20VC FF 035: Why Crowdfunding Is Not Right For Tech Startups with Ryan Caldbeck @ CircleUp

Ryan Caldbeck is the Founder & CEO @ CircleUp, the online investing platform that allows you to invest in innovative consumer companies. They have raised funding from some of the best including USV, Maveron and Canaan Partners (all past guests). Before Ryan founded CircleUp, he worked in consumer product and retail-focused private equity at TSG Consumer Partners and Encore Consumer Capital exposing him to many great consumer and retail businesses that were too small to obtain funding through the customary private equity channels. As a result, he decided to make funding available to these promising companies through CircleUp. In Today's Episode You Will Learn: 1.) How Ryan made the move from the world of VC to founding his own tech startup? 2.) Why is CircleUp marketplace investing, not crowdfunding? What does Ryan believe are the misnomers around the term crowdfunding? 3.) Where do you see this sector making sense and where does he think it is not so efficient? Why is it wrong for tech companies? 4.) One manjor aspect in the UK that this segment has struggled with is it’s ability to attract institutional investors to the sector. So with CircleUp, how are institutional investors getting into this market and is there anything more Ryan would like to see with this regard? 5.) To what extent does Ryan think this is disrupting private capital formation? Should VCs be concerned? What sector of the funding environment is most vulnerable to being disrupted by the rise of marketplace investing? 6.) How was the funding process for Ryan? CircleUp raised over $30m over several rounds with investors from our friends at USV and Maveron, how that came about and what Ryan would advise founders entering the process? Items Mentioned In Todays Show: Ryan's Fave Blog: AVC, Jeff Jordan, Bill Gurley As always you can follow The Twenty Minute VC and Harry on Twitter here! If you would like to see a more colourful side to Harry with many a mojito session, you can follow him on Instagram here!

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  I am Harry Stebbings, your host, and you are listening to the 20 Minute VC. And as we've been interviewing investors that have been disrupting the world of VC this week with Angel List, we thought we would continue this theme of disruption of traditional finance. And who better to have on than Ryan Caldbeck, founder at CircleUp, the online investing platform that allows you to invest in innovative consumer companies. They've raised funding from some of the best, including Union Square Ventures, Maveron, and Canaan Partners, all past guests, I hasten to add. And before he founded CircleUp, Ryan worked in consumer product and retail-focused private equity at TSG Consumer Partners and Encore Consumer Capital, exposing him to many great

• 0:44Harry Stebbings?

  consumer and retail businesses that were simply too small to obtain funding through the customary private equity channels. As a result, he decided to make funding available to these promising companies through CircleUp. Before we jump into the show today, this episode is supported by Wonder Capital, a very different type of online platform in terms of investment. Backed by tech stars, Wonder Capital allows you to earn 11% annually through investing in their solar funds. And best of all, they take no fees. And rather wonderfully, considering market conditions at the moment, that investment with Wonder Capital is independent of market performance. So join the thousands already using Wonder Capital and sign up with a free account at

• 1:28Harry Stebbings?

  wondercapital.com/20minetc, all in letters, and wonder with a U. Do well by doing good with Wonder Capital. And now it's time to delve into the show. Therefore, I'm thrilled to welcome Ryan Kuldbeck, founder and CEO at CircleUp.

• 1:51Speaker 01

  You have now arrived at your destination.

• 1:54Harry Stebbings?

  Ryan, welcome to the 20 Minute VC in this very special episode of Founders Friday. Thanks so much for coming on.

• 2:00Speaker 02

  Well, thank you very much for having me.

• 2:02Harry Stebbings?

  Now, I'd love to kick off today by hearing a little bit about you and how you started CircleUp, what the origin story was, and what really was the aha moment for you.

• 2:11Speaker 02

  Sure. So my background is in consumer-focused private equity. That's where I spent my whole career as an investor. What I noticed is that there's just hundreds and hundreds of investment firms around the country that love consumer retail. They love the returns, the... The cash flow characteristics. But the problem is that most investors will only invest after a company hits ten or fifteen million dollars in revenue. And when I was working as an investor, I'd continuously get frustrated that we'd get these companies that I was just in love with, they were too small for our fund, and I couldn't find anywhere else to send them. And so that frustration boiled over and eventually realized there's just got to be a better way.

