Union Square Ventures' Andy Weissman Getty/Jemal Countess
When Andy Weissman began to look at investing in a startup called CircleUp , he realized the underlying concept was something that could put him, or some of his competitors, out of business.
Weissman is a partner at iconic New York VC firm Union Square Ventures , and CircleUp’s vision is to bring machine learning to bear on the process of evaluating investments. Right now, CircleUp is focused on consumer goods startups, not tech, but Weissman says the premise of algorithms guiding investment decisions made him seriously think about the value venture capitalists bring to the table.
Once upon a time, a VC might tout proprietary access to certain deals, Weissman says . Not anymore. “We are all looking at the same companies,” Weissman tells Business Insider. It benefits startup founders to shop around their companies to different VC firms. “Why would I just look at USV [Union Square Ventures]?” Weissman asks, posing as a hypothetical startup founder. Some VCs have a little more data, some have a little less, but the informational advantages have basically evaporated as well.
Weissman says as a VC, he could have two reactions to the questions posed by CircleUp about his profession. The negative: an existential crisis. The positive: VCs will have to be better than they used to be.
But what does "better" mean? One big way is providing support to startups. USV is a long-term investor, and its average time to exit is eight years. In those eight years, USV has to prove its worth beyond simply being a good startup picker. USV is also guided by broader theories about trends in the marketplace, and being right on these is important.
What CircleUp is right now
Weissman’s VC "moment of reckoning" is, however, still a few years off at least. And currently, CircleUp is only focused on consumer goods startups : from social impact water to custom shirts to alcohol-infused cherries.
There’s a reason for that. CircleUp CEO Ryan Caldbeck says there are two beautiful things about investing in consumer goods startups: the business models are basically the same, and there is so much data to look at. A decade ago, when Caldbeck was working as an analyst in private equity, he says he realized there was a lot of his job that could be automated.
“I bet a computer could do this,” he thought.
The idea became CircleUp. The main component of CircleUp is the “Classifier,” a piece of software that can run through over 90,000 data points on thousands of startups. The computer screens poorly-performing startups so that humans can evaluate more potential investments. Young analysts don’t have to do the drudge work.
Caldbeck says private equity firms will typically ignore consumer goods companies that have under $10 million in revenues. That’s because it’s too time consuming. The pitch of CircleUp, he says, is that the best investing decisions are made by machines and humans together. Each side sticks to what it does best, and you can expand the number of startups you look at.
CircleUp COO Rory Eakin describes it as Moneyball for investing, in that it also aims to take some of the judgment biases out of the equation with intensive data analysis.
The end goal for CircleUp is to open up the private markets to more investors, and to reap the financial benefits of that.
CircleUp's Rory Eakin and Ryan Caldbeck (from left). CircleUp
The new way we consume
The trend that Caldbeck really sees pulling CircleUp's business along is a shift in the way that young people are buying consumer goods. Large brands are losing share to small ones, he says, citing three reasons: millennials demand uniqueness, and distribution is cheaper, as is marketing.
VCs have noticed, and there are a crop of consumer goods startups funded by VCs who usually invest in tech. Think about products like Warby Parker glasses, Casper mattresses, Sweetgreen salads, and so on. The consumer goods side has half the volatility of tech, Caldbeck claims. But there is no Silicon Valley, no centralized bastion of hype and early-stage investments. Many good ones slip through the cracks, he says.
The bottom line is this, Caldbeck says: VCs aren’t going to find all the promising consumer goods startups spread out all over the country, and private equity firms are going to ignore the small ones. Consumer products account for 20% of US GDP, but snag only 5% of early-stage funding, according to the Bureau of Economic Activity.
That leaves a gap Caldbeck hopes can draw investors to his platform.
CircleUp works in two basic ways right now. First there is access to the marketplace, which opens up the findings of the “Classifier” to investors. They can then make the individual deals themselves. The second is different financial products CircleUp builds using the "Classifier" data and its own analysis. The big one is a Marketplace Index Fund (MIX), which is like an ETF for early-stage private markets. It has a minimum $25,000 investment, and has a 0.5% management fee.
CircleUp has gotten funding for over 185 companies, and has seen more than $240 million invested through its marketplace, according to the company.