The CircleUp Vision: The Road to Transforming Private Investing
Updated as of March 2019.
CircleUp is transforming private investing with data and technology, an idea that has been called crazy. Einstein said that “If at first, the idea is not absurd, then there is no hope for it.” We have the conviction that data will create a more transparent and efficient private investing market, and thus help more entrepreneurs thrive. It will be hard, but from my perspective, the magnitude of potential impact makes the process of trying worthwhile.
It all starts with our mission and vision: CircleUp’s mission is to help entrepreneurs thrive by giving them the capital and resources they need. Our mission influences what we build and don’t build, who we hire, and with whom we partner. Since we launched in 2012 this mission has remained the same. CircleUp’s vision is to create a transparent and efficient market that drives innovation forward for all. A vision is a picture of the preferred future as we achieve our mission.
Realizing this vision takes discipline and focus. CircleUp is an investment platform powered by technology. Today, we focus on a single industry (consumer packaged goods, or CPG), a single stage (emerging brands), a single geography (North America), and two asset classes (equity and credit). Clay Christensen’s theory of Disruptive Innovation tells us that, “Initially, a disruptive innovation is formed in a niche market that may appear unattractive or inconsequential to industry incumbents, but eventually the new product or idea completely redefines the industry.”
We intend to completely redefine the private investing industry and build a portfolio of emerging brands that are themselves redefining the CPG industry. In doing so, we are attempting to remake two of the largest industries on earth, both of which are dominated by stale incumbents. CPG investing is the ideal place for this data-driven approach to begin because the industry contains a unique combination of a massive market, highly standardized business models, and treasure troves of data (a data scientist’s dream).
CIRCLEUP’S TECHNOLOGY — THE HELIO PLATFORM
Our data-first approach begins with Helio — a platform of data and algorithms on top of which we have built business applications. Helio proactively finds, classifies, and evaluates CPG companies on a set of dimensions calibrated for success. It is a knowledge graph for CPG.
Through years of facilitating investments, we have built the world’s most robust repository of early-stage CPG intelligence. To a data scientist, this is both feature data and training data. The data paints a descriptive picture of the current landscape and tells a diagnostic story of why it came to be. Rooted in the data, our team has gone on to build algorithms to help predict likely future outcomes and ultimately be prescriptive about ideal behavior to generate preferable outcomes. More on the Helio buildout and Gartner’s Sophistication Journey here.
Eventually, Helio will give an investor the conviction to make an investment, an entrepreneur the confidence to launch a bold new flavor, change packaging, or seek distribution in one retailer versus another, and a retailer the reason to bet on a peripheral sub-category or double down on a category it knows with non-commoditized data. With better information comes better decisions, and better decisions yield better outcomes for entrepreneurs, investors, industry players, and the end consumer alike.
Historically, CPG entrepreneurs haven’t had an equitable shot. Access to capital and resources are sorely lacking due to information asymmetry, geographic dispersion, and heuristic-heavy diligence. Helio changes that.
TODAY’S HELIO APPLICATIONS
On top of Helio, we have built an insights function and three business applications with strong network effects — with each additional portfolio company and each additional data point the value of the platform increases for entrepreneurs and investors.
CircleUp Credit Advisors extends loans to traditionally under-banked businesses to help fill their working capital gap — offering non-dilutive capital to fuel growth either alongside or independent of an equity raise. We leverage Helio to help identify the right companies, evaluate their growth potential, and monitor our existing book of borrowers. Offline lenders that don’t benefit from Helio fall into one of two buckets — they either wait for later-stage companies because the cost of sourcing and evaluating at the early stage is too high or they charge exorbitantly high rates to emerging brands to cover these costs. The monitoring and sourcing efficiencies created by our technology translates into greater access to capital and lower rates for our early-stage borrowers. Credit alone is a billion-dollar opportunity. Helio tracks hundreds of thousands of companies that could qualify for the product and just 1,000 borrowers (<1% of the universe) at an average line of $1 million creates $1 billion in Assets Under Management (AuM). That said, the vision is bigger than just credit.
Discretionary Equity Funds
CircleUp Growth Partners I is the largest CircleUp equity fund to date and a critical part of achieving our mission. With Helio, we have the ability to surface breakout companies earlier, increasing options for those entrepreneurs and giving investors access to a new asset class. The fund is technology-enabled with the ultimate investment decision made by our investment team, hence discretionary. The team is able to draw on Helio insights to both find prospective investments and share data insights with those companies post-close. Furthermore, the team provides a critical feedback loop to make Helio even better. Discretionary Equity is core to CircleUp’s business and position in the market. We intend to raise larger funds in the future, scaling AuM to help even more entrepreneurs.
