CircleUp is one of the latest in a line of startups including FundersClub, MicroVentures, and AngelList that are looking to disrupt the venture capital industry. The company profiles startups that are actively raising capital, and then connects the companies with accredited investors. Today, CircleUp is announcing that its platform has been used to successfully raise money for four startups.
Instead of targeting technology startups, as might be expected, CircleUp so far has worked with companies taking on very different markets. The four companies — Episencial, Little Duck Organics, Melt, and 18 Rabbits – are gunning for things like the organic kids snacks industry and the natural baby skin care market.
In addition, CircleUp’s platform introduces investors to companies that they wouldn’t have otherwise heard of. This is a big disruption for the industry, enabling a startup in the middle of Iowa to raise money from investors all over the country.
These differences in business mean that CircleUp is able to take the focus away from hype and user growth, and instead highlight how much money the companies are making. It does this by featuring startups that normally have more than $1 million in revenue — a big departure from competing platforms and a bonus for investors using the service.
But on top of the financial requirements, CircleUp also performs a number of other basic services to help out investors. The company does a background check on the entrepreneurs, and makes sure that investors are able to perform due diligence on the startups before allowing them to invest.
CircleUp uses a model similar to that of Austin-based startup Microventures, a broker-dealer that pools investor money to invest in startups. But the CircleUp and Microventures diverge in two key ways.
The first is that CircleUp isn’t actually a broker-dealer, despite operating as one. Instead, the company has partnered with an existing broker-dealer, WR Hambrecht, to ensure that the company is following all financial regulations. CircleUp is compliant with all financial regulations, according to the company, but its application for being a broker-dealer hasn’t been approved yet.
The second is that CircleUp doesn’t share in the risk/reward structure of the investment. Instead of taking an equity stake in the startups, CircleUp instead has decided to take a commission off of the funds raised.
To allay fears that CircleUp is trying to rake in as much cash as possible, founder and COO Rory Eakin says the company only takes a commission “on new capital introduced from the network.” This means that CircleUp will only claim a commission, when the investors come via the company, and when the round of financing is successfully raised.
If CircleUp were to continue on its current trajectory, it would likely do well over time. But according to Eakin, this growth will only be accelerate if and when the SEC enacts the JOBS Act. Namely, when the SEC lifts the ban on general solicitation of equity, which will allow startups to publicly state that they are raising a round of funding, CircleUp will get a lot more visibility and will be able to attract a number of additional potential investors.
However, as we reported earlier this year, the ban likely won’t be lifted for a few more months, with the rest of the JOBS Act delayed well into next year. When the ban does lift, though, CircleUp will really be able to take off and bring more startups onboard.