By Dan Levitan, co-founder of Maveron
Considered one of the greatest investors of all time, Peter Lynch had a simple investment principle - “invest in what you know.” This straightforward investment philosophy helped him find good undervalued consumer-oriented stocks and achieve an annual average return of 29 percent while managing the Fidelity Magellan Fund from 1977 to 1990, which grew from $20 million to $14 billion during that time.
We appreciate Lynch’s simple, yet adaptive, investment style, which focused on the basics of good management, exceptional businesses, and quality consumer products. However, in today’s Sarbanes-Oxley world, for lots of logical reasons, investors are increasingly unable to realize this type of return or get in early enough to see that magnitude of returns. For example, a single share of Starbucks bought at the 1992 IPO is now worth almost 100x its original price. Even if one invested at Facebook’s public nadir of $50 billion in value, and it reaches $350 billion market capitalization, it would only be a 7x return.
The JOBS Act has relieved some of the restrictions that were put into place by the Sarbanes-Oxley Act, with the most notable innovation being crowdfunding. As the investment banker who had the privilege to take storied retail brands like Starbucks public, I see the crowdfunding marketplace improving upon the investment banking franchises of yesteryear by allowing retail investors to once again gain early access to high-risk growth investment opportunities.
Providing that opportunity early to investors inspired us to invest in CircleUp, a great equity-based crowdfunding site focused on consumer and retail. In our minds, CircleUp’s equity-based crowdfunding approach will become the 21st century investment banker.
Rather than shying away from what some consider to be competition, we were the first institutional investors to back Ryan Caldbeck and Rory Eakin, the co-founders of CircleUp, and embrace the value that crowdfunding can bring to early-stage startups. Two years later, CircleUp is on its way to making their vision a reality with a game-changing approach and marketplace that matches promising consumer companies with the right investors. This week, the company successfully closed new funding of $7.5 million led by Union Square Ventures and Google Ventures, with participation from my firm, Maveron. The financing marks the next step for Caldbeck and Eakin in making CircleUp the investment platform for the next generation of consumer brands. Early evidence shows that there is a good chance the next Chobani, Vitamin Water, or Under Armor will start by raising capital on CircleUp.
In his Forbes article on the one-year old “Jumpstart Our Business Startups” (JOBS) Act, Caldbeck says “Equity crowd funding is the most disruptive thing to happen to the financial services industry in a very long time.” As a former investor at consumer private equity funds, Ryan saw a hole in the market – early stage consumer businesses with great potential struggling to find capital and not a head on fit with normalized fundraising models paired with investors who couldn’t gain early access to these high quality businesses.
I couldn’t agree more. Not only is crowdfunding great for investors, but it’s even better for entrepreneurs, opening up untraditional sources of capital and creating a network previously unavailable to early stage companies. While we know as well as any the value great institutional investors can bring to the table, we also know that institutional capital is not right for every type or stage of promising business. Raising capital from individuals rather than institutions, can provide entrepreneurs with benefits such as more internal control, or more flexible liquidity timelines. Unlike investment banking, crowdfunding gives independent investors complete transparency and visibility into where other smart investors, frequently their peers, are investing. Rather than a junior banker calling dozens of institutional clients and retail investors with research and analysis on potential investment opportunities, CircleUp offers individual investors direct access to opportunities. It provides a format where they can find the relevant information, receive sample products, and connect directly with the company and management team. This new approach allows influential private investors to speak with their pocketbooks, a signal that is vastly superior to the investment banking research analyst reports in today’s hyper connected world.
Lets face it, crowdfunding is the new investment banker and, in many ways, a new important player in the venture capital ecosystem. Maveron has been one of the few VC firms that have made bets on equity crowdfunding. Just like all our investments, we’re looking for incredible entrepreneurs like Ryan and Rory and for businesses that are ready to disrupt industries, displace incumbents, and establish market leadership. We love the idea of investing behind disruptive companies like CircleUp, and relish in the fact they might end up being our competition for certain investments. With crowdfunding, more entrepreneurs with the next big idea will access capital and that’s a good thing for the entire entrepreneurial ecosystem.