Why the change in general solicitation will matter…but not how you think

Tomorrow, the SEC is expected to announce new rules for General Solicitation, the way private companies and others can advertise offerings. This change was a key component of the JOBS Act passed by Congress in April, and much has been written about the benefits for technology start-ups and others since then.  Today, we are featuring a post from Ryan that debuted in Forbes today.  

In April, President Obama signed into law the JOBS Act, which was designed to make it easier for small businesses to access capital and create new jobs in the process. On Wednesday, rules for one of the key provisions of the JOBS Act, the removal of the SEC’s longstanding ban on “general solicitation or advertising” for companies selling securities without SEC registration, will be announced. In the past, companies that sold securities to accredited investors were able to avoid the expensive and burdensome process of SEC registration under a “safe harbor” exemption in the Exchange Act. However, one downside to raising capital this way has been that companies cannot take part in “general solicitation or advertising”, which nominally prohibits issuers from advertising securities offerings, but has effectively caused companies contemplating an offering to cease all public communications, making the fundraising process very inefficient.

While some experts are predicting that the removal of the general solicitation ban will help spawn the next Facebook or Google, tech companies will actually be the companies least affected by the change in law because the private capital markets for tech are already extremely efficient.  According to Pricewaterhouse Coopers’ and the National Venture Capital Association’s MoneyTree Report, almost 60% of the $28 billion of venture financing in 2011 went to the tech industry (including biotech). Silicon Valley, where the vast majority of venture capital money resides, has a long and storied history funding tech companies. “Demo days”, gatherings where promising (mostly tech) start-ups exhibit their wares to potential investors and industry observers (which straddle a legal grey area under the general solicitation ban) have become all the rage over the last few years, led by the success of start-up incubators like Y Combinator. Leading Silicon Valley law firm Fenwick & West summed up the early-stage investing environment well in its Second Quarter 2012 Silicon Valley Venture Survey: “The venture environment continues to be a “tale of two cities” with software and internet/digital media thriving and life science and cleantech lagging.”

Thus, there is clearly an efficient market for start-up tech companies with sound business models to raise capital today, without the need for the publicity that the removal of the general solicitation ban will afford them. There may be a few tech companies in obscure geographies that stand to benefit from the ban’s removal; however, tech companies that will be able to raise capital because of the ban’s removal when they were not able to before will mostly be the product of adverse selection. Great tech companies can already raise VC and angel money so the ones who have not been able to are primarily the ones whose business models are not sustainable. If these companies can now raise money because of increased publicity from the ban’s removal, investors may be in for a bumpy ride.

However, there is definitely a bright side to the ban’s removal for companies outside the Silicon Valley bubble. For example, the consumer industry accounts for nearly 15% of GDP but less than 5% of venture capital funding, yet according to a report by the Kaufmann Foundation, the leading authority on VC and angel investing returns, angel investments in consumer products companies have produced average returns of 3.6x invested capital over 4.4 years. Consumer companies and companies in other industries that have not been the historic focus of venture capitalists will be the big beneficiaries of the ban’s removal, as these companies that exist outside the Silicon Valley ecosystem will be able to publicly alert potential investors that they are raising money.

The JOBS Act is a great step in the right direction for America’s small businesses and will remove a lot of red tape that has prevented job creation. While the removal of the general solicitation ban is an important piece of the Act, the companies who will benefit the most from it are not the darlings of Silicon Valley, but the businesses of mainstream America.

http://www.forbes.com/sites/groupthink/2012/08/28/lifting-the-ban-on-general-solicitation-guess-which-startups-and-investors-it-helps/

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Interest in Health & Wellness CPG companies expands beyond usual (strategic) suspects

By Mike Dovbish, Executive Director of Nutrition Capital Network

For the past several years, I have been tracking financing and M&A activity within the health, wellness and nutrition sectors.  Recently I have noticed an interesting trend in the acquirers in this sector: some of the key, recent acquisitions have been made by non-traditional strategics (large, traditionally public, companies).  While these companies’ specific interests in their respective targets differ, the underlying trend is clear: health and wellness has been identified as a long term trend and an ever expanding group of strategics wants to get involved in this space. 

