If you had told me in June, 2011 that I would leave private equity to start an equity-based crowdfunding site, I would have laughed. At that time, I had just been promoted to Director at Encore Consumer Capital, a leading consumer-focused private equity firm, and, most importantly, I had never heard of equity-based crowdfunding.
After spending close to seven years at Encore and TSG Consumer Partners focused on private- equity investing in lower middle-market consumer products companies, I noticed a huge void in the marketplace. There were no institutional investors for small consumer brands. Almost every week, two or three consumer entrepreneurs would call me, looking to raise capital. For companies with revenues under $10 Million, there was nothing we, or any of the other funds I knew, could do. Because of this, each conversation ended the same way, with me turning them down without being able to give them another source to turn to, as they were too small for institutional equity and did not have sufficient assets to raise debt.
The turning point for me came when I spoke on a panel at a consumer trade show, the HBA Global Expo in June of 2011, where the topic was how to finance a small consumer brand. I sat there for an hour as the experts on the panel (myself included) could not come up with any viable financing options for the consumer entrepreneurs in the audience other than credit card debt. Think about leading a shampoo brand with two million dollars in revenue that has national distribution, a business that’s growing at 50% a year but has to take on credit card debt to finance the business. If you can’t imagine it, then you likely work for a tech company in San Francisco, because those are the only types of companies that don’t struggle to raise money. In consumer and retail, which is 20% of the economy but only 4% of angel funding, this is the reality.
At the same time, Rory Eakin, my co-founder, and a long-time public and private investor, saw that investors were becoming disenchanted with the public markets. Individual investors, no differently than large endowments, want diversification. For our parents, diversification meant stocks mixed with bonds, and maybe some real estate. But today, diversification means alternative assets like private companies. Together, we realized there was demand on both sides of the marketplace. Small consumer companies were frustrated by the inefficiency in the fundraising process and investors were hungry for alternative assets that could generate alpha. And given that angel investments in consumer companies generate an average return of 3.6x invested capital over 4.4 years (according to Kaufmann Foundation data), we realized that an aggregation platform that connected great sub-$10 million consumer companies with investors would solve a huge market inefficiency.
The problem of solving that inefficiency, and helping millions of investors and entrepreneurs, was intimidating. And exciting. We made one of the biggest decisions of our lives- we quit our jobs and started an equity-based crowdfunding site, CircleUp (www.circleup.com).