I started talking about CircleUp in 2011 and launched CircleUp in April, 2012.

How did you know it was time to quit?

I don’t think you ever know, to be frank. It was scary. If you had asked me a week before, I still would have told you that there’s a good chance that I wouldn’t quit. In retrospect, I wish that I had the courage to do it earlier.

Between July and October of 2011 (we quit our jobs in 2011), we talked to a lot of people in the space to get a sense of what their pain points were and if we could develop a product that solved those.

How do you see this shifting the role of investors in the consumer and retail space?

Private investing is three things. It’s sourcing a deal, it’s executing a deal, and then it’s helping the companies after the investment. What CircleUp has done so far is streamline the first part of that three-step process. So investors, who are used to telling their limited partners, “Oh, we find proprietary deal flow,” now are forced to say, “Look, there is no such thing as proprietary deal flow any more. We go to CircleUp; we find the best deals.” The difference will come from the value they add to these companies.

In consumer and retail, the average company takes six to twelve months to raise capital. It’s hard to argue that money is a commodity when it takes eight to twelve months to get that commodity. We’re shortening that time dramatically and, as a result, putting pressure on these investors to add more value. We think that’s a good thing for all people involved. We think it’s a good thing for the investors because now they can find the best companies much more efficiently. We think it’s a good thing for the companies because now they don’t just get capital more efficiently; they get capital from investors that have to help. They have to stand out by helping.

As I talk to different founders, there tends to be a theme in that they set out to solve a problem that they’re uniquely skilled for or have the right resources or community to solve. What was it about this problem that resonated with you?

I spent most of my career in consumer-focused private equity, which really laid the groundwork for CircleUp. The universe of consumer-focused private equity firms is very small. I had the benefit of being a part of that universe, while also living in Silicon Valley at a particular point where there was a tremendous amount of technological innovation.

In 2011, if you talked to most of the consumer investors in the country, most of them would not be able to tell you the dynamics of a marketplace or what machine learning was or the difference between a designer and an engineer. Conversely, if you talked to most of the folks in Silicon Valley, they would not be able to explain anything about the problems of raising money for a consumer and retail company. I happened to be at a point where I was straddling those two worlds and was able to build something at the intersection of both.

You were quoted in a Fast Company article saying that CircleUp is bypassing these traditional networks and “old-boy systems.” How are you doing that?

There are two ecosystems in the country that allow venture capital firms to efficiently find and evaluate companies, and they’re in New York and San Francisco. Investors read about a company in TechCrunch, hear about it from Y Combinator, listen to the other angel investors, or hear about it over and over and over again for two months and then invest by walking across the street — sometimes quite literally.

In consumer and retail, none of those dynamics are the same. There is no TechCrunch. There is no Y Combinator. When you have to fly to Idaho or Texas or Vermont, to not just invest in the company, but to even find the company, that changes the dynamics of who’s willing to invest. Traditional venture funding does not back early-stage consumer and retail companies, despite the fact that the returns in consumer and retail are very strong. Additionally, consumer retail companies have half the volatility of the technology space. The issue is, finding and investing into these companies in the early-stage has long been an inefficient, difficult process for investors.

How does your company level the playing field for both entrepreneurs and investors?

When we first started CircleUp, the average investor wrote a $12,000 check. Today, the average investor is investing more than $100,000 into each deal. The companies we get each year are better and better. They’re larger, they’re growing faster, they have higher margins. We’re leveling the playing field by helping individual and institutional investors connect with these consumer retail companies much more efficiently.

CircleUp is helping break down that wall by making it easier for entrepreneurs to connect with the investors and vice versa. What used to happen was that the only entrepreneurs that could get in front of institutional investors in consumer retail were those that already had a network to get an introduction. By creating an online marketplace that presents the opportunity to an investor in a much more efficient way, and presents contextual data for making much more effective decisions, the investor has essentially lowered his or her cost to evaluate the opportunity. Suddenly we have lowered the cost to participate in this market and thus expanded participation in the market.