• 2:53Speaker 02

  And started to look into kind of the core dislocation in the market. And what I found is that although the returns at the earlier stage are extraordinary, on average about three and a half times your money in four and a half years, the problem is that it's very inefficient to find and evaluate the companies. So in the tech world, whether or not you believe there's a bubble, very few people believe there's not enough money in that industry. And so if you're a tech company in San Francisco or New York, very easy to get the capital you need to thrive, in part because there's so much infrastructure and it's such an efficient industry. So there's the Y combinators of the world, there's Santill Road, et cetera.

• 3:33Speaker 02

  But in consumer retail, if you, Harry and I, start a fund trying to invest into one million dollar revenue consumer retail businesses, instead of finding them in one of two cities in the US, we're getting on a plane and we're flying to Texas, or to Florida, or to Idaho. And that inefficiency made it very difficult for companies in that industry to raise capital and get the resources and support they needed to thrive. That's what led me to starting this marketplace back in 2012.

• 4:06Harry Stebbings?

  On first glance, it would be very easy to put yourself in the bucket of crowdfunding, but you very particularly segment yourself away from that into the label of marketplace investing. So why is that and what are your thoughts on these two labels?

• 4:21Speaker 02

  Sure. So crowdfunding is just, it's a very broad term. So it basically means a group of people or institutions coming together to fund something. And that could be donating money to a cause, it could be pre-buying a watch on Kickstarter, it can be investing in the form of debt or in the form of equity. And that confusion, I think, has led some, not all, but some investing marketplaces to say, you know what, let's separate ourselves from that concept just to give more clarity on what we do. We don't allow folks to just donate or to companies to just ask for donations.

• 5:01Speaker 02

  We're an investing platform and our goal, our mission, is to help entrepreneurs to thrive and we do that by providing strong returns to the underlying investors. And that's a very different goal than some of the rewards-based crowdfunding sites that are looking to help a project get off the ground by allowing people to pre-buy product or some of the nonprofit sites which allow nonprofits to pool funds together. And it's not demeaning their missions at all, it's just a very different mission. And so we try to provide clarity with the focus of being marketplace investing.

• 5:40Harry Stebbings?

  And what do you think the transition in the jobs act and the movement in the SEC's ruling will affect the marketplace investing ecosystem?

• 5:48Speaker 02

  You know, it's a really good question and we have a contrarian view on Title III of the Jobs Act, which will allow unaccredited investors in the US to invest. Our view is that it won't be, it won't have a major impact. And we believe it will not have a major impact in part because of the costs to the companies. So we look at the rules themselves and while the goal of trying to allow unaccredited investors to access this, you know, private investments, I think is a worthy one, the execution by the SEC made it very difficult to believe that good companies would ever want to raise money using Title III. So, basic

• 6:33Speaker 02

  summary is that if a company raises capital using Title III of the Jobs Act, they have to jump through a bunch of hoops that they would not have had to jump through if they raised capital from accredited investors or institutions. And so what you have to believe is that that cost is worth an extra benefit. If you don't believe that there is an extra benefit from raising from unaccredited investors...

• 7:03Speaker 02

  Then logically, you'd have to believe that most companies would first go to accredited investors because there's just less cost to doing it. So let me walk through a little bit of what some of the costs are. The key one is exposing your financials on an annual basis for the entire world to see. Now, public companies do that on a quarterly basis, right? But in the form of most private companies, they don't want to do that. A million dollar revenue business doesn't want to expose their financials for everyone. They may not want their neighbor to know how much money they make. They may not want to have to answer questions to a customer who's wondering why prices went up even though the margins are high.

• 7:47Speaker 02

  But Title III of the Jobs Act has forced all companies that raise from unaccredited investors to do that. They also require, in certain instances, audited financials and in other instances, reviewed financials. And while at a high level, that goal sounds like a good one, most private companies don't have to do that. And so when a private company needs to raise capital and they're thinking, well, do I want to raise from unaccredited investors and go through this pain and pay these costs? Or do I want to raise the traditional way from accredited investors and not pay those costs or deal with that pain?

• 8:25Harry Stebbings?

  I have a question to ask, though, on this.

• 8:28Speaker 02

  Sure.

• 8:28Harry Stebbings?

  If you raise from unaccredited investors, they'll traditionally be far more than accredited as they tend to give much lower amounts and there are much many more of them. Am I correct?

• 8:37Speaker 02

  Correct. Yes, and it's almost, um, yes, that's exactly right.

• 8:42Harry Stebbings?

  So would the marketing benefit of getting the product out to more people not be a significant benefit maybe worth undertaking?