The fight against obesity has become a major investment thesis of BofA Merrill Lynch Global Research who are now assigning points to publicly traded companies that are fighting obesity.  Clearly these “new” strategics want to be on the right side of the game.

In the natural, functional and organic food and beverage sector, coffee retailer Starbucks has become quite aggressive in acquiring companies as they are in the process of re-shaping their business.  The company acquired Evolution Fresh (a natural/fresh juice business) and Bay Bread (La Boulange brand) and partnered and invested in Square, a mobile payment processing company, all in a relatively short time frame.  Fruit and vegetable producer Dole Foods acquired Mrs. Mays, a fruit and nut based snack company.  This is Dole’s first acquisition of a snack company and with the demand for healthy snacks continuing to increase, I expect more acquisitions by other “fresh faced” strategics on the horizon.

Earlier in 2012, Proctor & Gamble bought organic and whole food supplement company New Chapter.  This is Proctor and Gamble’s first (and long overdue) foray into the dietary supplement category.  According to New Hope Media, Paul Schulick, a New Chapter co-founder, is excited by the opportunities that Proctor and Gamble can provide to further New Chapter’s mission of providing its high quality, sustainability-focused products to the masses.

Lansinoh, a leading breastfeeding products marketer and manufacturer, acquired a UK based natural personal care company for babies.  While not the typical natural personal care acquirer, Lansinoh’s extension into this market is an obvious choice.

I believe the trend toward the natural space will only continue, and we will see more and more acquisitions by companies outside of the usual suspects.  The broadening of exit opportunities for health and wellness companies bodes well for emerging companies in this sector and will act as a great driver for overall growth in the industry. 

 

 The mission of Nutrition Capital Network (NCN) is to facilitate financing & asset sales for growing companies across the nutrition and health & wellness industries.  Nutrition Capital Network’s Fall Investor Meeting in San Francisco, CA, on October 15-16 will feature short presentations by qualified presenting companies – learn more at www.nutritioncapital.com.

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What’s Next?

By Dan Gross

Last week, Nutrition Business Journal and the Sterling-Rice Group released The Natural Products Industry Forecast 2013 (“NEXT”). NEXT examines the macro trends and forces that are having the greatest impact on the natural, organic and functional food and beverage space today and will have the greatest impact in the future. The report details seven macro trends shaping the natural food and beverage category and we will take a closer look at three that are particularly salient for investors in early-stage food and beverage companies:

