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



In this episode of the 20 Minutes VC, host Harry Stebings interviews Ryan Kuldebeck, founder of Circle Up, an online investment platform that democratizes funding for consumer companies. Kuldebeck shares his journey from working in private equity, where he noticed a funding gap for promising consumer and retail businesses, to establishing Circle Up to address this market inefficiency. Despite initial skepticism from investors, Kuldebeck persisted, and Circle Up has since attracted significant institutional investment and boasts a high growth rate for its companies. Kuldebeck discusses the nuances of marketplace investing versus crowdfunding, the impact of the JOBS Act on unaccredited investors, and the importance of targeting investors who understand the pain points being addressed. He emphasizes maintaining company culture during growth and envisions expanding Circle Up's financial products, geographies, and industries to further support entrepreneurs.

Summary Notes

Introduction to Ryan Caldbeck and CircleUp

  • Ryan Caldbeck is the founder of CircleUp, an online investing platform.
  • CircleUp allows investments in innovative consumer companies.
  • Ryan's background is in consumer-focused private equity.
  • He worked at TSG Consumer Partners and Encore Consumer Capital.
  • Ryan noticed a funding gap for small consumer and retail businesses.
  • CircleUp was founded to make funding accessible to these smaller companies.

"And who better to have on than Ryan Kuldebeck, founder at Circle up, the online investing platform that allows you to invest in innovative consumer companies."

This quote introduces Ryan Caldbeck as the founder of CircleUp, an online platform for investing in consumer companies.

Disruption of Traditional Finance

  • The theme of disruption in the VC world is highlighted.
  • CircleUp and Angelist are examples of platforms disrupting traditional finance.
  • Traditional private equity often overlooks smaller businesses that are too small for customary funding channels.
  • CircleUp provides an alternative funding route for these businesses.

"And as we've been interviewing investors that have been disrupting the world of VC this week with Angelist, we thought we would continue this theme of disruption of traditional finance."

Harry Stebbings sets the stage for discussing how platforms like CircleUp are changing the landscape of venture capital and finance.

Origin Story of CircleUp

  • Ryan Caldbeck's frustration with the funding limitations in private equity led to the creation of CircleUp.
  • He found that most investors only engage with companies that have significant revenue.
  • Smaller companies with potential were being overlooked due to inefficiencies in the market.
  • CircleUp was established to address these inefficiencies and help promising consumer and retail businesses.

"And so that frustration boiled over and eventually realized there's just got to be a better way, and started to look into kind of the core dislocation in the market."

Ryan Caldbeck explains the motivation behind founding CircleUp, which was born out of a need to find a better way to fund small but promising consumer and retail businesses.

Marketplace Investing vs. Crowdfunding

  • Ryan Caldbeck distinguishes CircleUp as a marketplace investing platform rather than a crowdfunding platform.
  • Crowdfunding is a broad term that can include donations, pre-purchasing products, and investments.
  • CircleUp focuses specifically on investments that yield returns.
  • The platform aims to help entrepreneurs thrive by connecting them with investors.
  • The distinction provides clarity on CircleUp's mission and operations.

"We don't allow folks to just donate or to companies to just ask for donations. We're an investing platform."

Ryan Caldbeck clarifies that CircleUp is not a platform for donations but an investing platform focused on generating returns for investors and supporting entrepreneurs.

Impact of the JOBS Act and SEC Rulings

  • Ryan Caldbeck shares his contrarian view on Title III of the JOBS Act.
  • The JOBS Act allows unaccredited investors in the US to invest in companies.
  • Caldbeck believes the impact will be limited due to the costs to companies.
  • CircleUp's focus remains on providing a marketplace for efficient investing regardless of these regulatory changes.

"Our view is that 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."

Ryan Caldbeck expresses skepticism about the significant impact of the JOBS Act on marketplace investing, citing the costs involved for companies as a limiting factor.

Title III of the JOBS Act and Its Impact on Private Companies

  • Title III of the JOBS Act was designed to allow unaccredited investors to access private investments.
  • The SEC's execution of Title III has been criticized for imposing significant regulatory burdens on companies.
  • Companies using Title III must disclose their financials annually to the public.
  • There is a requirement for audited or reviewed financials, which is not typical for most private companies.
  • The cost and effort of complying with Title III may not be justified unless there is a clear additional benefit from raising from unaccredited investors.
  • Most companies prefer raising capital from accredited investors due to lower costs and fewer regulatory requirements.

"So basic summary is that if a company raises capital using title three 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."

This quote summarizes the additional regulatory requirements imposed on companies raising capital under Title III of the JOBS Act compared to traditional methods.

