• CircleUp Carves Out a Niche, as the AngelList of Private Equity

    Rory-Eakin-CircleUpCircleUp isn’t a household name. But the three-year-old, San Francisco-based crowdfunding site has become well-known to consumer and retail companies that are too small to interest private equity firms yet growing too fast for a bank loan. So far, 70 businesses with yearly revenue of between $1 million and $10 million have raised an average of $1 million from CircleUp investors, all of whom are “accredited,” and who, on average, write checks in the neighborhood of $30,000.

    Many of those backers — and there are more than 10,000 of them — are high-net-worth entrepreneurs or executives who’ve been in or around the consumer space, says CircleUp cofounder Rory Eakin. But the next largest group isn’t wealthy dentists looking to play venture capitalist, he says. It’s financial services pros. “We’re seeing hedge fund [investors], VCs, and other investment professionals who like making direct investments without the typical fund structure,” he says. “More family offices and [registered investment advisors] are coming on to the platform, too.”

    It’s a little like AngelList — though less risky, suggests Eakin, citing Kauffman Foundation findings that smaller consumer and retail product companies return 3.5x within four-and-a-half years on average. Eakin, whose company now employs 40 people, told us more last week in a conversation that’s been edited for length.

    You work with companies with at least $1 million in revenue. Why is that threshold meaningful?

    It means these companies have an established product in the market, with suppliers, distribution and customers — data [that] can help put CircleUp’s investors in a position to succeed.

    The companies offer investors equity in return for their capital. How much, typically?

    A company typically sells 10 to 30 percent in a round on CircleUp. Investors can own all or a portion of that amount based on how much they invest.

    How do you assess the companies that are applying for funding on your platform?

    We [pore over] proprietary data about the more than 6,000 companies that have applied, as well as look at third party data, to score a company on how it has performed relative to its category. For example, if your natural shampoo is growing at 100 percent a year, that’s interesting, but if the category is growing at 200 percent per year, you’re losing market share.

    If more than 6,000 companies have applied for funding on the platform, yet 70 have completed a round, you must be turning away most applicants. Why?

    We’ll pass for two or three reasons. The first is valuation. Consumer goods tend to be valued off revenue multiples, so it’s a cleaner metric than you see in tech, and it gives us [information] to pass on to companies that aren’t priced appropriately based on risk. We also look at the experience and background of the management team, as well as the brand itself. Assessing the latter is more art than science, but we’re doing things with data now that helps us screen for it more efficiently.

    Are you actively seeking out companies or is your deal flow mostly inbound?

    A lot of great companies apply, but we’ve also done a lot of work to expand our partnerships. We get a lot of companies from PE firms with nowhere to send smaller companies. We’re also networking actively with bankers, brokers, and lawyers to ensure that we have quality companies.

    We’ve also announced partnerships with General Mills, Proctor & Gamble, and Johnson & Johnson that are designed to help companies thrive after they raise money.

    How so?

    Largely, they meet with founders in an informal mentorship program where they talk about distribution and key functions of helping companies scale. It’s a win-win, because these strategics get to see what’s happening in the early stage of the market and they get exposure to these new products, while the [smaller] companies form relationships with [these potential investors, who might also acquire them].

    CircleUp is a broker-dealer, meaning you accept a commission for facilitating the transactions on your platform. Do you share publicly what that percentage is?

    It’s a small amount that’s competitively priced.

    What about fundraising? CircleUp announced its last round nearly a year ago. Are you talking with investors again?

    A [new round] isn’t on the roadmap. Our focus right now is on continuing to see opportunities and to reduce friction in the market. We knew the market wasn’t functioning as well as it could, but we didn’t appreciate just how painful things had been for these companies and investors.

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

  • VCs Just Bet $32 Million on this 76-Year-Old; Here’s Why

    OM ChoiceThanks to the startup industry’s obsession with youth, you might think that running a fledgling venture-backed company is a young person’s game. But it’s often a different story when it comes to healthcare companies, where more experience can mean a smoother path through the lengthy FDA process — and a failure to deeply understand a technology can prove fatal.

    Seventy-six-year-old Alan Levy, an organic chemistry PhD and serial CEO, is a case in point. Guy DiPierro, a corporate attorney who acquired a smoking cessation technology from the University of Basel, spent nearly a decade trying to turn it into a commercial enterprise, but his progress was painstakingly slow. By 2012, he’d successfully attracted a $2.25 million grant from the National Institute of Health for his company, Chrono Therapeutics, but he knew it wasn’t enough; he knew he needed someone like Levy.

    Smart thinking. Last fall, after he pitched Levy on his anti-smoking cure, Levy, who has shepherded four early-stage companies to significant liquidity events, signed on. And yesterday, Chrono announced a $32 million round led by 5AM Venture and Canaan Partners — both of which have backed Levy in previous companies. I talked with Levy yesterday about signing up for a fifth company, and what made Chrono too good an opportunity to miss. Here’s part of that conversation, edited for length:

    How is Chrono’s product different from what’s already available?

    With other solutions, you put on a nicotine patch and it delivers a low, constant dose of nicotine. But you can improve efficacy if you can prevent smokers’ cravings, which are highly predictable. Take someone who wakes at 6 o’clock. We begin delivering nicotine to that person at 5 a.m., so that when he wakes, he’s feeling good. Smokers’ cravings typically spike after dinner, too, when they’re metabolizing everything — including nicotine — more quickly.

    It’s well-known that you can increase efficacy from around 10 percent to 50 percent [by delivering nicotine in targeted fashion], so the industry has been trying to do it for more than a decade. Our proprietary technology can do it reproducibly, robustly, and in a cost-effective manner.