  • Food Villains: Consumers are increasingly viewing food not as a way to be healthy, but as something that can potentially make them sick. Ingredients like gluten, milk, eggs, peanuts, etc. each provide a different group of consumers a reason to not purchase a food product. Why should you care: products that combat food villains and still taste great provide strong investment opportunities. For example, as we pointed out in an earlier blog post sales of gluten free foods are expected to grow from $4.8 billion in 2009 to $8 billion by 2013, even though only 3.1 million Americans actually suffer from Celiac disease (condition where gluten intake causes abdominal pain). A great gluten free success story is Udi’s, which made its name selling gluten free breads, and grew from $4.3 million of sales in 2009 to $60.9 million for the twelve months ended March 2012. Two weeks ago, Smart Balance, Inc. announced it was acquiring Udi’s for $125 million (Smart Balance Acquires Udi’s). Small companies like Udi’s are often the ones best positioned to take advantage of new “food villains” as they are viewed by consumers as being more authentic than their counterparts from major CPGs. While capitalizing on food villains can be lucrative, it is critical for investors to separate real food villains, that is, those where the food villains’ effects are backed by science, from fad food villains (Atkins diet anyone?).
  • Brands on a Mission: There is a broken trust between consumers and food companies. For years, food companies have made often suspect nutritional claims, which, while not always illegal, can be misleading. Take “all-natural”. Consumers have filed lawsuits against CPG stalwarts like ConAgra, Kashi and Snapple over (plaintiffs allege) misleading 100% natural or all-natural product claims.  Why should you care: Food companies that connect with consumers’ hearts and minds AND deliver on lofty nutritional promises AND taste great are the ones who will win on the shelves during the next decade. Perhaps the best example of a company like this is Greek yogurt manufacturer Chobani. Chobani started with nothing but a SBA loan and a 100-year old factory in 2007, and grew from zero to $700 million in sales by 2011 (The $700 Million Yogurt Startup). Today, Chobani holds 47% share of the Greek yogurt category (Who’s Winning the Greek Yogurt Revolution?) while multi-billion CPG companies like Kraft (abandoned its efforts in the Greek yogurt category) and General Mills have struggled mightily. So how has Chobani continued to stay on top in the face of companies with massive advertising budgets nipping at its heals? By staying authentic and connecting with consumers. Check out this Chobani video: Chobani: Our Real Love Story Video. When a company can personally answer every Facebook post and make great-tasting and nutritious products, they develop a passionate consumer base that all the Super Bowl ads in the world cannot replicate.        
  • “Wholegrarian” Revolution: Increasingly, consumers are seeking out whole-food based nutrition and the nutrient-dense rewards these products hold, while avoiding overly processed foods and beverages. Why should you care: Because the companies and categories on the front end of the Wholegrarian Revolution are attracting interest from strategic buyers much earlier than other companies. Take coconut water for example. The beverage made from young, green coconuts, is high in potassium and other vitamins, low in calories and naturally sweet. Over the last year, the market for this beverage has doubled in the U.S. and Europe (Coconut water craze more than just a fad, claims analyst) and both Coke and Pepsi have made strategic investments in coconut water brands (Coke buying ZICO and Pepsi Bottling Group investing in O.N.E.). Major food and beverage companies are incremental innovators; they rarely make revolutionary leaps because failure on an international scale is expensive. Thus, the companies experimenting with whole foods are the early-stage ones, and success breeds interest from strategics and lofty exit multiples.

 

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Returns in Angel Investing and What it Means for Crowdfunding

Today, we pleased to feature a guest post from Rob Wiltbank.  Rob is an Associate Professor of Strategy and Entrepreneurship at Willamette University, and the co-author of the most comprehensive research study on Angel Investing in the US.  Given the active discussion about Angel Investing and crowdfunding, we asked him to share his research, and his thoughts on what the findings mean for crowdfunding platforms like CircleUp

By Rob Wiltbank, Willamette University

With the growing prominence of Angel groups, and the introduction of crowdfunding as a new model for Angel investing, there has been much debate about risk and return for Angel investors. Rather than speculate, potential investors, policy makers and other participants can look at the data.  What do investor returns look like? How can crowdfunding help these new Angels invest wisely?

Angel investing can be quite profitable, producing outsized returns not just for the traditional industries of focus such as software and medical devices, but for investors in many areas of the economy.  I say this not as a casual observer, but as the lead researcher, along Warren Boeker of the University of Washington, for the largest study on the financial returns of angel investors in North America, the Angel Investment Performance Project (AIPP), released by the Kauffman Foundation.

In fact, the data show high rates of return for angel investments across many industries, from technology to consumer products and services.  Many will be surprised with the breadth of these returns.  Even in consumer products, though the N is small (just 29 companies) investors experienced 3.6x their investment in an average of 4.4 years. The investment return data compare favorably to that of other private equity investments, including those of early-stage venture capital.

Crowdfunding holds interesting promise for the Angel investing community, but it should be done with care.   A well run site will have zero anonymity, and allow for collective scrutiny and diligence from a diverse, sophisticated investor population. Investor experience, expertise, and some ongoing involvement in the ventures are highly related to stronger performance in angel investing.  Crowdfunding options that bring that mix of benefits, and great dealflow, should likely perform well.

To achieve better returns, crowdfunding participants should follow some of the best practices of successful angel groups, including:

  • Promote diversification. Investing in a number of companies simply gives you more chances to support a company that really can take flight.  Find an industry you understand and take the time to make multiple investments rather than just one.
  • Leverage the intelligence of a group to do due diligence.  Leverage specific industry expertise within that group relative to each investment, and allow investors to focus on what they know best.  The data from the AIPP show improved performance when investors spent more time conducting due diligence before investing.  With a well-run crowdfunding portal, that burden can be spread among the investor base for everyone’s benefit.
  • Remain engaged post-investment.  This is perhaps the most appealing promise of crowdfunding.  AIPP data show significant performance benefits for investments that have some active participation from the investors post-close – 3.7X return on investment vs. 1.3X return for low participation.  If crowdfunding portals can lower the ‘cost’ for investors to support and engage with the company post-close, they have potential to create significant value.

