CircleUp’s mission is to help entrepreneurs thrive by giving them the capital and resources they need. You will see that on the wall of our office when you walk in, and every team member will be able to tell you it isn’t just for show. Our mission influences what we build and don’t build, who we hire, and with whom we partner. When we launched in 2012, our mission was manifested in the form of an online marketplace to connect high-growth, emerging consumer packaged goods (CPG) and retail companies with investors. Six years later, our mission has remained the same – to help entrepreneurs thrive – but our tactics have evolved. Below I hope to crystalize CircleUp’s vision. My goal is to provide the clarity for entrepreneurs, investors, strategic partners, and even for ourselves.
A vision is a picture of the preferred future as we achieve our mission. CircleUp’s vision is to create a transparent and efficient market that drives innovation forward for all. Today, CircleUp is an investment platform powered by technology. CircleUp’s primary asset is Helio, a collection of data and algorithms, on top of which there are applications. Helio will give an investor the conviction to make an investment. Helio will give an entrepreneur the confidence to launch a bold new flavor, change packaging, seek distribution in one retailer versus another, or perhaps over time to even start a company. Helio will give a retailer the quantitative reason to bet on a peripheral sub-category or pick one product over another. With better information comes better decisions, and better decisions yield better outcomes for entrepreneurs, investors, and industry players alike.
There is an old saying that goes, “Give me six hours to chop down a tree and I will spend the first four sharpening the axe.” For CircleUp, our axe is Helio. Through years of facilitating investments, we have built the world’s most robust repository of early-stage CPG and retail intelligence (which we continue to build with each of our applications). To a data scientist, this is 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 a series of algorithms to help predict likely future outcomes and ultimately be prescriptive about ideal behavior to generate preferable outcomes. Our axe is sharp and getting sharper still.
As for the tree. CPG and retail entrepreneurs don’t have an equitable shot. Access to capital and resources are sorely lacking due to information asymmetry, geographic dispersion, and heuristic-heavy diligence. Helio changes that.
The next year at CircleUp will be focused on furthering our core technology asset, deploying our funds, and educating the market through insights and connections. In five years I believe Helio will become the rails on which the industry runs. We are on a path to empower stakeholders across the consumer ecosystem.
THE HELIO PLATFORM
Helio finds, classifies, and evaluates CPG and retail companies on a set of dimensions calibrated for success outcomes. Helio is the platform that enables CircleUp, and others, to build applications.
From hindsight, to insight, to foresight, Helio builds conviction for industry players through the four stages of data analytics:
1. Descriptive Analytics
There is an immense amount of data in the CPG sector. Every product has a unique identifier (UPC code), each transaction is documented at the unit-level, and product reviews add a qualitative and quantitative dimension to the data. Furthermore, entrepreneurs are highly motivated to get their brand out there (in contrast to the secrecy of tech) – be it through distribution or social media channels. To create an accurately descriptive map of the industry, someone has to capture and aggregate data on distribution, brand, and team. Helio is that aggregator.
While the bulk of the country’s distribution data for purchase is concentrated within the largest retailers (think Walmart, Costco, Safeway, Amazon, etc.), much of the future value and insights come from the rest of the picture, the long tail of retailers where most emerging brands find their beginnings. Brands don’t often start at Kroger. They typically build a following by either selling through their own targeted websites (d2c) – be it for apparel or color cosmetics – or through the long tail of retailers. Once these brands reach retail, they will typically start at an indie beauty store in LA, a pet store in Dallas, or a bodega in NYC. Without insight into that long tail (all the tiny puzzle pieces), investors don’t have differentiated insights, entrepreneurs don’t know the competitive landscape, and retailers fall behind consumer trends.
Players with the full picture will have the advantage. Players without it will be left behind, trying to find the right companies in this zoo.
2. Diagnostic Analytics
It’s one thing to have a snapshot of today’s CPG and retail landscape but quite another to understand why it looks that way. The key to diagnostic analysis (the why) is access to historical time series data in combination with algorithmic analysis. Historical data first explain how things have (or haven’t) changed so that algorithms can better explain why things have changed.
Investors can be right for the wrong reasons. Typically, for a private investment with a five-year duration, what matters most is just being right, not the reasons. But at CircleUp we care about making decisions for the right reasons. Being right for the wrong reasons (luck) may yield strong returns one time, but it is not repeatable and therefore not sustainable or scalable. CircleUp aims to be scalable and repeatable. Our mission is to help entrepreneurs to thrive, which means we care about helping tens of thousands of entrepreneurs over time. The why matters a lot.
Let’s take an example from tech – Slack, currently a multi-billion dollar messaging application, was launched by Stewart Butterfield as a non-violent video game company and turned out to be a total flop. But before Butterfield and his team ran out of their VC funding, they pivoted to build the Slack we know today. By any outcome measure, this was the “right” investment for those early investors.
But were the reasons right? If the thesis was based on a capable team, then yes. If the thesis was based on the non-violent video game, then no. Algorithmically knowing the difference in tech is almost impossible, given the lack of a standard data set and the wildly different business models. But in the consumer space, we are excited by the challenge.
To build the ability to diagnose, CircleUp has been capturing data since 2012. And while some information anyone can go back and find (e.g. Halo Top’s original packaging), most of it is nearly unattainable if not captured in the moment (e.g. the number of stores that carried Supergoop products in March of 2017).
Over time, the market will reward the best diagnosticians. Understanding the why means repeatable and scalable success.
