Ryan Caldbeck was stumped. A director at a private equity firm, he was taking part in a panel discussion at a consumer goods conference last summer in New York when an entrepreneur raised his hand with a question: Where could a young company with just a few million dollars in sales go for money to grow?
Mr. Caldbeck and his peers on the panel fumbled for a response. The fact is, most private equity investors and venture capitalists won't touch a consumer products company until it has surpassed $10 million in sales — anything else is too small to bother with.
The best advice the panel could offer was for the entrepreneur to tap his credit cards.
"The purpose of the panel was to help entrepreneurs raise money, but we had no answers," Mr. Caldbeck remembers. "That's when I knew that there is a big issue here."
That big issue caused Mr. Caldbeck to leave his job to start CircleUp, a company that aims to connect up-and-coming consumer products companies with investors.
Right now, the people allowed to invest through CircleUp must be accredited, meaning they have a high net worth. CircleUp hopes that soon not just the wealthy few, but the general public — whether friends, family members, customers, Facebook friends, or even total strangers — will be able to invest in deserving companies through a hot new area of finance known as crowdfunding.
Crowdfunding's Potential Minefields
To its advocates, crowdfunding is a way for capital-starved entrepreneurs to receive financing that neither big investors nor lenders are willing or able to provide. To others, it represents a potential minefield that could help bad businesses get off the ground before they eventually fail, and in some cases could even ensnare unsophisticated investors in outright fraud.
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Those fears are partly why the Securities and Exchange Commission has delayed rules allowing crowdfunding that were supposed to take effect this month as part of the JOBS Act (Jump-Start Our Business Start-Ups), signed by President Obama last April. The S.E.C. is wary of loosening investor protections that have been in place since the 1930s.
Despite the uncertainty, the outlines of a new industry are emerging as a few crowdfunding start-ups have found ways to raise money within current rules. They include companies like CircleUp and SoMoLend, which lends money to small, Main Street-type businesses that typically wouldn't interest private investors.
By themselves, of course, a few start-ups can't completely democratize finance. But they begin to illuminate what the future of crowdfunding could look like, as the debate continues over a vast widening of the private investor pool.
Mr. Caldbeck formed CircleUp last fall along with Rory Eakin, a former business school classmate who was working for a philanthropic foundation. Through their start-up, the two men seek to finance food, personal care, apparel and pet-related companies, often with an environmental or social bent.
CircleUp considers applications from companies with $1 million to $10 million in revenue. Companies whose applications are accepted make their pitches to investors behind a firewall on the CircleUp Web site, offering equity stakes in return for capital. CircleUp, which helps companies raise up to $3 million, takes a small cut of the money.
Under current federal regulations, CircleUp wouldn't be able to arrange such deals on its own. But it struck a partnership with W. R. Hambrecht, a registered broker-dealer that can handle investments from accredited, or high-net-worth, individuals whom the S.E.C. considers sophisticated enough to invest in private companies.
"Living here in Silicon Valley, a lot of people don't understand the need," Mr. Caldbeck says. "If you're a tech company with a good idea, you can raise money. But it's a different story for food, agriculture, retail and other consumer-oriented businesses."
Mr. Caldbeck sees a big opportunity. Consumer goods companies account for a sizable portion of the nation's businesses, yet very little capital — from private equity funds or from accredited investors — flows to them, he says.
What's more, only a tiny percentage of those who qualify as accredited investors actually invest in private companies, he says. (These are people with a net worth of at least $1 million, not including their primary residence, or who have earned more than $200,000 — $300,000 for couples — in each of the last two years.)
CircleUp is aiming to simplify the process so that more accredited investors take the plunge and more start-ups can get financing. And it wants to expand its business to unaccredited investors when the rules for crowdfunding are completed.
So far, CircleUp has helped seven companies raise money on its site. They include Episencial, a children's organic skin care line based in Los Angeles; Laloo's, a maker of goat milk ice cream in Petaluma, Calif.; and Little Duck Organics, a children's snack producer in Brooklyn.
Zak Normandin, 26, the tousled-haired founder of Little Duck Organics, got the money to start his business the way many small businesses do: by maxing out credit cards. He ran the company out of his basement and distributed products himself to local stores before winning his first big client: Whole Foods.
Two years later, he and nine employees operate out of offices in a brick warehouse in the Greenpoint area of Brooklyn. His goal has been to create healthy snacks and cereals that he would serve to his own three children.
"There's no healthy fun alternative for kids," Mr. Normandin says.
The company's first product — Tiny Fruits, a line of no-sugar-added organic fruit snacks — can be found in 6,000 retail outlets, including Whole Foods and Stop & Shop stores and on Amazon.com. Mighty Oats, a new cereal line packaged in compostable containers, will hit stores this month. There are juices, fruit pures and other products in the works, he says.
All of that takes capital — lots of it. Yet fund-raising takes valuable time away from running the business.
CircleUp has given entrepreneurs like Mr. Normandin a streamlined way to raise money while providing investors with opportunities they may not otherwise hear about. In seven weeks, Little Duck raised nearly $900,000 from about a dozen investors on the site.
"Pre-CircleUp, 80 percent of my time during fund-raising was spent with investors," Mr. Normandin says.
And the CircleUp fund-raising brought more than money. A few investors with experience in building and marketing consumer brands have become informal advisers to Mr. Normandin. "To have that kind of experience to leverage has been extremely helpful," he says.
Another draw is that CircleUp has partnered with corporations like General Mills, which get an early look at new brands they might want to acquire down the road.
CircleUp itself has attracted $1.5 million from big-name investors including Howard Schultz, the Starbucks chairman, through his Maveron venture fund.
Another supporter is Clayton Christensen, the Harvard Business School professor known for his work on what is called disruptive innovation; he invested in CircleUp through his Rose Park Advisors investment firm. (Professor Christensen says that seemingly simple innovations can disrupt and displace mainstays in a market the way the personal computer disrupted the mainframe market and smartphones are now disrupting PCs.)
CircleUp, and crowdfunding in general, have "the potential to be disruptive," Professor Christensen says, by opening up financing to companies that have traditionally struggled to raise capital and to investors who have been excluded from the market.