The verdict on crowdfunding is definitely still out, but given what we know about returns for Angel investors, it is an idea with legitimate potential.  The devil is in the details.  Models such as CircleUp, have promise given their key practices of industry focus, tools for investors to conduct deliberate diligence, slightly later stage opportunities, and active post investment involvement.

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Stacy’s Pita Chips: A case study on spotting success in early-stage CPG companies

Today, Stacy’s Pita Chips are ubiquitous in food retailers across America. However, when a husband and wife team abandoned their lunchtime food cart business to start selling pita chips in 1997, few would have predicted that just eight years later, the business would have $60 million in revenue and be sold to Frito-Lay (PepsiCo) for a price rumored to be in the nine figures. So how did Stacy’s grow from just $1.3 million of revenue in 2000 to $60 million five years later, with less than $1 million of outside capital to ramp-up sales with? Below are three keys to Stacy’s success:

  • Channel Focus: Most chips in the grocery store are sold in the salty snack / chip aisle, an aisle dominated by Frito-Lay and its army of brands. Frito has ~60% share of the potato chip category in tracked channels and uses direct-store delivery (DSD) to get its products to market. DSD encompasses a huge fixed asset base of delivery trucks, warehouses and IT infrastructure all of which allow Frito employees to actually stock the shelves of your local supermarket on their own (A good primer on Frito’s DSD for fellow CPG nerds: Harvard Business Review Blog). Stacy’s recognized early on that it was extremely difficult for a small company to compete head-on with Frito-Lay in the chip aisle, so they sold their chips into the deli section of grocery stores, which accomplished the dual objectives of not competing head on with Frito and not paying slotting, which is a one-time fee charged by many grocery stores to stock a new SKU in the chip aisle that can amount to more than six figures. Additionally, Stacy’s had huge early success in the club channel, namely Costco, which also does not charge slotting and focuses on stocking innovative products that mainstream grocery may not sell. Lesson for Investors: look for companies that sell where the big guys aren’t
  • Guerilla Marketing: Most people think of food marketing as national television ads produced by Madison Avenue advertising agencies, but from the beginning, Stacy’s marketing strategy was to get their chips into people’s mouths. According to a 2001 article in Inc. Magazine, “The [founders of Stacy’s] have done relatively little advertising; instead they give away samples in person at trade shows, cooking demonstrations, public appearances, and grocery stores nationwide (The Pita Principle).” Stacy’s laser-focus on getting product to consumers did not stop once the company was sold to Pepsi. In 2007, Stacy’s sent 133,000 bags of pita chips to people around the U.S. with the name “Stacy” the Thursday before the Super Bowl.  Lesson for Investors: food marketing should be about putting product in consumers’ mouths!
  • Product Differentiation: While there are a host of pita chip brands today, back in the late 1990s, there were hardly any, and certainly none that had national scale. The founders of Stacy’s capitalized on the beginnings of the healthy snack craze (which, as we have previously mentioned on this blog, had 41% share of the snack food market in 2010, up from 34% in 2006) and the market’s appetite for potato chip alternatives. Today, the market for potato alternatives is exploding, with chips made out of lentils, falafels, sweet potatoes, pretzels and popcorn, just to name a few, but in 1997, the market for alternatives was in its nascent phases. Lesson for Investors: invest in category creators, not category followers

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May 30, 2012 · 9:04 am

How the Jobs Act will Disrupt Funding for Small Businesses

Today, we are reprinting a piece from CircleUp Founder Ryan Caldbeck on Huffington Post.  There has been of attention recently for crowdfunding as a result of the Jobs Act.  We think much of commentary is misplaced.  The real impact of the bill will not be in technology, but in other areas of the economy that currently get a lot less attention:

 

Early this month, President Obama signed the JOBS Act into law, marking a new era for securities regulations.  The law eases restrictions for small businesses to raise capital, most notably through the introduction of equity based crowdfunding, the process of aggregating small individual investments to meet a larger financial goal for a small business.