I also read in that same Fast Company article that among the 160 startups that have raised money through CircleUp, 35% of those have female CEOs or founders, a huge difference compared to a lot of the more traditional capital-funded startups.

That’s a direct result of a couple things. The first is the marketplace. By lowering the cost to participate in the market, we’re lowering the barrier to entry. We’re also eliminating the need for an introduction. We provide one to every investor that’s ever invested in CircleUp. If you don’t have that existing network, it’s hard to do that.

With CircleUp, you no longer need to try to get an introduction from your network. You just have to pass the Classifier, which uses a range of data points to analyze your business. The Classifier relies on data to make a decision and, as it turns out, investors and companies like that a lot more than relying on a network anyways. A broad range of data sets are evaluated by the Classifier, including history financial information, pricing, product reviews, social media engagement, leadership experience, product market fit, and more. That process has created a meritocracy and thus the proportion of female entrepreneurs has increased.

Some investors might argue that they want to meet someone face-to-face. How do you balance that desire to see someone beyond their data points? And how do you account for that?

Investors can still meet people face-to-face. The Classifier expedites that process. Instead of looking at 1,000 deals when you only want to meet 100, CircleUp shows you only 120 deals that all passed the Classifier. It lets you fish from a stocked pond.

That’s what investors find when they come to CircleUp. We evaluate these companies ahead of time, so when you get here you can see the competitive landscape. The Classifier looks at over at 92,000 data points for each company, evaluating financial performance, industry and competition, team, product and brand, customers, as well as deal and exit potential.

Some of these areas are more obvious than others. For financial performance, when a company applies, we look at their financials and we compare it to the thousands of other companies that have applied. That’s an obvious one. The less obvious one are things like team or brand and product.

We use a machine learning algorithm that gets better the more data you feed it. So, for teams, we look at a number of data sets and score the strength of the team based on their experience. How much experience do they have? How relevant is their experience? We also score the strength of their networks. So, the same type of score that we put on their experience, we put on all of the people in their network’s experience, which allows us to get a sense of how they might handle issues with supply chains or marketing challenges. We look at things like their social network and their social graph and how that has changed over time. We’ll look at reviews on the product and what customers think of the reviews. That’s all part of the evaluation.

Looking into the future, do you see the role of the investor, the human, being removed from this process?

Absolutely. It’s really hard for me to believe in a world where that will not happen. Think of the public markets. Forty years ago, it was all individual investors picking stocks on your behalf and you had to invest into individual stocks. Some mutual funds, but mostly individual stocks that were either recommended by you or by a broker.

Then, mutual funds came on in a much bigger way. Mutual funds were still picked by individual people, but ETFs (exchange-traded funds, aka investment funds traded on stock exchanges, similar to stocks) then came on in a huge way, and ETFs are essentially picked algorithmically. ETFs are one of the core reasons that the public markets grew dramatically over the past 20 or 30 years. What they have found is that the algorithms are just a lot better at investing than humans are. It’s exceptionally hard to build those algorithms, and they’re worth a lot of money.

What we’re doing is the same thing in the private markets. We’re allowing investors to benefit from the data that we are compiling and the algorithms that we’re building.

Where do you see CircleUp going next?

We’re helping companies grow and thrive after investment. One way we are doing this is by improving distribution through partnerships with companies like Amazon and eBay. We want these companies to thrive. That’s our mission. We’ve still got a long way to go before we’ve helped the tens of thousands of entrepreneurs that we believe we can help, so we’re focused on continuing to do that—even better.

What advice would you give to one of these entrepreneurs looking to get funding? How should they prepare their company, themselves, their team to be a more desirable applicant?

The most successful consumer entrepreneurs in the fundraising process are those that are highly engaged in the capital raise and don’t procrastinate, don’t push it off, don’t assume someone else is going to do the job for you. They are strong communicators of their vision, direct with investors and experts in their industry. Other than that, a great entrepreneur need not fit any one specific mold.