There is a method behind Circle’s seemingly random deal-spree.
What started as a peer-to-peer payment company five years ago has fully embraced cryptocurrency. Circle is buying up exchanges and startups in a bet that, despite this year’s slump in prices, the crypto economy is here to stay.
Its latest move was acquiring equity-fundraising start-up SeedInvest last week. That company until now had nothing to do with cryptocurrency and didn’t seem like an obvious fit for Circle. But Circle founder and CEO Jeremy Allaire explained that it’s a cornerstone for his bet that most of the existing financial system is going digital.
“If we zoom out, there’s going to be this tokenization of everything,” Allaire told CNBC in an interview at the Security Token Academy conference in Manhattan. “Eventually these marketplaces will have tens of thousands, if not hundreds of thousands of assets — so the next piece was a broker dealer,” licensed and ready to go.
Allaire’s crypto bet has tricky timing. The SeedInvest deal comes just months after Circle bought a crypto exchange called Poloniex and introduced its own dollar-backed stable coin. Yet despite the investing public’s enthusiasm for digital currencies — initial coin offerings last year raised the total cryptocurrency market cap to more than $816 billion — the value of these volatile digital tokens has been cut in half this year, according to data from CoinMarketCap.com.
SeedInvest’s crowdfunding strategy, as the CEO described it, is a “cousin” to how cryptocurrencies raise money through ICOs. The New York-based company connects fellow start-ups with investors online. Its broker-dealer license was a key reason for the deal, which still needs to be approved by U.S. regulators.
While some ICOs turned out to be frauds, the retail interest was a strong indicator that the crowdfunding method was here to stay, Allaire said. Circle decided to seek out a regulated partner like SeedInvest instead of applying for its own licenses or building one in-house.
“We’re chasing a similar vision of changing the way businesses raise capital,” said SeedInvest CEO Ryan Feit, who sits on the fintech committee of FINRA, the brokerage industry’s regulator. “It’s a different form of enabling companies to raise money, and another form of alternative assets for investors.”
The crypto craze brought in billions from retail investors last year. That crowdfunding method has ushered in roughly $12 billion this year alone, according to the latest estimates from Autonomous Next.
“It was an incredible experiment in crowdfunding, and tokens and smart contracts as a new capital formation model,” Allaire said. “The growth in ICOs were really a pivotal moment for this concept of how can businesses issue digital investment contracts directly over the internet, from all around the world.”
Satya Bajpai, who leads blockchain and digital assets investment banking at JMP Securities, said the deal could be an example of what he calls an “acqui-hire,” short for “acquisition hiring,” that’s becoming popular as blockchain M&A picks up. In those cases, a company will buy another start-up to quickly gain employees along with its technology.
“It’s hard to get good employees, and even harder to get employees who understand the technology and the business,” said Bajpai, who advises technology and blockchain companies.
SeedInvest’s CEO disagreed with the “acqui-hire” characterization.
JMP’s Bajpai pointed to a natural progression of equity crowd-fundraising going digital and eventually looking more like tokenized securities. In that case, it’s possible that SeedInvest would have eventually moved toward the initial coin offering model on its own.
Venture-backed Circle is one of the most highly valued cryptocurrency companies out there. It’s profitable, according to Pitchbook, and brought in $110 million in its latest private fundraising round in May, which brought its valuation to $3 billion. Early investors include Goldman Sachs, bitcoin mining giant Bitmain, Breyer Capital, Oak Investment Partners, Accel and Pantera Capital.