CircleUp has built a platform that will provide deal flow between individual, accredited investors, and consumer products companies. Firms that have revenues between $1 and 5 million will be eligible to apply to be a part of the process.
Companies that make it past that point will join other firms on the platform. Each company will be able to raise between $100,000, and $1 million. Individual investors can invest as little as $1,000 and as much as $25,000. With the JOBS Act now law, crowdfunding is a hot term, but CircleUp intends to restrict itself to accredited investors only, even though the bill has introduced new leniency into the system.
Companies that are accepted will be valued by CircleUp and the firm itself. If that sounds a bit opaque, or risky, to have the valuation process outside the hands of the investors, CircleUp would respond that its two co-founders bring enough experience to make it work. Deal-sourcing experience, business school, and consulting at top institutions are what are offered as proof.
This is a bet: if the company mis-values firms, one of the two parts of its equation (firms or investors) will be burned, breaking down the entire system. So, either the company pulls valuations off, or it folds. Having seen some behind the scenes information, I think that this will not be too large an issue, at least at launch.
Once a company is accepted, valued, and has a figure that it wants to raise in mind, it is uploaded into the system. The following is an example company, but it does explain what the company has built:
Once the money has been raised, CircleUp takes a fee. However, the company will only take its cut of monies that the raising company doesn’t know. This is to say that if a company had a family member invest in it, CircleUp would not take a slice of those dollars.
Now, how does all this work from a regulation perspective? From CircleUp:
We are operating as a broker dealer, initially in partnership with WR Hambrecht while we go through the application process with FINRA independently. This regulatory approach enables us to operate ahead of the ‘crowdfunding’ legislation many investors may have heard about. In fact, our platform focuses exclusively on traditional Reg D 506 offerings, similar to most other angel investing today, and thus works currently only with accredited investors.
From our somewhat limited perspective, that appears kosher. The company could later adapt to accept unaccredited investors, provided that the JOBS Act works out, but for now, this is probably the simplest way to get started.
The company has been operating in pseudo-stealth thus far, which I think has been a net positive for the company. Why? It has allowed the company to prepare, potentially allowing it to lessen the chicken/egg issue that plagues all new marketplaces.
And that’s it: companies apply, are vetted, then valued, then funded. It’s a mix of AngelList and Kickstarter, in a way.
I dig this. It’s very interesting to see a company take technology products, and apply them to a segment of the business market that is not known for its technological savvy. By focusing on consumer products companies, CircleUp might provide a business-building conduit of funding for companies that are usually structured far differently than a tech firm, from a business perspective.
Even more, minor investors can now put their money in new, and I would say, non-traditional spaces. I don’t hear about too many angels funding food companies. And yet, there are more small companies of that ilk than one might imagine. Therefore, there may be big product/market fit in CircleUp’s model.
Risks: lack of deal flow, due to the best companies that fit the firm’s model not wanting to raise in this way; investor impatience in companies that are potentially slow-growing; and the mis-vetting of companies leading to fraud. Which is to say, I suppose, the normal risks of raising money: investor/company fit, growth fears, and mistakes.
We’re going to keep an eye on the firm’s market, to see if it can hit the scale that it needs to sustain deal flow. Sound off in the comments with your views, this is a very interesting company.