Entrepreneurs are known for figuring out solutions to every problem or obstacle in their way, however the one major issue that still holds most entrepreneurs back is money. If they can bootstrap though start-up phase, that’s terrific but then they find themselves stuck without adequate funds to continue growing.
It’s the Catch 22 that just about every entrepreneur experiences at some point. The old stand by methods of racking up credit card debt or asking friends and family for funding both have a less than stellar track record for long-term success. So, today technology allows for the popular new tool known as crowdfunding or crowdsourcing, which uses an online platform to bring together businesses with many small investors who pool together funds to take the business to their next level.
But like online dating, crowdsourcing faces similar issues of looking much better on paper than it does in real life. FInding the right match can be difficult and requires honesty and integrity from both parties.
This is where www.CircleUp.com comes in. CircleUp has been the prince charming to several brands in the company’s niche space within consumer products such as food, personal care, apparel and pet-related companies. CircleUp founder Ryan Caldbeck left his job as director of a private equity firm to start CircleUp (in 2011) to help entrepreneurs who were caught in this Catch 22 of not making enough money yet to attract private equity firms (typically at least $10 million a year) but still succeeding in building a brand that consumers are buying and following with loyalty. With many consumer brands in this predicament, CircleUp considers businesses that earn anywhere between $1-10 million annually.
A couple of months after reading about CircleUp in a Jan. 2013 New York Times article, I found myself sitting next to Ben Lee, Circle Up’s Director of Business Development, at a Fast Pitch Event at the Expo West Natural Products Expo in Anaheim. I saw firsthand how Ben was willing to help these young start-ups. His enthusiasm seemed so much different to me than the reputation that precedes many private equity investors. I had to learn more.
After the conference, I had a call with Ben and CircleUp’s Investor Executive Megan Zito, they explained why CircleUp was in fact different from most crowd sourcing platforms. In addition to helping smaller, up and coming brands, Circle Up prides itself on connecting the right people with the right business. Ben explains that “When investors are providing more than just funds, it becomes a much greater partnership. With CircleUp, our investors may offer business advice as well, which many entrepreneurs at that stage desperately need.”
Megan Zito says that:”CircleUp is the only equity crowdfunding site that focuses exclusively on retail and consumer products. This focus helps us attract potential investors with not only capital to invest, but also deep expertise to offer. Consumer and retail companies do not receive the same attention from the venture capital community as industries such as technology. Being able to aggregate investors around consumer product business is amazing. We also have valuable partnerships with various industry experts and large CPG companies, like P&G and General Mills, where by they are providing incubator days and helping brands be more successful. Our business is not just about successful transactions, it is about building successful brands.”
Ben explains that CircleUp may be for you if:
“We are interested in any branded consumer products and retail concepts but are currently not focused on services or pure e-commerce. We have seen initial success within personal care and food, particularly within the natural/organic space . Fashion accessory brands and baby products are areas of focus as well. The overall profile is a company that has strong brand recognition but needs money for growth equity while looking to grow the team or expand distribution, either nationally or internationally.”
One of the biggest and most common challenges (also faced by one of the participants of the Fast Pitch panel in the natural foods industry) is Initial distribution. Ben says, “Its very costly, particularly in the food space to get onto shelf. The product can do well but it takes considerable time for that initial investment to pay off, but in the meantime the company needs to ramp up inventory to increase distribution. CircleUp now comes in to solve the cash crunch where many other investors won’t even consider a brand at this stage.”
Ben says the biggest mistake in pitching is bad valuation:”It can hurt you. Business owner’s need to consider the question of ‘Do I get capital that I need, bring in smart people and own a smaller piece of bigger pie or grow slower and own a bigger piece of smaller pie?’ Bringing in the right people and having capital in hand can be more important for long-term success. Also, even if you are successful at receiving a high valuation, one or two years down the road when you need more funds, the next round of investors may be wary of that valuation. You should remember that how you raise money today will have an impact on your ability to raise money in the future. ”
Ben’s advice for raising the right amount of money:
“If you are a young company with $1 million in sales, you likely don’t need to raise $10 million. You would be taking significant dilution by raising that much capital at such an early stage. Lay out how you plan to use of funds and focus on the areas that will help you grow to the next level. You need to have clear sense of exactly what the funds will cover. This will help you raise the right amount of capital for the right usage.”
Megan Zito: Why Women Are Successful on Circle Up:
“Investors are looking for good deal at a fair price but are drawn to companies with a great story. Companies do well on CircelUp with their personal stories and women do a great job telling their story and connecting personally so that investors can relate easier. In addition to financials and technicals, women focus on stories that resonate with investors. When a brand can do that effectively, they do well on our platform.”
Megan on The Retail Sector:
“One reason that CircleUp focuses on consumer and retail companies is that investors are able to sample the products, which helps them feel more connected to the company. The challenge with crowd funding is that you don’t have as much connection as you would with an in-person fundraising pitch. Being able to sample the products helps investors with this discrepancy. Rather than cater to masses, companies tend to do well when they understand their niche and present at that niche to investors that will love your brand. When you cater to those people you have the perfect product. Don’t try to appeal to masses, be the niche brand.”
CircleUp is different from other crowdsourcing platforms in that they operate under a broker/dealer, which means they are licensed professionals to do these private placements with potential investors. Megan explains that this should be industry standard but it’s not.
Once success story that came from CircleUp is Christy Prunier’s Willa Skin Care.”I was in that Catch 22. I had not only boot strapped willa but also burned through most of an SBA loan collateralized with our home. We were certainly too small to capture interest of private equity. What’s more, PE wasn’t an ideal partner. I was spending way too much time chasing down potential investor leads — most of which were neither highly motivated investors nor consumer focused. It was a very frustrating process particularly given my time needed to be on executing our launch. I was introduced to CircleUp through someone in private equity who I admired so that gave me great confidence. I decided to go with CircleUp because of their sharp focus on consumer brands and the fact they had been very successful helping other startups raise capital. I’d encourage entrepreneurs considering crowdfunding to speak with some of the entrepreneurs who have raised funds on these platforms. CircleUp was a fantastic experience for me. Not only did Willa raise funds quickly on this platform, but the funds came from investors who bring added value. They have been instrumental in some of our key hires as well as helping us navigate challenges and creating new growth opportunities for the brand.”
So, if you’re an entrepreneur and find yourself in that awful Catch 22, crowd sourcing may just be your company’s prince charming.