Systematic Equity Funds
Let’s look back before we look ahead. In 1982, decades before “big data” was a Silicon Valley buzz-phrase, Renaissance Technologies began a systematic investing approach in the public markets. It replaced the intuition of MBAs with terabytes of data and statistics PhDs. Stock brokers and traditional public investors thought it was insane. Fast forward to today where Renaissance’s Medallion fund boasts one of the best records in investing history — with annual gains greater than 35% for over 20 years. One-third of the $3 trillion hedge fund market is algorithmically invested.
At CircleUp, we are sowing the seeds for a comparable shift to systematic private investing. Why is this important? Structurally removing human bias from private investing will give more entrepreneurs a fair shot to succeed and a finely tuned investing machine unlocks repeatability and scalability in the private markets.
We see a place for both discretionary and systematic investing in the private markets, similar to the existence of both quantitative and fundamental investing in the public markets, which often exist under a single roof (e.g. Blackrock, Schroders, J.P. Morgan Investment Management, and Wells Fargo Investment Management all have both fundamental and quantitative investment funds). In the private markets, each strategy will have a different, and often complementary, value proposition for both entrepreneurs and investors. For example, the discretionary fund gives an entrepreneur a trusted board member and gives fund LPs a small basket of scrupulously vetted companies. The systematic fund gives an entrepreneur a seamless close on capital (plus additional sources of orthogonal value including deep data insights) and gives an investor a highly diversified basket of companies. Whether it is discretionary or systematic, the future is undoubtedly data-driven.
The evolution to algorithmic private investing will take years, if not decades. It won’t displace discretionary investing but it will transform the market by helping to limit bias, create repeatable and scalable investment capabilities, provide orthogonal value to entrepreneurs and potentially generate strong and consistent returns to investors. I don’t expect everyone to agree that it is the future. But if we are right, CircleUp — and specifically Helio — should be at the forefront of this advancement.
The bridge between Helio and today’s applications is the Insights function. The team leverages raw Helio data and model outputs to provide investing teams with the insights to make data-driven decisions and to provide portfolio entrepreneurs with Helio data and analysis to help drive business decisions.
We envision that eventually, the Insights function will bring greater transparency to the industry and be available to a broader audience outside of CircleUp, including retailers, investors, CPG partners, and most importantly entrepreneurs. These players are already asking to license the data to identify innovation to put on shelves, to build market maps to understand the emerging landscape in a specific industry or use-occasion, and to help think through new product development.
Empowering others to leverage Helio in a way that is consistent with our mission will help more entrepreneurs to thrive.
HOW BIG COULD THIS BE?
Today, CircleUp is focused on providing equity and credit to early-stage CPG companies in North America. But our vision is much bigger. The path forward is a staged expansion along three axes:
I. Financial Products: First we will continue to introduce new financial products, building on the equity and credit products we already have.
II. Stage: Second we will grow with our portfolio companies into later-stage investments. We will be uniquely positioned to march up-market and disrupt the industry given the 100s of companies that we already have relationships with.
III. Geography: Third we will extend Helio’s capabilities beyond North America, funding entrepreneurs at a global scale.
Notice there is no axis to illustrate industry expansions, which will come much later. I will give a brief overview of why we have a near-term focus on CPG before diving into each of the expansion areas listed above.
Industry: a Near-Term Focus on CPG
Today CircleUp is focused on the CPG industry because of the inherent market inefficiencies, the highly standardized business models, the incredibly robust supply of data, and the massive market — we do not see the need to move outside of this industry in the near-term. We know that entrepreneurs in this industry face massive hurdles to accomplishing their dreams — let’s focus on serving those visionaries first.
The S&P 500’s Consumer Staples Sector (excluding Tobacco) has a market cap of $3.2 trillion. This Market Cap is the sum of the market value of each company assigned to the following five applicable GICS industries: Beverages, Food & Staples Retailing, Food Products Household Product, and Personal Products.
To put this into perspective, the S&P 500 Beverage industry has a larger market cap than Biotechnology and Personal Products is larger than Electronic Equipment, Instruments & Components. This is also only the S&P 500 consumer staples — not smaller public companies and not private companies. Before we extend into additional industries we will saturate this multi-trillion $ market by expanding our financial products, stage, and geography. I will elaborate on each area of growth below and the competitive advantage that CircleUp brings.
I. Financial Products: Expansion into Systematic
In 2017, CircleUp expanded into credit and began offering non-dilutive capital to help entrepreneurs fund their working capital gap. This expanded our addressable market in both directions — we can fuel smaller companies that aren’t yet ready for an equity raise and larger companies that have already achieved profitability. Offering credit to entrepreneurs creates network effects with our equity funds. Entrepreneurs can spend less time finding capital for their companies and more time building — CircleUp becomes a one-stop-shop.
