‘Founders use the most expensive capital in the world to do something really repeatable’: Behind the popularity of ClearCo’s new funding model

Subscribe: Apple Podcasts I SoundCloud I Spotify I Google Podcasts
The following excerpts were edited for clarity.

SPONSORED

Andrew D’Souza: We help entrepreneurs and online e-commerce businesses raise capital for their business and figure out what to do with their capital without giving up equity.

We renamed the company to ClearCo -- we used to be called Clearbanc. That's how we started. I'm an engineer. I had worked a couple years at McKinsey. And then I met a guy named Chamath in 2010. And he convinced me to move to Silicon Valley (he was head of growth of Facebook at the time) and join a company that he was on the board of. I'd say the first thing that I recognized when I moved out to San Francisco from Toronto, where I grew up, was how different the opportunities were for founders in that area, compared to people back in Canada or Europe or anywhere else in the world who didn't have easier access to venture capital and all the benefits that came with venture capital.

I just realized that having easy access capital was what made life so much easier for entrepreneurs and founders. And a lot of my career was focused on helping entrepreneurs that are outside of Silicon Valley get access to those same benefits. Then I met Michele in 2014.

Michele Romanow: Andrew and I had exact opposite backgrounds. He had raised a ton of venture capital before -- I had raised no venture capital before but had been a serial entrepreneur who had built five companies. One was early in the e-commerce space and is now public in Canada. One is in the AI space -- I sold that company to Groupon. But what was really interesting is when I was 28 years old, I was asked to join the cast of the Canadian version of the Shark Tank television series. So, I feel like I'm the runt of the litter -- I'm the youngest on the show.

I'm watching all these founders come on the show, and at the seed stage, they all sound the same. It's like, hey, I built this great e-commerce company. I remember the first one we did was wooden iPhone cases. And they're like, look, we're here to give up 5% of our company forever for $100,000. And when you asked almost all of those founders,what they needed the capital for, it was always two things: customer acquisition (which is Facebook and Google ads) and inventory.

And so I get home after filming one day, and I'm like, Andrew, why are founders using the most expensive capital in the world, which is equity, to do something really repeatable and scalable? That is the whole magic of ad spend -- you put in $1 and you get $3 out. We put our heads together, and I came back the next day on the show, and I said, okay, I'm going to throw out a different deal type: instead of giving you $100,000 and taking 5% of your company forever, why don't I give you that same $100,000, but instead take 5% of your revenue until you pay me back my capital plus 6%. So for 100 grand, it's $106,000. People get confused because they think this is a loan.

But this wasn't a loan: there was no personal guarantee or fixed payment timeline or compounding interest. This was just a rev share design for ads or for inventory or any other repeatable expenses. And honestly, Zack, I never thought that this would become as big as it has. ClearCo has invested more than $2 billion into more than 4500 different companies, making us the largest e-commerce investor on the planet. And in turn, we have helped thousands of founders figure out how to grow their business without having to do that incredibly time consuming process of raising capital.

SPONSORED

How did your pitch resonate with entrepreneurs when you first started pitching it?

Michele Romanow: I think founders got it right away. They understood. And sometimes there's this thought that equity is free, but as soon as you've gotten close to an exit, I've done the math: you can pay your seed investors 350 times their money and they still own that piece of your company. And so our view is not that equity is bad. It's just that you should use that for true risk in your business.

Andrew D’Souza: Yeah, I've been burned by that a few times. Prior to starting ClearCo, I had been part of a few ventures -- startups -- and helped them raise money. I think one of the things you realize is that you give up a lot of ownership, you also give up a lot of control of the business. Equity is a great tool if you're investing in things like R&D and product development and things with a very long time horizon and a lot of uncertainty. Equity investors and venture capital investors are risk capital. But once you've de-risked part of your business, and you're investing in repeatable growth and sales and marketing, it starts to feel very, very expensive. And as you get more and more successful, you end up diluting more and more of your business and you wake up one day and realize that you don't actually own or control the company that you started. That's really what we're trying to help entrepreneurs avoid, or at least, understand.

How did you get in front of entrepreneurs in the early days? And how do you get in front of them now?

Michele Romanow: In the early days, I think it was us talking about the product. I think the first couple of entrepreneurs came from the show. We do two things. We partner with a ton of folks in this system. And so if you are a VC or if you sell any sort of e-commerce software, we have partnerships with people like that. A VC might see a thousand pitches a year and maybe write 10 checks. So we get a lot of referrals from that. And then we look for our own great companies and reach out to them and explain the model.

What is the 20 minute term sheet?

