Investments

Inside Clearbanc’s ‘Alt VC’ Model For eCommerce Startups

Capital tied to equity can be expensive, time-consuming and sometimes deflating. Funding negotiations and deals are complex. A business might end up trading chunks of itself to fund day-to-day marketing. Outsiders join the board and often end up gaining total or near-total control of the company. And if the entrepreneurial idea behind all that funding hits it big, investors will take a hefty percentage as payoff for their bet.

But a young company called Clearbanc uses analytics to determine how risky a bet a company seeking capital is, and then provides funds to use for online ads and other marketing activity, intended to help the company grow its business. Clearbanc takes a cut of future revenue from the businesses it funds. In a new PYMNTS interview with Karen Webster, Michele Romanow, Clearbanc’s co-founder and president, and Andrew D’Souza, co-founder and CEO, discussed the model and its place in the eCommerce world, and how providing funding not tied to equity can be a money-maker for both the lender and the entrepreneur. The interview came about a month after Clearbanc announced it has raised $70 million in its own funding round.

Anyone who’s watched “Shark Tank” on TV or seen Oliver Stone’s “Wall Street” or its sequel on TV knows the fierce, costly nature of raising capital — the pitches from entrepreneurs and business owners, the cold analysis and pushback from would-be investors, the offer of a deal, give-and-take, and then the rejection or acceptance of that deal. That will likely never go away, or at least not until sentient robots really take over.

Equity Expense

But, as Romanow told Webster, “equity is the most expensive form of capital.” And that expense can become difficult to justify — or live with — if newly raised funds are used not for, say, international expansion, key hiring or to scale the business, but for online ads that appear on consumers’ social network feeds, or other relatively mundane marketing tasks. She estimated that a healthy chunk of venture capital dollars — perhaps 40 percent — indeed goes into those marketing use cases. That can essentially amount to paying for tactical gains with high-priced money that should probably go toward strategic goals.

Clearbanc takes no equity. Assuming a company has six months of what D’Souza called “consistent revenue history” — and assuming that company provides ample data to Clearbanc — the funding providers will front cash that can be used for those mostly tactical marketing tasks. In return, Clearbanc takes its 6 percent premium as well as well as a cut of the revenue generated from those marketing efforts — the cut flowing to Clearbanc until the funding is paid off.

Clearbanc imposes no time scheduled on repayments, and can disburse the funding via prepaid card — most companies that gain funding don’t spend it all at once, D’Souza said. Funded companies provide no personal guarantees, give up no equity and submit to no credit checks. Clearbanc crunches a company’s data to determine how likely it will be to repay the funding advance, and to craft terms and the funding amount specific to that company. According to D’Souza, the main idea is to help fund “a predictable and repeatable part of your business” — that’s the marketing part, which in this case mainly means online Facebook and Google ads — which, historically, have benefited from relatively few dedicated funding options (hence the use of equity to pay for such efforts).

Funding Metrics

Probably the most predictable metric when it comes to this type of funding, Romanow said, is customer acquisition costs. A company with an average basket of $100 and average customer acquisition cost of $10 represents a healthy risk when it comes to funding, she said during the PYMNTS interview, with that ratio repeatable in the future.

This type of funding removes “subjective” decision from the process, D’Souza said. Other metrics include the saturation of channels in which the company operates along with revenue flow, and the relationships among such traits. “We try to automate all that (on our end) with the data we ingest” from funding candidates, he told Webster. As might be the case with some venture capitalists, feelings about whether a specific investor might buy the product — or judgments based on where the company leaders went to school — are removed from the decision-making process.

“Our business model depends on a high level of confidence and a high degree of accuracy,” he said, adding that one thing that differentiates Clearbanc from traditional venture capital is that “VCs swing for homeruns.”

“We just try to make it as impartial and fair as possible,” Romanow said. It’s the data, the two of them added, that gives Clearbanc the assurance that a company will indeed make good on its repayment. It has provided at least $100 million worth of funding to some 500 companies.

The digital economy runs less on gut instinct than on data and what it can provide when enough of it is collected and analyzed: a firm picture of what’s predictable and repeatable. Now there’s opportunity to do more raising of capital with such guidance.

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