But there is more to be done. In 2019 we are building out the systematic equity strategy to get more capital into the hands of more entrepreneurs faster. Why do we have the conviction there is room for a systematic equity strategy in this market? Based on CircleUp’s internal analysis of PwC, NVCA, Pitchbook, and Preqin CPG market data there are 500+ venture-stage CPG equity investments per year in the U.S., a pace that has tripled in the last decade. These investments sum to $3–5 billion in transaction value per year, which has quadrupled in the last decade (note that this analysis excludes the retail sector and excludes seed stage transactions). Based on conversations with the SEC and our own research, we believe this massively underestimates the market, but for the sake of intellectual honesty, we will stick with these estimates.
With a large and growing market, it’s reasonable to believe that CircleUp can deploy the first $500 million systematic fund into a total of ~100 early-stage brands ($130 million per year after fees into ~33 companies per year). As the market continues to expand, we see a path to invest $500+ million per year with <10% share of transactions. That number doubles if the SEC is right and the estimate above underestimates the true market size. The proliferation of emerging CPG brands will only continue with the personalization of consumer preferences and a shift from fixed to variable distribution and marketing costs. In conjunction with these tailwinds, a systematic fund will lower the barriers for entrepreneurs to funding, thus expanding participation in (and the size of) the entry market.
While such deal volumes are unheard of in the highly fragmented consumer investing ecosystem, the standardization of a scalable and repeatable investing machine, coupled with Helio’s ability to lower the cost to participate in the market, unlocks the ability to invest at these volumes. Nobody thinks it will be easy, but nothing worth doing is easy.
Having a robust entry market isn’t enough — the exit market needs to be large as well. In the U.S. CPG exit market, there are 500+ acquisitions per year with values <$500 million (based on CircleUp’s internal analysis of PwC, NVCA, Pitchbook, and proprietary data — stripping out mega-deals to be conservative and excluding PE transactions that could be exits). This translates into $30+ billion in transaction value, which gives us the conviction that a meaningfully sized fund could generate strong returns for investors with very reasonable assumptions of <2% exit market share.
In summary, Helio is CircleUp’s primary competitive advantage as we move into new financial products for early-stage companies. The technology allows us to identify brands earlier, evaluate them efficiently, and offer data insights to fuel growth.
II. Stage: Expansion Beyond Early and into Growth Stage
Today there are approximately $75 billion in AuM focused on U.S. CPG private equity alone based on CircleUp’s analysis of Preqin data. 90% of that AuM is reserved for companies with >$20 million in revenue. We are well positioned to expand into investing in these companies with a “growth stage” fund. The combination of the pipeline from our venture funds and the capabilities we bring to add value after close uniquely position us for success.
First, by investing $1–10M venture checks into hundreds of the highest performing companies before they hit $20 million in revenue, we set ourselves up to be at the table when the $10–20 million checks are being written at the next stage. This gives us the opportunity to first extend our discretionary capabilities, followed by our systematic capabilities. In some cases this would be structured as CircleUp exercising pro-rata rights, in other cases, we will leverage our relationship with the companies to lead future rounds and go beyond our pro-rata. As an analogy, Y Combinator (YC) has invested into over 1,500 seed stage tech startups since 2005 and is often credited with disrupting the traditional tech VC model. In 2017, they formally announced the Continuity Fund ($700M) to make growth stage investments, partly through pro-rata or bigger ticket checks ($15–50M). They focus primarily on YC portfolio companies but aren’t tied to that pool. YC’s advantage is driven by their place on so many cap tables. Similarly, we plan to march up-market and invest in companies later in their life cycle.
Second, we bring unique capabilities — which we are honing in our current funds — around post-close value add. We will offer unparalleled post-close value as Helio surfaces unique data insights for these portfolio companies. We will already have established and proven out this value with our portfolio as companies scale from venture to growth stage.
In summary, our current view is that CircleUp’s competitive advantages as we move further into growth equity and credit will be the hundreds of companies already in our fund portfolios as well as our Helio insights. This community and these established relationships — originating from Helio’s sourcing and evaluation — will give us a clear head start at the growth stage and companies will already know the value we can add through data insights.
III. Geography: Expansion Outside of North America
Our technology has yet to tackle languages other than English and has yet to understand the nuances of different markets. That said, everything we are building with Helio is designed to be extendible to additional geographies. The beauty of the CPG industry is that the business models are standardized across product types. This standardization also holds across geographies. We are building for a future where CircleUp’s mission extends globally, a multi-trillion dollar market for private market AuM.
In summary, CircleUp’s primary competitive advantage as we move into new geographies is the extendible technology. Rather than building something from scratch, we will leverage our existing data pipelines, entity resolution technology, and the predictive models that are already in production.
CircleUp’s mission has always been to help entrepreneurs thrive. The path we’ve taken to fulfill that mission has and will continue to evolve, but the reason we’re building it will remain the same. We will continue to be guided and inspired by our mission as we take these exciting next steps.