• 8:49Speaker 02

  I think it's a really good point. You know, I think that is, that has been the only argument that I have heard. I think you could probably reasonably believe that that marketing benefit is not relevant for most industries. Hard to believe that it's relevant, let's say, in healthcare, right? Or industrial companies and even most tech companies. Well, it could be somewhat interesting for a game for your iPhone. The majority of tech, whether it's clean tech or SaaS or a lot of marketplaces, probably hard to believe that having 200 people invest is going to move the needle for them when they're looking to get 50 million users. For a consumer product or retail company like the ones that we focus on at Circle Up,

• 9:30Speaker 02

  I think it's easier to believe that having a base of passionate brand advocates is worthwhile. But, and this is the key but, you're going to have to prove that to a company before they're willing to take on that cost. And that's going to be pretty hard to prove. I think what's more likely, to be frank with you, is that companies will fail in trying to raise from accredited investors and then turn to unaccredited investors. That's adverse selection, and that concerns me. Now, look, there may be a technology solution that will exist that will help companies raise more efficiently and deal with the financials in a way that's suitable for companies.

• 10:12Speaker 02

  But all the companies we talk to are very scared of that and would rather raise in a form where they're not forced to do that.

• 10:22Harry Stebbings?

  And you mentioned there that it might not be optimal for tech companies to raise using this form of funding platform. Why is it that you believe that? And why may it be not so optimal for them to raise using this?

• 10:33Speaker 02

  Well, first and foremost, I think tech companies, to be candid with you, shouldn't use any online platform. I think tech companies have a very robust funding environment already. And so, you know, that's in the form of not just Silicon Valley and New York City, but the other 25 cities in the US and dozens and dozens of cities around the world that are giving strong incentives for the tech environment and for VC firms. There is no shortage of investors or capital flowing into tech companies. So then, when you consider if a company in the tech space goes to an online platform, I think you can reasonably assume they already tried to raise from Sequoia

• 11:18Speaker 02

  or Union Square Ventures or all of the other VC firms, or they've tried to go to the incubator groups or the angel groups that are offline, et cetera. And they were passed over. And that's fine. But then what you have to believe is that those companies who were passed over... Will still provide a strong return to accredited investors through an online platform. And that's difficult for us to believe, especially when you consider that the returns in tech investing over the past 15 years have been very poor. Then, when you start talking about Title III of the Jobs Act, unaccredited investors, I think what you have to believe is, all right, they were passed over by all the best VC firms, then they went to all the angel groups, then they went to accredited investors through online platforms, they were passed over by all those groups, but there's still good

• 12:03Speaker 02

  companies that unaccredited investors would want to fund. And that scares me.

• 12:07Harry Stebbings?

  It would seem fair to say then that the unaccredited investors are just getting the crappy deal flirt at the end of the funnel.

• 12:13Speaker 02

  That's right, which is a shame. You know, whether, I think there was a debate for several years about whether unaccredited investors should be able to invest into these companies because it's so risky and what happens if they lose all their money? And then the flip side of the argument is, well, they can still go to Vegas and gamble, right? Regardless of whether, what side you come out on, it's very hard to believe that it's a good investment for unaccredited investors when you consider the adverse selection that exists. And that's what really scares me.

• 12:45Harry Stebbings?

  And talking of accredited versus unaccredited investors, in the UK, one of the main reasons this sector's failed to explode is because of the lack of institutional capital flowing into this sector.

• 12:56Speaker 02

  Yep.

• 12:57Harry Stebbings?

  So for you and Circle Up, how are institutional investors getting into this sector? And is there anything else you'd like to see in terms of them entering the market?

• 13:05Speaker 02

  You know, that's a great question. So we're seeing a explosion of institutional investors on the platform. In 2012, when we first started, the average check on Circle Up was $12,000, and it was all from individual investors, accredited investors. In 2015, the average individual check was over $100,000 into a single deal on Circle Up, and half the capital comes from institutional investors. What you've seen over the course of those three years is a path that looks very similar to Lending Club's path in their first three or four years. Where they started with individuals loaning money to other individuals and then moved

• 13:47Speaker 02

  to family offices, then small funds, then larger funds, et cetera. And we're seeing a very similar path, which by the way is why some of the largest VC firms that backed Lending Club are in Circle Up and their COO is on our board. They see a very similar path. They view us as the equity equivalent of Lending Club. But I think as we look forward, we get even more excited about that. So in our Series C a few months ago that we raised and announced it in November, some of the best marketplace and fintech investors in the world invested, but we also had the ex-CEOs or presidents of Goldman Sachs, Thomson Endowment, Capital One and others invest.

