Here's one way to get private market liquidity

CircleUp CEO Ryan Caldbeck
Source: CircleUp

Investing in private companies is notoriously risky. Most start-ups fail, and those that succeed can take a decade or longer to provide returns to shareholders.

During a stock market rout, like the one experienced over the past two weeks, that risk is felt more acutely as investors aim to make sure they have ready access to cash.

Starting Thursday, investors in companies like Greensbury Market, an organic food market in New York, Flipdaddy's, a burger and beer joint in Kentucky, and Le Grand Courtage, a sparkling wine maker, will have a new way to get liquidity.

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That's because CircleUp, an online marketplace that connects emerging consumer brands with investors, has just introduced a secondary market that enables shareholders to sell their stakes twice a year.

While no replacement for a real-time stock market, the new offering at least opens the asset class to a segment of investors previously relegated to the sidelines because of the extended period of illiquidity.

Ryan Caldbeck, CircleUp's co-founder and CEO, said companies on the site have been asking for the service in order to appeal to a wider set of investors.

"Helping to shorten the liquidity period or giving certainty over the exits is something that both sides are particularly excited about," Caldbeck said. Investors "get a lot more excited to do that when they know a secondary market is up and running."

More pain for stocks?

Companies that choose to enable secondary selling will indicate that status when they're raising capital on the site. Information transfer rights will be included with those shares, so secondary buyers will be able to see the available financial details before deciding to invest.

About 15 to 20 companies are set to start using the new service this week.

In its initial form, the CircleUp secondary market will not apply to employee shares, but it's something that could be added in the future. For venture-backed start-ups, companies like SecondMarket and SharesPost (through a joint venture with Nasdaq) have built technology to simplify the secondary process for employees and early investors.

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Though CircleUp hadn't initially intended to make the announcement amid a stock market rout, the timing doesn't hurt.

"With high volatility, investors of all stripes recognize the importance of liquid investments," said Rory Eakin, co-founder and operating chief of San Francisco-based CircleUp. "It's especially resonant today when all investors are increasingly aware of the volatility in public markets."

Correction: A previous version of this story incorrectly said that SharesPost is owned by Nasdaq.