Reality TV Star Offers $1 Billion for Slice of Startup Sales
(Bloomberg) -- A Canadian alternative lender is planning to offer $1 billion in funding for startups this year in exchange for a cut of future sales.
Four-year-old Clearbanc advanced $150 million to companies in Canada and the U.S. last year. The Toronto-based firm plans to boost that almost sevenfold by targeting 2,000 firms, armed with $120 million in venture capital backing of its own, co-founder Michele Romanow said.
The lender offers e-commerce startups $10,000 to $10 million through a merchant-cash advance model. It charges a flat fee of 6 percent to 12.5 percent and takes as much as a fifth of monthly revenue until everything is paid back. If the company fails to meet revenue expectations, the lender walks away with nothing, though it claims its default rates are lower than the sector average at 7 percent to 10 percent.
Romanow came up with the idea after appearing on “Dragons’ Den” -- the Canadian version of “Shark Tank” -- a television show in which investors get pitched business ideas by contestants.
“After hearing something like 200 back-to-back pitches, there was something that just crystallized about equity not being the right fit for a lot of the companies,” Romanow said from her office in Toronto. The 33-year-old has started five companies, including SnapSaves, which was acquired by Groupon Inc. in 2014.
Merchant cash advances, which have been likened by some to payday loans for business, have taken off in the U.S. The industry has come under scrutiny in some quarters for charging interest rates that can exceed 400 percent annualized, and for using courts to seize assets. New York’s attorney general has opened an investigation looking into whether the lenders have engaged in fraud or abused the state court system, a person familiar with the probe told Bloomberg in December.
Clearbanc is nothing like those companies, Romanow said.
“There have been many bad actors in that space, there is tons of people who have done terrible deals and it is just very painful to watch,” she said. “Some firms do all sorts of nasty things to collect their payments. We, on the other hand, have no recourse, no personal guarantees. We would never go after a company’s personal assets or bank accounts, and our rates are just a small fraction of theirs.”
Clearbanc secured venture capital funding last year, including from Seamless co-founder Jason Finger’s new firm, Upper90. Seamless is part of Grubhub Inc., the online food delivery business. Other backers include several startup founders, including some who have previously received cash from Clearbanc, family offices and university endowments.
The lender is seeking to more than triple its workforce in 2019 to 210 employees and plans to expand to Latin America and Western Europe, according to Romanow.
Clearbanc co-founder Andrew D’Souza said VC-backed startups spend nearly 40 percent of what they raise on ads to attract customers, as costs have skyrocketed with e-commerce channels becoming heavily saturated.
“When you put a dollar on advertising and get four dollars in sales, by definition that’s repeatable and scalable and you should be able to fund that with cheaper capital than equity,” D’Souza said.
Other lenders are breaking out of the traditional venture-funding model. In Canada, Corl also offers funding for early-stage startups with revenue sharing agreements. Kansas-based Novel GP also has a $12 million fund focused on revenue-share investments in software-as-a-service companies while Indie.vc, from San Francisco, also invests through a profit-sharing structure.
©2019 Bloomberg L.P.