• 14:28Speaker 02

  And they all invested with the theses that goes back to your original question, which is they all think institutional investors will find this to be an extraordinarily attractive asset class. And their logic is, you know, you look at the performance of Circle Up companies. The average company is growing at more than 100% per year since raising on Circle Up. The unrealized average IRR on Circle Up is over 50%, 5-0. In addition to that, this is an asset class that's not correlated with the overall economy and has half the volatility of the tech market. Institutional investors can't access this for the reasons we talked about earlier without a marketplace like Circle Up.

• 15:09Speaker 02

  And so we see institutional investors catching on at an increasing rate, which is why we're growing rapidly.

• 15:18Harry Stebbings?

  And you mentioned there the funding process for you and raising from USV, Maveron, Canaan Partners, and that naturally gets very excited, all as past guests of the show. So how was the funding process then for you? And what was it like getting such top-tier investors investing in Circle Up?

• 15:36Speaker 02

  Sure, yeah, it's actually, it's been different in each round, to be candid with you. So when we first started and raised our seed round, which Maveron and Clayton Christensen, who wrote the book called The Innovator's Dilemma, through his hedge fund, Rose Park, they led that back in 2012. That was a very hard round for us to raise, to be frank with you. And I think we went to 60 some odd investors who passed. And I remember vividly more than a few investors laughing at the concept of this little niche industry called consumer product and retail companies. And as much data as I would show them to say it's actually a larger industry than

• 16:15Speaker 02

  tech and it's 20% of the economy and it's just hard to get them excited about where the dislocation occurs. You fast forward then to our A round and you know, Union Square had said very energetically that they would never invest into an online equity investing platform. And they met us and they changed their view because they realized that we were filling a need. And their thesis and our thesis is that marketplaces work when there is a pain to be solved. And that's exactly why they didn't believe it worked in the tech world, that there was no pain to be solved.

• 16:57Speaker 02

  But in consumer retail, there's a massive industry and a massive pain to be solved. You know, our Series B, we were fortunate. So each round has gotten easier and our Series B, from our first meeting to the money in the bank was less than 30 days and we were extraordinarily fortunate in that regard. And our Series C came about because the lead investor collaborative fund made a list of the top four investments that they wanted to make in the country and we were there and they gave us a call. We weren't looking for capital, to be candid with you, in an active way, but they were, they seemed like a fantastic partner.

• 17:37Speaker 02

  And I think, to be frank with you, one lesson that I learned throughout that process is that targeting investors, and this, it sounds so obvious, but targeting investors that have an understanding of the underlying pain that you're trying to solve is critical. And when you go to an investment firm that has, that needs to be educated for 45 minutes out of an hour-long meeting about the pain, it's really hard to make traction in that meeting and to get them excited. And so each round, we kind of learned that more and more. But we also, to be candid with you over time, had better and better metrics, which allowed us to raise more easily.

• 18:18Harry Stebbings?

  And I have to ask there, you mentioned the seed round with possibly 60 VCs saying no to you. How did you, as the founder, keep the morale up and not be disheartened by the continuous rejection of investors at such an early stage?

• 18:34Speaker 02

  That's a great question. I have a bizarre personality trait that when someone doesn't believe in me, I believe in myself more. And I use that, there is a little bit of a vengeance, to be candid with you. And that anger energizes me. And so I said to our board casually, you know, after the C round, that, you know, I'm someone that when my teammates believe in me, and the opponents don't believe in me, I am at my best. And so when I would meet with a VC firm, and they didn't, or an angel investor, whatever, and they didn't

• 19:18Speaker 02

  believe in me or us, it got me more excited. And just to prove them wrong, to be candid. And so I could, I could still tell you very small details about most of the meetings of folks that passed. And I remember those details very vividly. And when things are going really well, I like to think back to those details to fuel me to prove them wrong and to build something that's really special.

• 19:48Harry Stebbings?

  Absolutely. And I'd love to dive into a quickfire round now. So your favorite book, and why?

• 19:56Speaker 02

  It's one of my favorite questions. You can tell I need to read. The hard thing, yeah, the hard thing about hard things. And because he is so candid.

• 20:06Harry Stebbings?