The Marketing Benefit of Raising from Unaccredited Investors

  • Raising from unaccredited investors can lead to a larger number of investors due to their tendency to invest smaller amounts.
  • There is a potential marketing benefit from having more people aware of and invested in the product.
  • This benefit may not be significant for most industries, such as healthcare, industrial companies, or most tech companies.
  • For consumer or retail companies, having passionate brand advocates could be more valuable.
  • The challenge is proving to companies that the marketing benefit outweighs the regulatory costs.

"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."

Ryan Caldbeck highlights the difficulty in convincing companies that the potential marketing benefits of raising from unaccredited investors are worth the additional costs and regulatory burdens.

Adverse Selection and the Risks to Unaccredited Investors

  • Companies may resort to raising from unaccredited investors after failing to secure funding from accredited ones, leading to adverse selection.
  • There is concern that unaccredited investors may end up with lower quality investment opportunities.
  • The possibility of technology solutions that could streamline the process and handle financial disclosures in a company-friendly way is mentioned.
  • However, the current sentiment among companies is one of apprehension towards raising capital that requires public financial disclosure.

"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."

Ryan Caldbeck expresses concern that companies turning to unaccredited investors after being rejected by accredited ones could lead to a situation of adverse selection, where unaccredited investors are left with less desirable investment opportunities.

Suitability of Title III Funding for Tech Companies

  • Tech companies are advised against using online funding platforms, including those enabled by Title III.
  • The tech industry already has a robust funding environment with ample capital and investor interest.
  • If a tech company is resorting to an online platform, it may indicate that they have already been passed over by traditional VC firms and angel investors.
  • The implication is that such companies may not provide strong returns, which is a concern when considering investment by unaccredited investors.

"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."

Ryan Caldbeck argues that tech companies generally do not need to use online platforms due to the healthy and supportive funding ecosystem that already exists for them.

The Deal Flow Funnel and Consequences for Unaccredited Investors

  • The process of raising capital can be seen as a funnel, with unaccredited investors at the end.
  • The concern is that by the time investment opportunities reach unaccredited investors, they may be of lower quality.
  • The implication is that unaccredited investors may not have access to the same quality of deals as accredited investors.

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

Harry Stebbings suggests that unaccredited investors are left with less attractive investment opportunities after accredited investors have had the first pick.

Debate on Unaccredited Investors in High-Risk Investments

  • There has been an ongoing debate about the suitability of unaccredited investors investing in high-risk companies.
  • Concerns center around the potential for significant financial loss for unaccredited investors.
  • The counterargument is that unaccredited investors have the freedom to engage in other high-risk activities, such as gambling in Vegas.
  • The adverse selection in investment opportunities for unaccredited investors is a point of worry.

"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?"

This quote highlights the concern for unaccredited investors' potential to incur substantial losses in high-risk investments.

"And the flip side of the argument is, well, they can still go to Vegas and gamble, regardless of what side you come out on."

This quote presents the opposing viewpoint that unaccredited investors already have the freedom to take financial risks, similar to gambling.

"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."

The speaker expresses skepticism about the prudence of unaccredited investors participating in high-risk investments due to adverse selection, highlighting the risk of selecting unfavorable investment opportunities.

Institutional Capital in the UK Investment Sector

  • The UK's investment sector has not seen significant growth due to a lack of institutional capital.
  • Circle Up has experienced an influx of institutional investors.
  • The evolution of investor participation on Circle Up mirrors that of Lending Club's growth trajectory.

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

Speaker A identifies the absence of institutional capital as a key reason for the stagnation of the UK investment sector.

"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?"

Speaker A inquires about the participation of institutional investors in Circle Up and any desired changes in market entry.

Circle Up's Investor Evolution and Performance

  • Circle Up started with individual accredited investors and has seen a shift towards significant institutional investment.
  • The average investment amount has increased considerably over time.
  • Institutional investors are attracted to Circle Up due to its performance and the non-correlation of its asset class with the overall economy.

"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."

Speaker B outlines the growth in average investment amounts and the increasing participation of institutional investors in Circle Up.

"They view us as the equity equivalent of lending club."

Institutional investors see Circle Up as comparable to Lending Club but for equity investments, indicating a similar growth pattern.

"The average company is growing at more than 100% per year since raising on circle up, or the, the unrealized average IRR on circle up is over 50% 50."

Speaker B provides compelling performance metrics that are likely attractive to investors, demonstrating the high growth rate of companies on Circle Up.

Circle Up's Funding Process and Investor Targeting

  • Circle Up's funding process varied across different rounds, with initial difficulty in raising a seed round.
  • The company's value proposition resonated with certain investors, leading to easier subsequent funding rounds.
  • Targeting investors who understand the underlying pain points that Circle Up addresses is crucial for successful fundraising.

"So when we first started and raised our seed round, which Mavron and Clayton Christensen, who wrote the book called the Innovators 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."

