Before joining CircleUp, you were an associate at consumer-focused private equity firm JH Partners. What motivated your move to the startup world?
Being an associate at a private equity firm is a great opportunity to be exposed to a ton of companies and learn about what traits make great businesses. However, you are always one step removed from the reality of what it means to be running a business day to day, solving the unexpected challenges that come up for any operator. I wanted to be a part of building a business from the ground up, to face the unknown and help solve big problems.
I was drawn to CircleUp because it was solving a problem I had seen first hand. At my previous firm, like many other middle-market private equity firms, it was difficult to invest small amounts in early-stage companies, no matter how interesting the opportunity might be. Small investments simply did not provide enough upside and often took as much, if not more, work to execute and monitor than larger investments. It seemed like there should be some resource for these companies, but there was none, so CircleUp made complete sense in how it was leveraging technology to bring more resources to the early-stage ecosystem.
CircleUp’s team includes several private equity professionals, such as you and Asher Hochberg, who joined from Goldman Sachs. How does your expertise and experience as a private equity investor inform the work of evaluating startups for CircleUp?
My background in private equity, as well as the backgrounds of others on our team in investment banking and other areas of finance, are certainly very formative of the work we do at CircleUp. It provides the basis for the disciplined approach to investing we take and gives us the ability to hone in on the key attributes that will help determine whether or not a company can be successful.
Not only was my private equity experience relevant, in terms of deal evaluations and investment theses, it exposed me to the problem that CircleUp was created to fix. The very early-stage market in consumer has very few financing options, other than raising capital from friends and family and bootstrapping until you hit $10m in revenue, when you are large enough for traditional private equity firms. CircleUp was built to fill this void, providing capital and resources to early-stage consumer brands.
There were adjustments and new challenges for me, as I moved into earlier-stage consumer investing, which is pretty much uncharted territory for the entire world of finance. But by far the biggest change is the immense personal reward of knowing we are helping entrepreneurs take their business to the next level and helping to bring products into the world that improve what people eat, drink and wear.
The US consumer and retail sector receives less than 5% of early-stage funding, even though it makes up about 20% of the US economy. What explains this discrepancy, and how is CircleUp seeking to help bridge this gap?
This imbalance of market size and opportunity is central to CircleUp’s vision and value proposition to entrepreneurs. It is important to understand though that this imbalance, where early-stage consumer private equity is largely neglected, is not because of risk or concerns with financial outcomes. The asset class actually has relatively low volatility and great returns historically. The issue is the inefficiency that has plagued early-stage consumer, deterring investors from -pursuing it.
In consumer, there is a geographic dispersion, meaning companies are as likely to be in Texas, Colorado or Idaho as they are in San Francisco or New York. There is no literal or figurative Silicon Valley in the consumer industry, meaning no central hub cycling the best new brands and entrepreneurs to the right networks, and to VCs. When there are millions of small consumer brands scattered throughout the nation, finding and diligencing the top ones is expensive, in terms of time spent and search costs. These high sourcing costs are not justifiable when you are making a small investment – $1m or less – for a small company.
A lot of CircleUp’s value for investors, and thus for entrepreneurs and consumer product innovation at large, is drastically lowering these sourcing costs and opening up this asset class for much more efficient evaluations and investments. We use the model of an online platform connecting capital and brands. Our platform is built on our consumer business graph, Helio, which uses machine learning and a tremendous amount of data to spot fast-growth, early-stage consumer brands.
Today, Helio is collecting and analysing data on 1.2 million consumer brands, and is built to mimic the investor’s mind, assessing brand, distribution, team and revenue – all from afar, without us needing to contact the company. The result is an intelligent lens into an otherwise messy, far-reaching and opaque market, where we can spot great brands instantly and early when they pull ahead, and provide them with the capital and resources they need to thrive.
301 Inc, the investment arm of consumer foods manufacturer General Mills, is a CircleUp partner. Tell us how this partnership came about. Is corporate venturing interest in consumer innovations growing?
We have been fortunate to have General Mills as a partner since very early in our company’s life, starting in 2012. The scope of the partnership has grown and evolved over time, but at the core of the partnership was their interest in innovative consumer products companies. This eventually grew to include a greater focus on investing through 301 Inc.
We are continuously impressed with General Mills’ dedication to being an active source of capital and mentoring, fuelling innovation among early-stage consumer companies. Several big consumer packaged goods (CPG) brands have launched venture arms, but General Mills 301 Inc is by far the most active. The partnership was a natural move for us both – us to provide emerging brands with strategic capital, and them to access a direct channel for some of the top industry deals, as well as industry insights.
