Raising capital usually is a months-long process. Toronto-based alternative lender Clearbanc promises to make you an offer in 20 minutes.
On March 3, Clearbanc introduced its "20-min Term Sheet," which offers e-commerce startups based in North America anywhere from $10,000 to $10 million in minutes without signing over any equity. Clearbanc instead takes a portion of startups' top-line revenue.
While the model isn't entirely new, co-founder and president Michele Romanow says entrepreneurs have long needed more options between taking venture capital and taking debt. Romanow, who's also an an investor on Canada's version of Shark Tank, Dragons' Den, says Clearbanc gives founders a shot at growing while still retaining ownership of their companies.
"Founders are using the most expensive form of capital" to grow, she says, quoting the 2018 annual letter from Social Capital, a San Francisco-based venture capital firm founded by early Facebook employee-turned-investor Chamath Palihapitiya. According to him, VC-backed startups spend nearly 40 cents of every VC dollar on Facebook and Google ads. Plus, thanks to inherent biases in the industry, even if you want to raise venture capital you might not get it--only 2.2 percent of all VC dollars go to women, Romanow notes. Clearbanc can solve both problems, she argues: It's less expensive capital and it has nothing to do with your investor connections. "Because we're using digital data, we've actually taken the bias out of decision-making," she claims.
The Fine Print
As opposed to a loan product, Clearbanc advances do not have a repayment timeline, and the interest rate does not compound over time. Once you receive the funds, Clearbanc will take 5 percent of your company's top-line monthly revenue until its advance is repaid. It will add a 6 to 12.5 percent fee on top, which will vary depending on how you spend the funds. For example, if you use the money to buy ads from its approved vendor list, which includes Facebook, Google, Amazon, Pinterest, and Twitter, Clearbanc will charge you a 6 percent fee. If you use the money for something else, say buying a new office computer, the fee could go up to 12.5 percent, which is more than what you might pay for a Small Business Administration-backed loan.
If your company, which must have at least six months of consistent revenue history to qualify, can't meet future revenue expectations, Clearbanc walks away with nothing. The focus, Romanow says, is on e-commerce startups because the nature of their revenue is repeatable.
Receiving a term sheet does not automatically mean you've been approved for the funds. You must go through a due diligence process that includes giving Clearbanc access to your payment processor (Stripe, Square, Amazon, etc.) and connect both your bank account and your advertising data to its platform. On average, that process takes between five and seven days, the company says, though once that's done Clearbanc can dispatch the funds in a day.
What Clearbanc is doing is not necessarily new, says Bill Phelan, co-founder and president of PayNet, a small business-credit rating company based in Skokie, Illinois. Clearbanc's model falls under what is known in the industry as merchant cash advances, which offer money to companies in exchange for a slice of their revenue, albeit with a twist. Competitors include fellow Canadian startup Corl, which is based in Montreal, and Seattle-based Lighter Capital.
"I think where this is innovative is in financing an intangible activity like marketing," he says, noting that most lenders will require some security in the form of collateral. "In this case, if the advertising doesn't work out, what does the lender have?"
Romanow, who co-founded the company in 2015 with Andrew D'Souza, says she is clear-eyed about the risks. As a founder who bootstrapped three of her previous companies--and raised more than $120 million in venture funding for Clearbanc--she is convinced that the offering will entice many entrepreneurs. The company divvied out $150 million in revenue-share agreements to 500 startups in 2018. Ultimately, the duo wants to dole out roughly $1 billion to more than 2,000 companies by the end of 2019.
While not currently a customer, Alicia Yoon--the founder of Peach & Lilly, a Korean-beauty products maker in New York City--is intrigued. She tells Inc. that part of the reason why her company hasn't sought outside investment--other than not needing it at the moment--is the time commitment tied to fundraising.
"When you're an entrepreneur, [it can feel like] you're working 30 hours a day," says Yoon, who is not a Clearbanc customer. "That 6 percent [fee]--that's nothing compared to the opportunity cost of not working on the business."