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Forget VC money. This company wants to loan you up to $10 million

Investment firm Clearbanc doesn’t want a chunk of your company or a big interest payment in exchange for funding. AI helps decide who gets the money (and they’ve funded more women because of it).

Forget VC money. This company wants to loan you up to $10 million
[Photo: Flickr user Ken Teegardin]

Raising money is tough for all founders, especially if they aren’t in a chummy network. Eighty-two percent of companies receiving VC funding have all-male founders (typically two white dudes living in Silicon Valley), according to research by RateMyInvestor.

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And if investors do take an interest, it usually means the startup has to give up a chunk of equity even just to fund so-called “repeatable growth,” like buying online ads. Founders can retain as little as 10% to 20% of the company, according to venture investor Fred Wilson of Union Square Ventures.

“It’s one thing when it’s funding R&D and product development and long-term investments. But when you’re funding repeatable growth, it’s a lot to give up,” says Andrew D’Souza, cofounder and CEO of fast-growing investment firm Clearbanc. “You can’t get that ownership of your company back.”

In place of demanding stock, Clearbanc takes a flat fee on the payback of investments up to $10 million. And in place of pitch meetings and schmoozing, Clearbanc approves or rejects candidates based on an online application. They even promise to make money available within three days to approved applicants. It’s not the only company to offer such services, but it stands out for its modest payback fees, which are as low as 6%.

Based in Toronto and founded in 2015, Clearbanc has financed over 1,000 companies to date, including mattress maker Leesa Sleep, fashion-rental service Le Tote, home goods company Public Goods, and shirtmaker UNTUCKit. And it’s about to finance a lot more. The company has just announced a $300 million funding round, led by Highland Capital, along with iNovia, and Emergence Capital.

Combining $250 million of that amount with other funds, Clearbanc promises to invest a billion dollars in 2019 in 2,000 companies, mainly e-commerce companies. That’s up from $143 million invested in 2018 and $17 million in 2017.

Clearbanc isn’t the first company to offer fixed-fee financing without taking equity, says Robert Le, senior analyst at PitchBook, a data provider for the private and public equity markets. Seattle-based Lighter Capital began lending in 2012, although it focuses on business-to-business companies. Lighter requires customers to pay back the principle, plus from 35% to 100% over three to five years. CEO BJ Lackland says the company will fund 200 deals worth about $70 million in 2019. A startup called Corl has repayment rates typically ranging from 10% to 50% (sometimes more).

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“At 6%, even at 12%, I do not think that’s a good return for the backers,” Le contends. Clearbanc counters that its automated, AI-driven approval system allows it to finance a high volume of safe-bet companies. “We’re structured in a way that we need almost all of our companies to succeed,” says D’Souza.

Clearbanc clients are on track to make at least $1.5 billion in revenue for 2019, says the company. Clearbanc will not reveal its own revenue, but is “close” to profitable, says Michele Romanow, Clearbanc’s president and another of its five cofounders. It’s also earned an endorsement from prominent entrepreneurs like media exec and pundit Gary Vaynerchuk, who have signed on to advise Clearbanc’s clients.

Most of those clients are e-commerce companies—the sector Clearbanc’s team has the most experience in. Romanow herself cofounded five bootstrapped companies before age 33, including a kind of online-coupon app, called SnapSaves, that Groupon acquired in 2014.

Romanow says that Clearbanc has been “running some experiments” with “consumer SaaS” companies–otherwise known as online services such as Spotify or a dating app. And she hints at plans to invest in business-to-business companies, although she declines to provide more details.

Machine lending

Clearbanc works by offering consumer-focused companies an online application that evaluates all their financials. That includes providing (read-only) access to accounts for their bank, payment processing services such as Stripe, e-commerce platforms such as Shopify, and online advertising accounts for sites like Facebook.

Clearbanc evaluates the company’s business performance with algorithms trained on data from other applicants. If the AI decides a company is a safe bet, it makes an offer to provide a loan from $10,000 to $10 million. Recipients can access the money using a debit card, which Romanow says is a convenient way to pay for advertising on sites like Google and Facebook.

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Clearbanc’s system also sets a flat fee for applicants: from 6%, if the money goes to digital marketing, up to 12.5% for other uses. Clearbanc reckons that money spent on digital marketing leads to faster growth. Companies pay Clearbanc from 1% to 20% of their gross monthly revenue—typically about 5%, says Romanow—until the debt has been settled, and it doesn’t have a set repayment period.

The burden on businesses varies based on how they are doing. If the company hits a slow patch, its payment amounts automatically go down, and the length of time to make them goes up. Still, not all clients have been able to keep up. “We couldn’t learn without defaults,” says Romanow.

Just don’t call Clearbanc’s investment a loan, which is subject to a host of regulatory requirements and also requires a personal guarantee, says Romanow. She characterizes the deals as “revenue-sharing agreements.” Clearbanc doesn’t charge compound interest, but this isn’t unique for short-term lending or financing, says Le. Lighter does call all its funding products “loans.”

Clearbanc operates in a growing environment of automated business lending or funding. Corl, a relative newcomer that just launched in 2018, also bases decisions on machine-learning AI. Lackland says that Lighter uses “human-assisted AI” to make decisions.

Brex offers fast applications for high-limit credit cards based on the value of the company, not the individual. Repayment is interest-free but must be made within 60 days. Brex also offers specialty cards for e-commerce and life-sciences companies. The cards provide rewards for spending common to those sectors, such as advertising, marketing, and shipping services.

Another funder, Kabbage, extends lines of credit of up to $250,000 to companies. It also uses an online application process to evaluate a company’s financial health in order to make a determination—promising an answer in a few minutes. Kabbage offers 6-, 12-, and 18-month repayment periods, with varying interest rates. While it has funded e-commerce companies, Kabbage has a much broader range of clients, from restaurants to law offices. And it’s more a substitute for small-business loans to cover short-term expenses like payroll shortfalls or replacing broken equipment.

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Spreading the wealth

Like other companies that employ AI in decision-making (say, hiring and recruiting services like DeepSense and Textio), Clearbanc touts the benefits of using technology to overcome human bias. In this case, an impersonal, cold-calculated approach is a selling feature.

“It’s not a human relationship,” says Romanow. Instead, “We’re looking [at], does this business have positive unit economics, and do they have customers that they can continue to scale to?”

That’s allowed Clearbanc to distribute funding much more broadly than white male-dominated, venture capital firms do. Women-founded companies currently are getting just 3.1% of all venture funding, according to PitchBook’s VC Female Founders Dashboard. (Companies founded by a mix of men and women are taking in only 11.7%.) In contrast, Clearbanc says that women-founded companies make up 17-18% of its portfolio.

Clearbanc spreads the money out geographically, too. A 2018 study by PWC and CB Insights reported that about 80% of venture funding goes to four states: California (with more than half), Massachusetts, New York, and Texas. As a counterpoint, “We have backed companies in 43 states in America, which is pretty cool,” says Romanow.

And now the company aims to expand . . . somewhere. “We don’t have that announcement yet,” says Romanow, although she adds, “Obviously Europe is a natural market for us; Latin American is a natural market for us.”

But success for Clearbanc isn’t tied to a specific region, says Romanow, noting that e-commerce is taking off around the world. “As long as there are those e-commerce markets,” she says, “we don’t see a limitation to where we can provide something.”

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Correction: A previous version of this story misstated Clearbanc’s expected 2019 revenue.

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About the author

Sean Captain is a Bay Area technology, science, and policy journalist. Follow him on Twitter @seancaptain.

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