Overall, CVC is growing in consumer innovation. In the past year, 10 of the biggest consumer and retail brands have invested in CircleUp companies. Big consumer brands are well aware they are in trouble, with eroding market share as people are losing interest in their mass-market products. All the while, better-quality authentic emerging products are surfacing left and right, and they have entered the mainstream.
Big consumer brands invest primarily for three reasons – to make a strong return, to inform their M&A pipeline, and to learn about trends that inform future deals. The partnership with CircleUp gives them great exposure to all three, with a highly-curated selection of some of the top brands across all consumer categories.
CircleUp raised $30m in a series C round in 2015 to grow its platform and invest in machine learning technology. What has changed since then?
A lot has progressed on this front over the past few years. We rolled out consumer business graph Helio, which collects and analyses data on the greater consumer brand universe to predict the likelihood of breakout success for early-stage businesses. Helio is based on hundreds of data sources – some public, some proprietary, billions of data points and many algorithms, with more being built. It is the foundation for all the work we do.
Tell us how deals are sourced at CircleUp. Do brands approach you, or is it more the reverse?
Helio allows us effectively and efficiently to evaluate not just companies that apply to CircleUp, but the greater consumer brand universe at large. Helio begins with subcategory identification, understanding if a brand sells popcorn, shampoo or kombucha, then compares it only with like brands, understanding the specific nuances of the exact subcategory, like margins, distribution and channels. Helio predicts financial performance, both current revenue and revenue estimate, and assesses strength of brand, management team and distribution. The goal is to mimic the investor’s thought process, by considering these key metrics, but with more data and intelligence than a human could compute manually.
Helio can also be tailored to investment thesis. For example, you can look at beer brands doing $5m in revenue with great brand scores, but average distribution scores, theorising that capital could fuel distribution and then catapult growth. Or an investor can look at men’s personal care brands that are growing very fast, with an excellent team.
In terms of how we engage these companies to work together, it is a strong mix of applications, referrals and companies we reach out to proactively based on Helio’s identification. In the case of reaching out proactively, entrepreneurs are very enthusiastic, because they have put their head down, worked hard and done a great job, and now are being rewarded quickly and early for pulling ahead.
What kinds of emerging companies are attracting investor attention? What key criteria are investors looking for, and what sectors within consumer products are the most appealing?
The trend to natural, organic and sustainable has taken hold across every consumer category, leading to higher-quality and fewer ingredients in products. At a more specific level, we have seen an explosion in plant-based foods, such as dairy and meat alternatives and better-for-you snacks, as well functional beverages, which tout positive health benefits coming from unique ingredients like probiotics and superfoods. We also see a surge in “upcycling”, which is reinventing food waste. Finally, healthy fats are in, with ingredients like avocado and coconut in different types of snacks and foods.
Every investor considers financials, brand, team and distribution. How they weight these areas may vary according to their investment thesis, but these are the core metrics.
Overall, we are seeing successful modern CPG businesses doing an excellent job of telling and selling a story, a story that is authentic and inspiring. Today, people want to feel connected to what they are buying and consuming. They do not want the makeup their parents wore, and do not want to feed their dogs the brands they grew up with. Even the act of selecting a household cleaner is now a form of self-expression.
Share a few recent capital raising success stories with our readers.
Supergoop is a skincare brand which brings sun protection factor to new kinds of products and makes it something that feels great to put on your skin. We presented Supergoop to institutional investors, and shortly afterwards they raised $3.25m, including an investment from CircleUp’s own fund.
Rebbl is a line of functional plant-based drinks that incorporate the power of super-herbs, and the brand donates 2.5% of sales to initiatives that help to eradicate human trafficking. The CEO is a co-founder of Plum Organics and former CEO of Clif Bar. Lead investors are Powerplant Ventures, led by the Zico coconut water founder, and Boulder Investment Group Reprise, with investment from CircleUp’s own fund.
Tio Gazpacho is a quickly-growing brand in the relatively new category of bottled soups, or more broadly, drinkable meals. We introduced them to General Mills 301 Inc, which is now is its lead investor.
Rhythm Superfoods is a leading plant-based snack company, whose products include kale chips, beet chips, and broccoli bites. General Mills 301 Inc has been a lead investor in two investment rounds, which included investments from CircleUp’s fund.
What are CircleUp’s plans for further expansion?
The US consumer market is massive, with millions of emerging businesses across food, beverage, personal care, home goods, pet care and apparel. There is still a long runway for us to go within this market. However, we find international consumer markets very interesting for the same reason as the US consumer market – there are numerous innovative brands, which also face challenges with insufficient financing options.