Forbes by Ryan Caldbeck | October 20, 2013

Photo by Mario Tama/Getty Images

While crowdfunding has received considerable positive fanfare since the JOBS Act was passed in April 2012, there has also been considerable criticism leveled against the industry covering both the companies trying to crowdfund and the investors funding them. Below are the three concerns that I hear most often as CEO of CircleUp, and what we do as a platform to mitigate these concerns.

Concern 1: Companies that use crowdfunding are weak.

At CircleUp, we accept a small (low single digit) percentage of companies that apply to be on our platform—truly the best of the best among early stage consumer and retail businesses—and our platform is curated by former private equity and other investing professionals who have substantial experience investing in consumer and retail businesses. We recently examined the performance of companies before and after raising money on our platform. The companies that we have raised money for since we launched in April 2012 have grown at an average of over 80% per year (average revenue growth, 2012-2013). [These investments, it should be noted, are high risk and illiquid.]

Related: Let the Crowd raise capital

As I have mentioned before, while we believe (and the data prove) that the companies on CircleUp are the best in the consumer industry, there is good reason to believe that tech companies pursuing crowdfunding  may be weak—70% of venture capital dollars flow to the tech space, so when tech companies are crowdfunding it’s likely because VCs up and down Sand Hill Road have already passed on their business plans. In short, it’s not unlikely that crowdfunding platforms in the tech space suffer from adverse selection. Not so with consumer, however. In consumer space there are almost no institutional investors in sub-$10 million companies. As a result, CircleUp and other consumer crowdfunding platforms get to choose from the very best young businesses in the industry.

Concern 2: Confidentiality.

I often hear the concern that companies seeking funding through crowdfunding platforms suffer from their disclosure of confidential information. As a result, anyone, including competitors, can examine what might otherwise be non-public information. While this concern matters in some industries, it is far less of a concern for consumer companies. Consumer companies flourish because of brand, the essence of which cannot be copied. For example, there are many nutrition bars and nut bars on the market, but there is a reason KIND finds itself atop one of the most crowded categories in the grocery store—the brand has the cool factor that can’t be replicated because it emanates from the people and culture behind the company. We believe this is true for the brands on CircleUp as well. Sure, a competitor can learn their revenue or margins, but at the end of the day, there’s not a whole lot they can do with this information if their own brand does not resonate with consumers. Good equity crowdfunding sites can also allow companies to put their sensitive information into private deal rooms that give the companies control over who can and cannot see their data.

Related: Dispelling Myths: “Extraordinary popular delusions and the madness of crowdfunding” (3-part series)

Concern 3: The investors will not add value.

Another criticism I often hear is that the investors on crowdfunding sites are not value add investors; They’re simply college kids sitting in their dorm rooms spending their parents’ money. At CircleUp this could not be further from the truth. Our investors are successful consumer entrepreneurs and operators as well as other entrepreneurs who have successfully started and sold consumer and retail companies. There are also seasoned private equity and angel investors from top tier firms who routinely find businesses on CircleUp in which to invest. Additionally, CircleUp has partnerships with leading CPG companies like General Mills and Procter & Gamble that give our companies access to resources from these leading brands.

Related: Investment Crowdfunding – “A great idea whose time has come!”

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