Speaker B recounts the challenges faced during the initial seed funding round despite the involvement of notable investors.

"But in consumer and retail, there's a massive industry and a massive pain to be solved."

Speaker B explains the unique market need that Circle Up fulfills, which eventually attracted Union Square Ventures, despite their initial disinterest.

"One lesson that I learned throughout that process is that targeting investors, and it sounds so obvious, but targeting investors that have an understanding of the underlying pain that you're trying to solve is critical."

Speaker B emphasizes the importance of engaging investors who grasp the specific problems that Circle Up aims to address, as it greatly facilitates the fundraising process.

Personal Motivation and Vengeance

  • Ryan Caldbeck is driven by a desire to prove doubters wrong.
  • He feels energized by opposition and uses it as motivation to succeed.
  • Caldbeck retains detailed memories of meetings with VCs and investors who passed on opportunities with his company.
  • He uses the recollection of these rejections as fuel to build something special.

"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."

This quote highlights Caldbeck's unique motivational trait where disbelief from others increases his self-belief and determination to succeed, using it as a source of energy.

Favorite Book and Its Impact

  • Ryan Caldbeck's favorite book is "The Hard Thing About Hard Things" by Ben Horowitz.
  • He appreciates the author's candidness and insights.

"The hard thing about hard things and because he is so candid, indeed a brilliant book."

Caldbeck expresses his admiration for Horowitz's openness in the book, which he finds to be a brilliant read.

Transparency in Leadership

  • Circle Up practices company-wide transparency, with all employees having access to all metrics.
  • The board deck is presented unedited every 60 days.
  • The company discusses difficult decisions openly.
  • There is a balance between transparency and respect for individuals, especially regarding performance-related departures.

"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."

Caldbeck discusses the delicate balance of maintaining transparency while respecting the privacy and dignity of employees who are let go due to performance issues.

Productivity Tips and Tools

  • Ryan Caldbeck uses Slack for communication within his team.
  • He practices transcendental meditation, which he started 15 months prior to the interview.
  • Caldbeck finds that meditation helps him perform better.

"Tools, I would say slack is an important one for us. I actually do transcendental meditation and I started it about 15 months ago and I am headspace. It's similar. Very similar. Yeah, that's right. And what I found is that 220 minutes sessions a day just allow me to be better."

Caldbeck shares that Slack and transcendental meditation are key tools for his productivity, with meditation particularly enhancing his performance.

Essential Reading Material

  • Ryan Caldbeck regularly reads blogs by influential venture capitalists.
  • His top three blog recommendations are AVC by Fred Wilson, Jeff Jordan's blog from Andreessen Horowitz, and Bill Gurley's writings on marketplaces.

"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."

Caldbeck recommends these blogs for insights into venture capital and marketplaces, highlighting them as his most-read sources.

Company Culture and Challenges

  • Balancing culture at Circle Up is a significant challenge.
  • It involves keeping high-performing employees challenged and managing those who are underperforming.
  • Culture is a primary concern for Caldbeck, more so than other aspects of the business.

"Growing circle up for you, culture balancing culture. Someone's doing really well. How do you continue to keep them challenged and give them an expanding role? Someone's not doing well. How do you coach them or eventually lead them to a transition out?"

Caldbeck discusses the complexities of nurturing company culture, including the need to continually challenge successful employees and address underperformance.

Future Plans for Circle Up

  • Circle Up aims to dominate the early-stage consumer and retail space.
  • Plans include expanding financial products, geographic reach, and eventually other industries.
  • The mission is to support entrepreneurs with capital and resources.

"The growth is phenomenal and I think what you'll see us do is continue to own early stage consumer and retail. And over time you'll see an expansion as we add other financial products to help companies thrive and eventually expand to other geographies and then finally other industries."

Caldbeck outlines Circle Up's ambitious growth plans, emphasizing the company's commitment to empowering entrepreneurs.

Market Expansion and Product Development

  • Circle Up's growth strategy includes market expansion and product development.
  • The goal is to create network effects and improve the marketplace's effectiveness.

"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."

Caldbeck explains that while market expansion is part of the strategy, developing products that enhance the marketplace's network effects is crucial.

Acknowledgements and Sign-Off

  • Ryan Caldbeck thanks Harry Stebbings for the opportunity to share his insights.
  • Harry Stebbings promotes the 20 Minute VC newsletter and thanks listeners for tuning in.

"Terrific. Thank you so much, Harry."

Caldbeck expresses his gratitude to Harry Stebbings for the interview.

"Fantastic to hear Ryan's thoughts there. And if you are loving the 20 minutes vc, then head over to the twentyminutevc.com all in letters and sign up for our newsletter so you never have to miss an episode or an update."

Harry Stebbings wraps up the episode by encouraging listeners to subscribe to the podcast's newsletter for updates and future episodes.

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