the percentage is, but it’s consistent with what companies would pay an investment bank in the offline world,” says Caldbeck.
While they wait for their own broker-dealer license, the CircleUp team is operating under the aegis of financial services firm W.R. Hambrecht + Co., which is best known for helping companies like Google go public through online auctions. They’re also renting space inside Hambrecht’s swanky Pier One offices in San Francisco.
CircleUp works like this: Companies selected by Caldbeck and Eakin create an online profile, with separate tabs for a company overview, a rundown of the founding team members and their backgrounds, a gallery of products, and an interactive forum for questions from investors. The overview section usually consist of a 10- to 30-page presentation describing the industry landscape, the companies’ unique products and who’s buying them, and their financial performance—in other words, the same stuff you’d find in the pitch deck of any Silicon Valley startup. “It’s not a coincidence,” says Caldbeck. “As former investors, this is what we would like to see.”
To help keep the total number of investors under control, companies set a minimum investment. (Episencial, for example, set its minimum at $5,000.) As on Kickstarter and other popular crowdfunding platforms, there’s a status bar on each profile page showing how close the company is getting to its fundraising goal. But Caldbeck describes the forum area as one of CircleUp’s biggest innovations; he says it speeds up the due-diligence process for both sides. “When you’re going out meeting with individual investors, you get the same questions over and over,” he says. “If you deal with those questions in the context an online forum, you only have to answer them once. By the same token, if an investor asks a really tough question that the company can’t answer, the other investors want to know that.
Once a CircleUp member decides to they want to back a company, there’s a simple, automated process to complete the deal. The investor enters in the amount they want to invest—say, $10,000—and CircleUp tells them how many shares they’ll get. (There’s typically no negotiation around valuation, share prices, or terms; all of that is dictated by the companies.) The site creates standardized investor-rights and purchase agreements, which are e-mailed to the investor for their electronic signature. Then the investor wires the money to a third-party escrow service. Once the fundraising target is reached and all the paperwork is signed, the money is released to the company.
Wells, at Episencial, says listing her company on CircleUp led to four big surprises: “How fast it was, how easy it was, how much interest there was, and the quality of the investors we ended up getting. Some of these people have fantastic connections that we didn’t have, such as Catamount. [Catamount Ventures is a San Francisco-based firm that makes seed-stage technology investments; individual partners from Catamount put money into Episencial through the CircleUp round.] I believe our next growth round will be easier to get because we are in front of more people now.”
But while crowdfunding is clearly the latest hot trend in the startup and investing worlds, the big questions are whether it can be scaled up in a responsible way, and whether CircleUp can build up a big lead before competitors enter the market.
Caldbeck says the five-man firm is being extremely selective to start. It does extensive background checks on each company, and so far it has agreed to help fewer than 2 percent of the more than 350 companies who have applied to be listed in the marketplace. “That’s because are trying to stay focused on providing really great investment opportunities,” Caldbeck says.
Whether that level of screening and curation will be sustainable as the marketplace grows remains to be seen. Meanwhile, the very rules around crowdfunding are in flux. The JOBS Act, passed by Congress in April, includes provisions that will allow companies to use registered Internet “funding portals” to raise money from unaccredited investors as well as accredited investors, subject to certain caps based on