3. Predictive Analytics
The value of predictive analytics is easy to understand – it’s more compelling to know what will likely happen than what already happened. Everyone wants to predict the future but no data company in CPG or retail can do it. To confirm this we have tested the most commonly used data sources in CPG and retail across tens of thousands of CPG companies – the predictive power of revenue is almost nonexistent. Enter Helio. Helio has several predictive elements, including future product distribution. With predictive insights retailers can stay ahead of trends, entrepreneurs can move into a growing category with confidence, and investors can invest based on quantifiable future potential rather than just historical metrics.This is the stage of data analytics that relies heavily on machine learning algorithms.
As humans, we develop simple predictive algorithms all the time – some are accurate, but most are pretty lousy and rely on limited information. First you notice a pattern – you save 20 minutes on your commute when you leave five minutes earlier; or you nail a presentation at work when you wear your lucky socks. These observations lead to a change in behavior as you believe a specific variable (departure time or sock choice) is causal of a specific outcome (commute duration or presentation success). Correct or not, these are simple algorithms.
Now get data scientists involved and suddenly algorithms can process thousands of variables, trillions of data points, and can test numerous different outcomes. At CircleUp we implement both supervised and unsupervised modeling techniques to look at thousands of input variables ranging from distribution expansion to product packaging. The outcomes we care most about are revenue growth and exit-events, which are aligned with the goals of both entrepreneurs and investors, and happen to be very relevant for most industry participants.
I cannot overemphasize the importance of the training data that we have collected over the past six years to shape these algorithms. A statistician would tell you that the more robust the data sample, the higher the confidence level. Think of how many presentations you would have to make with those lucky socks before your theory is statistically significant. CircleUp wouldn’t be predictive if we didn’t first have enough data to be descriptive.
4. Prescriptive Analytics
Imagine being able to algorithmically effect change at a company by identifying levers it could change to grow more quickly. Nobody does this today. And for good reason. It’s hard. Sure, board members give portfolio companies advice and serial entrepreneurs claim to have a “winning formula,” but there has never been a way to set strategy or tactics based on algorithmic prescriptive insights. The human brain can’t identify (let alone replicate) the factors that drive success – we are dealing with thousands of variables that potentially drive outcomes, not to mention the interaction effects between those variables. The number of possible combinations moves beyond the limits of human cognition and requires machine learning to make sense of it all.
What if we had data to help an entrepreneur differentiate their ingredient list, determine the best package size, and redirect their distribution strategy?
That is where Helio is going.
TODAY’S HELIO APPLICATIONS
On top of the Helio platform we have built applications. Applications that leverage Helio, monetize Helio and help to actually build Helio – reinforcing data network effects between the applications and the platform.
The current applications are CircleUp controlled equity and credit funds investing directly in emerging brands, as well as an Insights & Connections business, providing the connective tissue for a more efficient and innovative market.
1. Equity Funds
CircleUp Advisors manages a series of equity funds, the largest of which is $125 million dollars. By raising our own funds we have the agency to leverage Helio, acting quickly and with conviction, providing a better experience for entrepreneurs. It also creates a feedback loop to make Helio even better.
2. Credit Funds
CircleUp Credit Advisors extends loans to traditionally un-bankable businesses to help fill their working capital gap. The credit business offers non-dilutive capital to fuel growth either alongside or independent of an equity raise. We leverage Helio to target the right prospects and monitor our existing book of borrowers. The efficiencies created by the technology translates into lower rates for our borrowers.
3. Insights & Connections
Our Insights & Connections business connects third parties (entrepreneurs, investors, retailers, strategics) with the power of Helio. We can connect an emerging CPG company with an investor, or we can help empower a strategic to identify the right consumer companies with which to partner and grow. The early-stage CPG & retail market is far too big for just our own internal funds. Furthermore, empowering others to leverage Helio is consistent with our mission and will help more entrepreneurs to thrive. Helio data has big implications for entrepreneurs and for the rest of the CPG ecosystem.
FUTURE HELIO APPLICATIONS
I get excited thinking about future applications yet to come – these applications will come from within CircleUp and from external players who find use cases beyond our focus areas. To paint a picture of the future, I will outline one future Helio application on CircleUp’s roadmap – a private systematic fund.
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 greater than 35% IRR for over 20 years. One third of the $3 trillion hedge fund market is algorithmically invested and this percentage only continues to grow.
At CircleUp, we are sowing the seeds for a comparable shift to systematic private equity and debt investing. Why is this important? Until we structurally remove human bias from private investing, not every entrepreneur will have a fair shot to succeed. And until we trust an algorithm to make investment decisions, we will fall back on gut feelings and typical human cognitive biases: anchoring, recency bias, the endowment effect, confirmation bias, etc. We are proud of the progress we have made in terms of limiting bias, but we know can do so much more with a series of systematic private funds. A systematic approach will lead to more efficient capital markets and a more transparent process for entrepreneurs.
BlackRock’s Global Head of Active Equities, Mark Wiseman, has said that “the old way of people sitting in a room picking stocks, thinking they are smarter than the next guy – that does not work anymore.” In a similar vein, I believe that the days of Investment Committee decks and subjective voting found in venture and private equity will eventually be displaced by Helio. And the concept of proprietary deal flow through a “better network”- think cocktail parties and trade shows – will become a fallacy. CPG is the perfect place for this transformation to begin because of the unique combination of a massive market, the highly standardized business models, and the treasure trove of data (a data scientist’s dream).
The shift from manual to algorithmic private investing will take years, if not decades, and I don’t expect everyone to agree that it is the future. But if we are right, CircleUp – and specifically Helio – will be at the forefront of this advancement.
CircleUp’s mission has always been to help entrepreneurs thrive. The path we’ve taken to fulfill that mission has evolved and the platform we’re building 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 forward.