Future of Investing, Member Exclusive

‘We put our skin in the game’: How Clearbanc is rethinking funding for growing startups

  • Last month Clearbanc released ClearAngel, a program that acts as an automated angel investor.
  • Clearbanc’s revenue-based model speaks to the increased need of startup funding.
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‘We put our skin in the game’: How Clearbanc is rethinking funding for growing startups

With Covid-19 leaving people jobless or with extra time to think, many are turning to entrepreneurship. And with all these new entrepreneurs looking for financing, this may be the perfect time for companies providing unconventional funding methods to shine.

We’re starting to see a specialization within these funding methods -- in who they fund, how they fund and what they fund. 

Companies like Capchase and Pipe, for instance, provide funding for subscription-based businesses that correlates with the number of subscriptions a startup gets. Lighter Capital and Clearbanc provide revenue-based capital. 

While revenue based financing isn’t something new -- PayPal, Square, Shopify and many traditional lenders all provide small business financing in the form of loans and merchant cash advance -- it is changing, becoming more focused and automated.

Clearbanc provides revenue-based financing specifically for ecommerce businesses. Lately, its business model has been getting a lot of attention.

The company differentiates itself by focusing on e-commerce entrepreneurs and providing capital that’s earmarked for marketing and inventory. It also uses its own algorithms to determine who gets a loan by looking at specific business metrics.

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“What we invented was a way to finance marketing and inventory on a revenue share basis. So we {might} give you $100,000 for your marketing budget, and we’ll take back 5% of your sales until we get $100,000 back. Same thing for inventory,” said Andrew D'Souza, co-founder and CEO of Clearbanc. “And that program’s worked really well. We funded $1.6 billion to 4000 companies around the world.”

Clearbanc funds e-commerce businesses with yearly revenues up to $20 million.

In February, Clearbanc launched ClearAngel, an AI-based program meant to act as an automated angel investor for entrepreneurs. The goal of the platform is to eventually get these businesses to a stage where Clearbanc or another investor can provide more funding.

“We're trying to be the friends, family, and angel investor to help guide these early stage ecommerce and internet entrepreneurs, to get to the point where they do have a repeatable business,” said D’Souza. “And then we can fund them with our marketing capital or inventory capital, or we can {eventually} introduce them to an investor. And, and we help them by just putting our thumb on the scale to tip things in their favor.”

The AI platform gives the entrepreneur steps and tips for what their business needs in order to succeed. It allows them to set business goals, structure benchmarks for those goals, and matches them with specific agencies, apps, or consultancies that could help them through certain challenges. It also shows them how they compare to other businesses their age.

Here, too, Clearbanc makes money through a revenue based model -- the company provides the startup with $10k - $25k to start with, and meanwhile takes 2% of the startups’ sales revenue for four years.

“We put our skin in the game to give them some early funds, and then do a lot of work to try and help them scale,” said D'Souza. “And we don't make money unless they grow quite a bit over those four years. So that's the agreement that we enter with them. And then the first step is {helping them earn} that $10k to $50k. And once they start to build a repeatable business, we unlock more and more data.”

Still, Clearbanc may have some challenges to face. For one, a platform can’t automate everything. Emotional support remains in the hands of humans.

“Building a startup is a roller coaster. You go through a lot of ups and downs, and it's very taxing on your ego,” said D’Souza. “Your startup is very much an extension of your being. And I think that's where people lean on colleagues, peers, investors, and advisors. And we haven't yet figured out how to automate that in a realistic way.”

Data might also be the answer here too eventually.

“We think we can take capital network advice and use data to do an even better job of that,” said D’Souza. “And then hopefully everybody has their own emotional support systems -- peer groups, friends and family -- that can get them through the tough times of being a founder.”

Ultimately, though, what Clearbanc is doing speaks to the newfound need of finding ways to fund more startups and do so quickly.

Clearbanc’s goal is to invest over $100 million in 5000 companies in the next two years.

“There could be so many more entrepreneurs. If they had that angel investor, if they had that friend and family, they could get rolling even earlier and they could have a chance of succeeding,” said D’Souza.

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