There are 6 million small businesses in America today– only one of them sold to Facebook for $1 billion.  In fact, the vast majority of businesses operate outside of the Silicon Valley bubble – where established networks of venture capitalists, angel investors and entrepreneurs all come together to provide the capital and support small businesses need to grow.  It is these companies, not the high flying technology startups, that will be the beneficiaries of crowdfunding.

Small businesses are the engine of sustainable economic growth for our economy. Between 1993 and 2009, small businesses created 65% of the new jobs in America. However, the “fuel” that small businesses need to power this growth is capital. According to a survey conducted by Dun & Bradstreet and Pepperdine University, “increased access to capital” was cited by small and medium-sized businesses as the best way to spur job creation in 2012.

In today’s economic environment, it is extremely difficult for most businesses to raise capital the capital they need. Banks are very reluctant to lend money to small businesses, which prompted the government to create the Small Business Lending Fund as part of TARP. However, instead of using this money to help small businesses, banks used $2.2 of the $4.0 billion of funds disbursed in 2011 to pay off their TARP debt.

Equity financing is the alternative to debt; however, unless a company is in the high tech or life sciences industries—recipients of over 70% of the $28 billion of 2011 venture capital funding—equity financing is very tough to come by. For example, the consumer products industry, which accounts for 15% of U.S. GDP, received only 4% of venture financing in 2011. This leaves small businesses with alternatives like using high cost credit card debt or raising money from friends and family, both of which have their pitfalls.

Enter the JOBS Act and crowdfunding. Equity based crowdfunding opens a new pathway for funding these small businesses.  The potential pool of investors will shift from the very narrow 1%, accredited investors in the eyes of the SEC, to “the American people” in the words of President Obama.  The influx of potential new investors brings new capital, but more importantly, new perspectives.

As the diversity of investors increases, small business owners outside of Silicon Valley are more likely to find investors interested in their particular story.  Already, we see crowdfunding platforms springing up to connect investors and companies with common interests, such as socially conscious businesses or mobile phone applications.  Soon, sites will cater to all sorts of focused investor interests, from businesses in a local community to those with a particular industry focus.  For small businesses, the promise of crowdfunding is the opportunity to find these investors more efficiently. It won’t guarantee investment, of course, but helping business owners find the right investors at the right time is a critical first step.

The “crowd” also provides benefits beyond capital to small businesses. For example, a pet food company that raises money via crowdfunding now has 150 new passionate consumers as shareholders, who can serve as a great sounding board for new ideas and as brand evangelists—a critical asset in consumer products. The JOBS Act will also eventually allow companies to actively solicit equity investments, so companies can reach out to their customers and consumers—the people who believe most in the brand and know it the best—for capital, something they cannot do today.

By almost every measure, small businesses are the life blood of our economy and our communities, yet since the financial crisis, most small businesses have been cut off from the capital markets at the very time they need the capital most. The JOBS Act, and crowdfunding specifically, will go a long way towards alleviating small businesses’ capital access problem, and benefit investors in the process. The capital markets have finally entered the 21st Century and the future looks bright.

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The Qualities Investors Look For Before Funding Companies

Today, we are reposting a piece from Small Food Business, a great resource for food entrepreneurs.  Jennifer reached out to us about CircleUp – and we are happy to repost her write-up of the conversation.  For more advice and tips for starting a new food focused business make sure to check out: http://smallfoodbiz.com
by smallfoodbiz on April 9, 2012

strong_businessAnyone who has started a successful business knows that at some point the time comes where additional growth requires capital.  At this point you’ve probably tapped out of what you can personally contribute to the business and your friends and family – the second line of funding for many entrepreneurs – can’t give anymore.  It’s great to be at that point where people are literally banging on your door for more product, but at the same time frustrating to not be able to meet their needs because you lack the capital needed to grow the business.   This is the point where many people start looking for angels to come to their rescue.

