Institutional investors will soon have an easier — and cheaper — way to invest in the consumer product start-ups that are taking a bite out of established brands. San Francisco–based CircleUp, which launched in 2012 as a marketplace for investors to find venture opportunities outside the tech craze, has created a new index fund that bundles small consumer and retail companies for 80 to 90 percent less in fees than does a traditional private equity fund.
“The fee structure model of private equity hasn’t changed in 40 years,” says COO Rory Eakin, who founded CircleUp with CEO Ryan Caldbeck. “We’re offering a new path using data.”
Eakin, who has a BA from Princeton, an MBA from Stanford and a MA in international relations from the University of Cape Town, began his career training entrepreneurs in South Africa and then spent four years as the director of investments at Humanity United, eBay founder Pierre Omidyar’s philanthropic family foundation. Now Eakin and funds manager Jason Starr, who spent eight years as a principal at Chicago-based Winona Capital Management, a private equity firm that focuses on middle-market consumer companies, are leveraging their combined expertise to bring venture investors streamlined access to well-vetted start-ups.
CircleUp recently quietly closed a trial of the new product, known as the Marketplace Index Fund, or MIX, which Eakin says is the “first true ETF-like product” to give larger institutions the benefits of a broad fund with much more ease than a typical general partner relationship. Through MIX, investors pay only a 0.5 percent management fee for access to a portfolio of consumer products companies vetted by a machine-learning algorithm called Classifier, as well as a business development team made up of seasoned investors. CircleUp launched the second “vintage” of the fund earlier this month.
MIX funds are billed as a streamlined way for investors like family offices to take part in the trend toward small, local, meaningful brands without doing the work of vetting thousands of start-ups or committing hundreds of thousands of dollars, according to Starr.
“Right now, you can get into one of our MIX funds for as little as $25,000, essentially bypassing a minimum investment by being part of a pooled fund,” Starr says. “If it were a traditional fund, we wouldn’t be able to build this kind of product.”
Starr says the sector is ripe for new investment as consumers move away from big brands toward companies that better match their values. Research seems to bear this out: According to Paris-based advertising and public relations firm Havas Worldwide, consumers increasingly consider “meaningfulness” one of the most important factors in choosing which brands to purchase. Havas surveyed 300,000 people in 34 countries and found that the 25 brands that customers described as the most “meaningful” reported nearly 12 percent annual returns on average, about seven times higher than the STOXX Global 1800 index in 2015.
When it comes to food, consumers appear to be even more inclined to reach for something made by a small producer, rather than a large manufacturer. According to research from Credit Suisse, the largest 25 food and beverage companies’ market share shrank from 49.4 percent in 2009 to 45.1 percent in 2014. During the same time, brands like New York–based KIND Snacks grew significantly; KIND had cornered more than 7 percent of the snack bar market by early 2015, according to research from Sanford C. Bernstein.
“Every consumer is now expecting a product more customized to their needs,” says Ali Dibadj, a senior analyst covering consumer products at Sanford C. Bernstein. “The nimbleness required for this consumer is really advantageous to smaller brands.”
A glance at the companies raising money through CircleUp illustrates this trend toward customization. It’s hard to imagine a company like General Mills offering falafel and hummus patties such as those served by Falasophy’s food trucks in Orange County, California, for example, or Procter & Gamble Co. introducing a “sophisticated sex toy” like the ones co-created by an MIT engineer and on offer from Brooklyn-based Dame Products. But there’s more to developing a lasting consumer goods brand than a unique product that fits a niche need, says Dibadj. The necessary marketing and business chops to really make a consumer product successful can be hard to find at a small scale. That’s where Eakin and Starr believe CircleUp’s machine-learning algorithm, business development team of angel and professional investors and partnerships with big names like Amazon.com come in.
By the time a company makes it into MIX, it has been deemed a worthy investment by CircleUp and its four-year-old marketplace, promised a minimum amount of investor rights and reached a capital raise minimum. At that point, CircleUp invests $100,000 of the fund into that company, and institutional investors have the benefit of building a bigger portfolio without assessing each individual deal. Once the capital is deployed, the process is similar to that of a traditional venture capital or private equity fund, with the proceeds of eventual exits and acquisitions being fed back to investors.
Then Amazon.com — which Eakin says reached out to CircleUp because it was having trouble finding small consumer product companies to meet growing demand — helps with sales and distribution through a dedicated CircleUp company landing page on Amazon.com. For organic food companies raising funds through CircleUp, New York–based organic food broker Presence Marketing provides a distribution discount.
Eakin admits there’s a high risk associated with going into early-stage consumer goods companies, and acknowledges that some investors will be wary. But he points to CircleUp’s four years of data prior to the introduction of MIX, which show that the average company raising money through the marketplace sees revenue grow 80 percent per year postfunding.
“We’re excited about the data we’ve seen after four years of operating the platform and seeing how the model curates companies,” he says. “It’s helped us find some very promising businesses.”
