Investment Platform CircleUp Is Using a Moneyball-Style Algorithm to Identify the Next Hit Consumer Brand
This article first appeared in Term Sheet, Fortune’s newsletter on deals and dealmakers. Sign up here.
Is it fair to say the realities of equity crowdfunding have not lived up to the category’s promises? Most action in this much-hyped market has remained limited to helping same institutional investors and high net worth individuals that could always invest in private companies, not the “average Joe” investors that get shut out of the Unicorn investing action. To expand, crowdfunding platform AngelList now operates its own fund, and consumer packaged goods-focused CircleUp focuses more on institutional investors.
Since 2012, CircleUp has helped 233 companies raise $315 million in capital. (Of those, five have failed, none have exited, but they carry and unrealized IRR of more than 40%.) Today the company announces an important next step in its evolution as a “marketplace” company: A Moneyball-style set of algorithms that predicts the next breakout hit in consumer packaged goods called Helio. It uses “a web of algorithms and data sets meant to mimic the investor’s mind,” says CEO Ryan Caldbeck. It analyzes a company’s financial performance, competitors’ performance, brand, distribution, and team. he company has been building this for several years and views the product as deeply central to its future.
The Moneyball-for-startups idea isn’t new. (Steve Blank has been big on this concept for years.) But Caldbeck says that Silicon Valley’s system for investing in tech startups is less suited to this type of data crunching. For one, startup investing is fairly efficient, with the capital and startups clustered around a handful of innovation hubs in the country.
But the consumer packaged goods industry does not have a Sand Hill Road, making it difficult for investors to surface fast-growing companies with less than $15 million in revenue. Further, it’s easier for algorithms compare business models in consumer goods because they are essentially the same across all categories, but with tech startups, every business model (if they even have one) is its own special snowflake. Lastly, unlike with opaque tech startups, the data points are plentiful in the consumer world. Retailers and third parties make inventory, distribution and sales data publicly available.
In the beginning, Helio identified companies with strong financials, but whose brands would not pass an investor’s “eye test,” Caldbeck says. But after taking customer data into account – from social media and review sites – Helio can now accurately identify when an off-brand or copycat product’s success is short-lived. (One example: Companies that say “Send us a direct message” on Twitter three times more than average are not likely to have long-term success.)
Helio has sourced a handful of deals so far, including REBBL, a line of coconut-milk beverages, nutpods, a dairly alternative snack, and Supergoop, a sunscreen brand. It charges private equity and venture capital firms 5% of the investment for surfacing the deals. In other cases, retailers looking for up-and-coming brands to carry offer a discount on shelf space as compensation for introductions made by CircleUp.
CircleUp has 55 employees. The company recently laid off six employees from its business operations side as a result of the “evolution” brought about by Helio. CircleUp has teams of people working with companies on its platform, but now it can be “more efficient” on tasks like verifying financial information, CircleUp COO Rory Eakin says.
Correction: A previous version of this article incorrectly attributed quotes to the wrong executive. It has been updated to reflect that Ryan Caldbeck is CEO of CircleUp and Rory Eakin is COO.