By William Dowling and Jonathan Scherr
Part I: Why we want to build a systematic investing strategy
Part II: The operational hurdle of valuing companies at scale
Part III: Other investors in the ecosystem
Part IV: How systematic investing will help entrepreneurs
Part V: Getting the deal done – from outreach to close
In the world of early-stage investing, sometimes it’s easy for investors to get caught up in the details of LTM revenue, gross margin, scalability or a hundred other financial terms that become shorthand for whether or not they think a particular business will succeed. While these are certainly necessary concepts, it’s important not to lose sight of what an investment can actually mean for an entrepreneur on the other side.
At CircleUp, our mission is to help entrepreneurs thrive by giving them the capital and resources they need and our vision is to create a transparent and efficient market that drives innovation forward for all. By executing on our mission, we move closer towards our vision. Our primary reason for launching a private systematic fund is not because it’s the first fund of its kind (although it is), and not because we think it will lead to impressive returns (although we do); our primary reason for launching a systematic fund is because we believe that it will allow us to help a far greater number of entrepreneurs thrive than traditional approaches and allow us to do it in a transparent and efficient way. The more entrepreneurs we are able to help, the more we are living out our mission and moving towards our vision. And the more we do it, the better we get at it. There are powerful network effects to building our portfolio which we will discuss below.
At CircleUp, we’ve had the opportunity to work with hundreds of entrepreneurs as they go through the process of raising capital. We thought it would be helpful to share some high-level feedback that has emerged from working with these entrepreneurs over the years and explore how we think systematic will help alleviate some of the pain points they’ve talked about. Three big themes that have surfaced from our work with entrepreneurs surround efficiency, fairness, and value creation. Let’s explore each in turn.
What entrepreneurs want: A clear theme that has emerged from our work with entrepreneurs surrounds the inefficiency of raising capital as a consumer company. For entrepreneurs, raising capital can be a very absorbing process. One founder told us recently that it was the greatest challenge his company faced over the last five years and another said that around 35% of his day was spent following up with investor leads. Time is one big inefficiency, but lack of consumer expertise among investors is another huge inefficiency in the process. Investors who don’t specialize in consumer may not know how to best evaluate consumer companies which can end up being harmful for both the investors and the entrepreneurs. Such investors might end up hyper-focusing on only one part of a consumer company’s business model (e.g. D2C) or come in with the mindset that one company can rule its market. Such a mentality may be useful in tech investing but it does not carry over to consumer and can end up creating unneeded friction between entrepreneurs and investors who may see a different path forward for the company.
How systematic will deliver: Our target is to ultimately be able to close a round in 15 days. An ambitious goal, we know, but Helio will take us there. As we outlined previously, with Helio we are able to evaluate private consumer companies at scale. These evaluations are based on millions of data points gathered through a variety of public, partnership, and practitioner data, and the feedback loop between our systematic fund and Helio means that model performance continually improves as we add more data and work with more companies. Helio will let our systematic fund approach entrepreneurs already knowing our level of interest in a company. This will allow us to move quickly, and avoid the ongoing back and forth that most investors have to go through in order to develop their own investment thesis. This will save entrepreneurs a huge amount of time and allow them to devote their energies to what they know best — building their businesses. While this strategy won’t guarantee every founder a successful round of financing, it will make it meaningfully easier for those companies that are objectively identified as poised for growth to raise capital quickly.
What entrepreneurs want: It’s no secret that the world of venture capital has historically been a boys’ club. In 2016, only 2 percent of venture funding went to women. We’ve heard many frustrations from female and minority founders who aren’t getting fair opportunities to access capital. In addition to bias based on gender and race, there is also bias in the investing world that comes from where companies are headquartered. Investors tend to prioritize companies that are based in their neck of the woods, meaning that consumer companies located outside of major cities can get overlooked. Entrepreneurs want to be evaluated based on the merit of their ideas and products not whether they happen to be a man or a woman or based in San Francisco or Des Moines.
How systematic will deliver: Removing the bias from investing has long been central to CircleUp’s vision to create a transparent and efficient market that drives innovation forward for all. Helio evaluates companies in a data-driven way that is repeatable, scalable, and doesn’t succumb to bias or heuristics. It provides us unparalleled information on the consumer sector, so our evaluations are not based on feeling, gut, or fuzzy metrics. Because our investment strategy is built on Helio, it removes bias and heuristics from the investment process and ensures that all companies are evaluated fairly. We are excited to continue to level the playing field for entrepreneurs as they build their businesses and realize their dreams.
What entrepreneurs want: Many funds today provide some type of post-close value (job boards, networking events for portfolio companies, advisory network, etc.) but it’s not always clear how valuable that value actually is. Sometimes it comes in the form of a partner with years of experience as an investor (not operator) who might spend a limited amount of time attending board meetings for 10 different companies (can be hard to truly add value). Many founders want more than networking events or an investor sitting in on board meetings- they want strategic insights and connections that can help their business grow and a community of entrepreneurs that can help support one another. This could come in the form of input on a new product, data on a competitor’s distribution, feedback from other founders on a designer or advertising agency, or a hundred other resources that most funds just don’t provide.
How systematic will deliver: While capital is important, it’s only half of our mission. Providing value post-close is equally important to us. This post-close value can take the form of data, connections, or community. On the data side, Helio, the very platform that will help us find and invest in great companies in the first place, will also be a powerful resource for these companies once they are part of our portfolio. Imagine an entrepreneur who wants to launch a new probiotic beverage. She can use Helio data to analyze the competitive landscape and look at the ingredients and packaging of probiotic beverages that are currently on the market as she decides how her’s will be differentiated. She can get a data driven assessment of her own brand’s strengths and weaknesses vs her competitors, and understand how her brand’s omnichannel reach has changed over time and what areas she needs to focus on. She can look at her current store distribution and evaluate what retailers to target in order for her new product to be most successful in the future. This is just one potential use case, but it’s illustrative of the type of value that Helio unlocks. Our Insights and Connections team will also be in a position to introduce these brands to a variety of industry players that will help them grow. Finally, our growing community of founders and entrepreneurs will be able to engage with new members of our community across a variety of platforms we currently have in place. This provides a safe place for entrepreneurs to share and learn from one another as they grow their brands. We believe there are powerful network effects to this type of community. The more entrepreneurs that join the richer the resource becomes.
Where the rubber meets the road
We also got feedback from some founders we’ve worked with that they might be skeptical if they heard that a fund could invest as quickly as ours will be able to. We can have the greatest investment strategy in the world, but if entrepreneurs are incredulous when we engage with them then we will not be successful. We think this is important feedback and that’s why we’re trying to be as open as possible as we go through this process together. Through posts like these and many conversations we’re having with stakeholders along the way, we hope to be able to show that with the right technology a private market systematic investing strategy is not only possible but presents a huge benefit for entrepreneurs.
We don’t have this all figured out yet and we’re learning as we go, but we’re encouraged by the progress we’re making and enormously excited by the opportunity in front of us.