Michele Romanow: When you go fundraise for equity, this is a three to six month process. And it's grueling. The way that our platform works is that you connect us to the apps that run your business. And then in 20 minutes, we can show you how much capital we can give you in the terms of capital. Hence, the 20 minute term sheet. And it really was to show the contrast between what it takes to do conventional equity fundraising and how fast we can move. And the craziest thing about the 20 minute term sheet that I don't think we expected is we were first aiming for speed. An entrepreneur's most valuable resource is their time. And so the way we could do a 20 minute term sheet is we had to use data science and AI to do all of our assessment of how well these businesses were doing.

It was really interesting because we look back at our portfolio years later, and it looks very different than most venture capital portfolios. We had backed eight times more women than the venture capital industry average. We now have founders in every state in America, compared to 80% of venture dollars going into four states in America. And 30% of our founders were people of color. My belief always has been if you have a great idea with great metrics, getting capital shouldn't be limited to going to the right school or having the right parents or being in the right social circles. I don't think it was intentional, but that's what VC became. The only way a VC will meet with you is if you get a warm email intro, so naturally, you're just excluding people that didn't grow up in those circles.

Many VCs continue to invest in follow on rounds. Does ClearCo grow alongside some of the companies that you're funding?

Andrew D’Souza: 100%. We'll start a company as early as their first few thousands of dollars in revenue, and we'll grow with them. Our largest companies will do half a billion dollars in revenue, $500 million in revenue this this year, and we just continue to grow with them. If they can find uses of funds that continue to drive growth, if they're investing in marketing, and it's continuing to work at higher and higher scale, or if they're investing in their inventory, or they're getting sustainable and improving margins, we'll continue to fund those use cases.

We've taken some companies where we've given them $10,000, to start and grown up to $10 million. We funded companies like Nectar Sleep, which has built a phenomenal business, and the founders have still been able to retain a lot of ownership and control in that business. Public Goods is great business that started as an Indiegogo crowdfunding campaign and built a great, great business. Many of these companies had a highly venture backed competitor that kind of blew up. Right? If you think about businesses like Casper and Brandless, they took on a ton of venture capital, grew sort of unsustainably, and didn't actually have positive unit economics. They struggled at scale, whereas Nectar and Public Goods really had fantastic business economics. We were able to fund them because we saw how efficient they were with capital. And the founders maintained way more ownership and control of their business as they grew.

Have your own investors pressured you at any point to make equity investments?

Andrew D’Souza: Our investors haven't pressured us. Some of our customers would love for us to be on their cap tables. And we've considered it. Look, I think the idea is we want to be able to do things that are scalable -- we want to be able to use technology and data science to make decisions. We don't want to introduce the bias and the human element, because then we're just another VC. One of the things that we've done on that path is we looked at our portfolio about a year ago and realized that we'd funded close to 5000 businesses. We've said no to 50,000 businesses, because they were just too early or too small.

And so especially in the pandemic, when so many new e-commerce businesses and software businesses have been started, we realized that there was a way for us to create an accelerator program, our answer to Y Combinator. So we launched this program called ClearAngel, which allows us to fund businesses without a fixed fee. So we'll give a company up to $20,000 to $25,000 and we'll take 2% of revenue for four years. We don't take equity, like a typical accelerator -- it's still a revenue share, but then we're working with them through this four year program to help get their revenue, from maybe $1000 or $2000 per month to hundreds of thousands of dollars in monthly recurring revenue. That program is is a few months old, but it's already showing great success. That's not exactly an equity investment, but closer to much more shared upside.

And what kind of resources do companies in that program get from you guys?

Andrew D’Souza: We bring our entire network. So if you think about what an investor does, they bring capital, which many investors have, but then they also bring expertise and guidance, and they bring their network. And so we've built a network of experts -- whether it's negotiating with your suppliers or advertising, ad optimization, finding new channels, going wholesale for wholesalers going direct to consumer for consumer businesses -- we bring experts and provide expert, targeted introductions.

And then we provide them a playbook. We say, look, for a company of your scale and of your size and your category, here are the next three things you should do. And we can work with them and give them a coach that works through the playbook. And on a weekly basis, they have, okay, here's the next task -- it's almost like a video game. Here's what I've got to do to get to the next level. Founders love the experience. A lot of these founders, especially in the middle of the country, don't have an advisor or a friend who's gone through it before. So they're building it -- it's a pretty lonely job. We've been able to help a number of people. We're excited about the potential of that program, as well.

Is there current or future thinking around providing network level insights? Like, here's what's working with Facebook for this type of product -- providing that type of feedback loop to your companies.