    Tell me about the form factor and the cost.

    The product is about the size of a small men’s watch and it can be worn as a watch, as an arm band, or a patch. It’s this circular product, mostly made out of plastic, into which a disposable cartridge snaps. It’s the razor-razorblade model.

    It’s a 10-week course of treatment. Existing products on the market cost between $400 and $500 and that’s what our product will cost, too, for the band and 70 daily cartridges.

    When will it hit the market?

    We’ll need to do what’s required for the FDA which, in this case, is very little compared with what it would be if it were a new drug . . . so we should be able to market the product within three years.

    How can you be so certain?

    Nicotine delivered through the skin [is a decade-old technology] that’s been shown to be very safe. Even if someone puts on two patches, they may get sick to their stomach, but no one dies from patches. Because of that, there’s a specific pathway to approval that’s low cost and low risk.

    You sold your last company in 2012, less than three years after it was founded. Why not kick up your heels and relax?

    I did take a weekend off. [Laughs.] On a more serious note, I saw [Chrono’s technology] as something that could have an enormous impact – perhaps more than any other product I’ve developed in my career. The consequences of smoking are just devastating and as an ex-smoker, I know how hard it is to quit.

    You’re 76. Did your age ever come up in Chrono’s funding discussions? You don’t see a lot of 76-year-olds raising huge venture rounds in information technology.

    It didn’t [come up]. Most of the investors in the healthcare space know me or we know one another. They know my energy level and my level of involvement, as well as my management style and accomplishments. Fortunately, I’m very healthy; in fact, in two weeks, I’m going on a two-week biking trip to Poland.

    I don’t think [healthcare executives] necessarily have to be my age. [Laughs.] But experience counts. If Groupon fails, it doesn’t make that much of a difference. I don’t think anyone is gong to die. But [at my last company], if [the product] failed, there was the potential for people to die and that’s been true of many products that I’ve developed.

    You’ve heard people in the venture world say, “We can have a product out there and have it fail.” People don’t go into healthcare with that attitude. No one can afford it.

  • NatureBox Shows Why VCs Are Rushing to Back Food-Delivery Companies

    naturebox_121912-070.1363818457Venture capitalists have seemingly gone bananas over food startups. According to VentureSource, in the last 14 months, 15 companies that deliver restaurant meals have been funded; meanwhile another 11 startups that sell general food products were funded last year – an industry record.

    Are investors overdoing it? Perhaps, though a peek into the business of NatureBox, a two-year-old, San Carlos, Ca.-based snack-delivery company that has raised $28 million to date, highlights the opportunity they’re chasing. Earlier this week, I spoke with CEO Gautam Gupta, a former investor with General Catalyst (which is among NatureBox’s backers), about his 60-person company. Our chat has been edited for length.

    How fast is NatureBox growing?

    I started the company with a friend of mine from college two-and-a-half years ago. That first year, we shipped 50,000 [boxes of snacks to customers]. Last year, we shipped a million and we’re on track to triple that this year.

    Who, and where, are your customers?

    We have customers in all 50 states. We do skew toward a female audience. The largest segment is moms looking to find healthier options for their family and school lunches. Half of our customers are on the coasts; the other 50 percent are in the Midwest, where people don’t have access to Whole Foods or Trader Joe’s.

    How much are they paying for their Naturebox deliveries?

    We have three different offerings, so $20, $30, or $50 a month [based on how much you’re ordering]. You can choose the items yourself from 120 different options in our catalog, or we can select them for you.

    From where are you shipping the products?

    We work directly with almond and fruit growers across the country to source the ingredients. We then have a network of contract manufacturers who work on the product across the country and who send the product to our two fulfillment centers in California. We’re also about to launch an Indiana-based fulfillment center, which is a big undertaking for us and will enable us to get our boxes to our East Coast and Midwest customers much faster.

    What convinced you that this was a big opportunity?

    The traditional model, through retail stores, really involves a fight for shelf space, with [food companies] having to develop products based on the retail calendar. What we’ve done is take a product development cycle that’s one to three years and condensed it to the point where an idea can be made into a product that’s in customers’ hands in two or three months. More, as soon as it reaches that customer, we’re getting feedback about what they like and don’t like to eat and what makes products more or less successful — data that drives the business [forward].

    What have you learned about your customers so far?

    We’ve learned how important the aspect of familiarity is to a new product. We have four or five flavors of wheat fig bars available to customers on our site, for example, because the taste is very similar to Fig Newton [cookies], though our products are made of whole grain and without any fructose syrup.

    You spent eight years working at General Catalyst. Do you think VCs are beginning to plug too much money into me-too food startups?

    From an investors’ standpoint, the industry we’re going after is a trillion dollar market. It’s one of the last industries to be disrupted by the Internet.

    Will you be back in the market in 2014?

    We’ve had a lot of folks reaching out to us and have a lot of options. We’re kind of heads down, building the business, but if it continues to grow and we’re in a good position, it’s [possible].

    Before you go, which is better, life as a VC or as an entrepreneur?

    I started with General Catalyst when I was in college, and it was the only real job I had before starting NatureBox . . . I’ve now learned that building a company is so much of a team sport, versus investing, which is more about being an individual contributor. I’m definitely learning a lot, but I also really love the aspect of being able to do something and see the impact of that and really playing in the game. This job is a lot more fun.

    Sign up for our morning missive, StrictlyVC, featuring all the venture-related news you need to start you day.

StrictlyVC on Twitter