There are many great consumer and retail businesses that are too small to obtain funding through customary private equity channels. For many of them, crowdfunding may now provide an answer, says investor Ryan Caldbeck. And they don't have to wait until the full measure of the Jumpstart Our Business Startups (JOBS) Act kicks in next year.
Signed by President Barack Obama in April, the JOBS Act establishes a new legal framework for private share offerings. After a Securities and Exchange Commission rulemaking period ends in 2013, crowdfunding will be permitted for all Americans. But a flavor of crowdfunding is already open to individuals who qualify as "accredited investors."
The SEC defines an accredited investor as one with a net annual income of $200,000 or a net worth of more than $1 million. Securities issued to them are exempt from registration with the SEC, which can be a lengthy and expensive undertaking.
Caldbeck is the founder and CEO of CircleUp, an online crowdfunding marketplace that supports direct equity investments from accredited investors into privately held consumer and retail companies. The site provides accredited investors with free access to select private investment, tools to identify and perform due diligence on companies and online transaction capabilities to facilitate investment.
Unlike other crowdfunding permutations such as Kickstarter, CircleUp deals in equity, not in the promise of the delivery of a product or service in the future. But like Kickstarter, CircleUp is based on all-or-nothing funding. Investments are held in escrow until the funding target is realized. If the target is not reached, the money is returned to investors.
CircleUp focuses on high-growth consumer and retail companies with at least $1 million revenue. Tech companies have little trouble raising funds from investors, Caldbeck told BusinessNewsDaily. But small consumer product and retail companies are largely overlooked by institutional investors.
CircleUp specifically targets companies in the food, beverage, personal care, pet products, sporting goods, apparel, household products, retail and restaurant industries. All companies have a tangible product or retail outlet that you can touch, taste, use or visit, he said.
"It's an area that is inefficient in fund-raising," Caldbeck said. "The $1 million to $15 million revenue range is where the inefficiencies exist. This sector represents 20 percent of the U.S. economy, but only receives 4 percent of angel funding. That disconnect creates an opportunity for the investor.". Credit: Photo of Ryan Caldback courtesy of CircleUp
The selection process works like this: Companies request to be listed on CircleUp; their approval is contingent on how well a company fits CircleUp's investors as well as the successful completion of a background check and research with investor and consumer industry sources. Less than 2 percent of applicants have been approved since the site was launched in April, Caldbeck said.
Potential investors establish their accredited investor bona fides by filling out a self-accreditation form.
CircleUp also investigates the identification of every investor to weed out potential fraudsters, Caldbeck said. CircleUp currently has an investment maximum of $25,000 per deal, but will consider exceptions.
"We try to protect the investor," he said. "If they want to invest more, they have to talk with the entrepreneur."
Since its launch in April, CircleUp has already beaten its targets for the year and hit its number for investor signing in the first eight days. The first company to complete a funding round on the site was Episencial, an organic skin care company. Though the company had already posted impressive financials — revenue growth in excess of 100 percent over three years and estimated 2012 sales projections of $2 million — they still needed to raise capital to fund the company's growth.
Episencial raised $200,000 in just 14 days on CircleUp, Caldbeck said. For most companies, 30 to 90 days is the target for meeting goals, he said. The site is also beginning to attract interest from professional investors. There is no fee for investors; companies pay a small commission if an investment round successfully closes.
In addition to offering companies an alternative to traditional funding channels such as bank loans, equity-based crowdfunding also provides businesses with access to smart, value-driven investors whose goals are more in line with Warren Buffett than with Wall Street bankers.
"We give individual investors an opportunity to participate in the upside of these companies," Caldbeck said. "They become passionate brand advocates. We're not just providing efficient capital. We're providing smart capital."