  Indeed, a brilliant book. But I do have one question to ask you then, as founder and CEO of Circle Up. In The Hard Thing About Hard Things, Ben Horowitz touches on transparency, and the importance of transparency with your team. I just spoke to Jeff Seibert, Senior Director of Product at Twitter, and he said that one of his main problems pre-acquisition was being overly transparent with his employees, leading to them not actually working and concentrating on what they were supposed to be doing. So where do you stand on the whole transparency debate?

• 20:35Speaker 02

  We are. And sometimes it's hard. So everyone in the company has complete access to all the metrics. We present the board deck every 60 days, completely unedited. We talk with the company about very difficult decisions. One topic that, you know, has been...

• 20:54Speaker 02

  Difficult is when folks leave and when folks leave not on their own choice. We have a philosophy to allow people to leave with their head held high and to leave with respect. But sometimes that is difficult because it's almost in contradiction with the concept of transparency. Right? We don't notify everyone that someone was let go because of performance reasons. And that is a difficult balance because I think that's probably the only area where we are not as transparent, but we do it out of respect for the person that's leaving.

• 21:32Harry Stebbings?

  And then the biggest productivity tips and tools that you use?

• 21:36Speaker 02

  Tools, I would say Slack is an important one for us. I think in terms of processes, this is going to sound a little out there, Harry, but I actually do transcendental meditation and I started it about 15 months ago and I am...

• 21:53Harry Stebbings?

  Headspace?

• 21:54Speaker 02

  It's similar, very similar. Yeah, that's right. And what I've found is that two 20-minute sessions a day just allow me to be better.

• 22:03Harry Stebbings?

  Absolutely. We're totally with you and we love headspace here. And then the next one is the best piece of advice ever given to you?

• 22:10Speaker 02

  Never, ever, ever give up.

• 22:13Harry Stebbings?

  Your most read blog or newsletter? What's the must reads for you?

• 22:17Speaker 02

  The blogs that I like the most are AVC, it's Fred Wilson's blog, and Jeff Jordan's blog from Andreessen. When Bill Gurley does something from Benchmark, he writes a lot about marketplaces, so I tend to like that as well. Yeah, those are my top three.

• 22:35Harry Stebbings?

  And then the most challenging aspect of growing Circle Up for you?

• 22:39Speaker 02

  Culture. A balancing culture where someone's doing really well, how do you continue to keep them challenged and keep them, give them an expanding role? Someone's not doing well, how do you coach them or eventually lead them to a transition out? But culture is the thing that keeps us up at night more than anything else combined, to be candid.

• 22:59Harry Stebbings?

  And then finally, the next five years for you and for Circle Up, what have we got in store?

• 23:04Speaker 02

  The growth is phenomenal and I think what you'll see us do is continue to own early-stage consumer retail and over time you'll see an expansion as we add other financial products to help companies thrive.

• 23:22Speaker 02

  And eventually expand to other geographies and then finally other industries. So consumer, our mission is to help entrepreneurs to thrive by giving them the capital and resources that they need.

• 23:33Harry Stebbings?

  Is it a market expansion play for you guys now then?

• 23:36Speaker 02

  Well, yeah, that's part of it, but the products that we need to continue to help generate network effects to make our underlying marketplace more effective are critical.

• 23:45Harry Stebbings?

  Ryan, thank you so much for joining us today and sharing the incredible circle up journey and for detailing your thoughts on the SEC's recent ruling. It's absolutely incredible to hear your opinions. Thank you so much for giving up the time.

• 23:57Speaker 02

  Terrific. Thank you so much, Harry.

• 24:00Harry Stebbings?

  Fantastic to hear Ryan's thoughts there. And if you are loving the 20 minute VC, then head over to the20minutvc.com, all in letters, and sign up for our newsletter so you never have to miss an episode or an update. And today's episode is supported by the incredible team at Techstars-backed Wunder Capital. What's interesting about Wunder Capital? Well, the solar market has seen a 1600%, yes, 1600% growth in just five years. And Wunder Capital allow you to invest in those solar funds and received up to 11% annual monthly, annual return, sorry, with monthly cash flows and absolutely no fees. And you can join the thousands of people already benefiting from these incredible

• 24:44Harry Stebbings?

  returns by heading over to wundercapital.com/20minutvc, that's 20 minute VC, all in letters, and Wunder with a U. Diversify your portfolio, save the planet, do well by doing good with Wunder Capital. Thank you so much as always for tuning in and I look so forward to seeing you in next week's episode.