You may have already guessed that I’m not talking about angels in a literal sense, but rather angel investors.  These are folks who have the capability to step in and invest in small businesses with anywhere from a few thousand dollars to hundreds of thousands or even millions of dollars in some cases.  It should be noted that angel investors are different from crowd-funders in today’s sense of the word.  With the new JOBS Act, crowd-funding will prohibit nonaccredited investors from contributing more than $10,000 (or 10% of their income, whichever is smaller) into a business.   Angel investors, however, are generally accredited investors which means that they are less constrained, from a regulatory standpoint, with respect to how much they can invest.

How Do You Find Angel Investors?

The next question most small business owners ask then is how does one find those angel investors.   This has long been a quandary since there’s seldom been a clear path to connect interested entrepreneurs with solid investors.  More often than not you had to know someone who knew someone who knew someone – not exactly a strong financial model to build your business of off!

Which is why CircleUp is so revolutionary.  CircleUp is an online community designed to help “passionate investors” (as they call them) connect with small private companies.  What makes CircleUp even more interesting is that it is focused on consumer products – things like strong food brands – and not on technology which is where so much of the angel investor time and focus has gone in the last decade.   I had the chance to talk with Ryan Caldbeck, Founder and CEO of CircleUp to find out more about why he believes so strongly in facilitating connections between small brands and angel investors.

“People Like To Invest In Products They’re Using”

Ryan Caldbeck is not a newcomer to the world of helping to  finance small businesses.  He spent seven years as a consumer-focused growth equity investor helping to evaluate and fund companies that had at least $10M in revenue.   That, he says, is the level of revenue most institutional investors require as a minimum before they’ll consider writing a check.   As Ryan toured the country looking for potential new business opportunities, he realized there were hundreds of strong, nationally recognized brands that weren’t able to access traditional funding because they fell below the $10M revenue figure.

At the same time, Ryan realized that there were angels out there who wanted to invest in companies they believed in but didn’t have access into those companies.  “It takes a lot of networking and knowing the right people at the right time,” Ryan says.  “I wanted to build some transparency into the system.”

CircleUp is designed to offer that transparency.  Ryan and his team have created a strong database of accredited investors who are actively seeking to invest their money into small brands they believe in.  These investors have the choice to invest – or not invest if the business is not right for them – in a number of consumer companies Ryan and his team have handpicked and fully vetted.  These are brands that are, in most cases, nationally recognized but are challenged to find the finances to grow.  Investors have the opportunity to contribute capital in the dollar amount of their choosing so, for example, while one investor may only $5000 into Company A, the opportunity exists for another CircleUp member – perhaps someone who has been a longtime user of Company A’s products – to invest more because they believe in the company and the brand.

Qualities Angel Investors Are Looking For

Since this site focuses more on brands and companies that are just starting out, you may not yet be at the point where CircleUp is knocking on your door (but hopefully you will one day soon!). Ryan did however share some of his insights into what qualities make a strong company.  It is these qualities, he says, that investors are looking for regardless of where you are seeking to source your capital.

  • Brand Strength: Are people passionate about the brand?  Passionate brand advocates are people who use the brand and tell everyone they know about it.  Having this type of following is not only good for your sales revenue, but that type of social word-of-mouth marketing is important to investors as they want to invest in companies that have buzz and a low cost method of growing their customer base.
  • Performance Relative to Benchmark: If you’re looking to grow your company to the point where you can seek angel financing it’s important to always be striving to outperform other companies in your industry based on the metrics investors in the industry care about.  For example, if you run a small gourmet grocery store then you should be looking at things like your inventory turns (how often your inventory turns over/sells in a year) and comparing that to the average industry turns in your specific niche in addition to your revenue and profitability figures.
  • Entrepreneurial Passion: Ryan shared with me one example of a company he was thinking of working with that had great sales figures and a strong financial track record but when it came down to it, Ryan says that the entrepreneur’s heart was no longer in it.  For a company to be successful, and for an investor to want to come in and put their money into a company, the entrepreneur has to still believe themselves in the brand and has to still want to wake up every morning and do what’s needed to help build that company.

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