Michele Romanow: Certainly. We're doing that today. We could see things last year: at the beginning of COVID, Facebook ad prices were the lowest that they've been in probably the last three years. And so we were encouraging our founders to start spending on Facebook. But as we got into holiday season last year, we were seeing that Facebook was declining. Google was actually converting a lot better, and then TikTok really started to take off.

So we were giving founders insights within their dashboard. We can show how they're doing relative to very large benchmarks so they can kind of see, hey, this is what I should be looking to do. And then we're trying to give them some of these global insights that we're seeing by backing so many companies across the space, because that's been a difference, right? A VC has maybe 20 portfolio companies -- they're not going to know which software to use, which agency to use, and exactly what's trending on these platforms. We can use the power of all of our data to give our founders a real competitive advantage to win.

Is there an interest to move further into spend management?

Michele Romanow: Our founders can use our capital for anything. We just make our capital a lot cheaper if you spend it on inventory and marketing. And so we've been able to help founders choose different software tools that can be helpful for converting their business. I've never loved the concept of an app store -- I find it overwhelming. I just want to know the one thing that I should be using. And I think founders feel the same way, as well.

Andrew D’Souza: We try to be very, very personalized with our recommendations instead of it just being global insights. I think people appreciate that. This is what works for a pet food company that's doing a million dollars in annual sales at this scale on Amazon and direct to consumer.

I want to shift gears a bit and talk about your personal relationship, the dynamic and the decision to work together and how you navigate that. Can you talk to us about that?

Andrew D’Souza: It was a high risk move. We had not been dating that long, but we'd known each other for a while. I had moved back from San Francisco to Toronto, maybe a year before. And, you know, we just started dating. One of my previous companies had a board meeting that blew up and our board members wanted to take the company in a different direction. I came back to Michele and said, what do we do? And she said, we're going to start a company.

First of all, I was a little terrified. But Michele was the best entrepreneur I knew. And so, it seemed like it was a good idea at the time. We were both really passionate about entrepreneurship. We thought about starting our own venture fund, but we realized that the world didn't need another venture fund. We wanted to be able to do this at scale. And for Michele, seeing all these entrepreneurs and founders on Dragon's Den was really eye opening that there might be a better way to help them.

How do you navigate between the work domain and private domain? Is it blurred? Are there times where you have to take time outs? Are you working all the time?

Michele Romanow: When you're a founder, this is beyond a full time job. There are very little boundaries you can set. There are very few moments where you cannot work. But instead of thinking about that, which I think is the reality for almost every founder, I think we've chosen to see the incredible advantages of that. One of the great advantages of working with your partner is that you're on the same schedule. So that actually means you're stressed at the same time and you're not stressing at the same time.

If you're at dinner together and something's blowing up, you have a lot of empathy, because you're like, well, I'm going to respond to that email. And if you do it, I really appreciate that. I think that Andrew and I are pretty good. If there's nothing blowing up at work, we're pretty calm. We can go a whole weekend or a week if we're on vacation without spending a lot of time talking about work. We love what we do, our team, and the founders we've been able to support like.

People ask what would we would do if we weren't running this company, and I was like, we would restart this company. I think that there are so many incredible ideas that don't really get to see the light of day and don't really get to see scale because capital is the thing that's holding those founders back -- because capital has just forever been limited to the people that knew the folks with capital. 2000 years ago, that was knowing the king, and then your projects and roads got built. Today, that network effectively still exists. We found a lot of excitement in doing that. I would never say it's easy. Andrew is just an extraordinary founder. It's been pretty fun to to learn and to grow together.

Andrew D’Souza: During the first two years of the company, we either lived with our employees, or they would come to our condo. We got up to about 12 people that would show up every day and we'd buy the security desk at our building coffee and donuts and then eventually, our neighbors started complaining and we had to get an office but those were great times. We love spending time together -- we still do retreats frequently with our team. We haven't been able to do that during the pandemic, obviously, but we used to do that. We'd spend time together and there's the brainstorming that happens and the creativity that happens when you let those boundaries expand a little. It's what we love, so it doesn't feel like a burden when you let your work spill over into your personal life.

I'm curious how you guys are thinking about the future. You're fresh off of an equity raise. You've rebranded the company. How are you thinking about the future?

Andrew D’Souza: A big part of the reason why we removed bank from our name is I think a lot of people think of their bank as where they have a transactional relationship. You go to your bank when you need money or when you need something, but you don't think of them as a partner. We really want to be a long term partner for the founders that we back. So capital is part of the equation. But one of the things we're realizing is because we've now seen so many businesses, and we see what works and what doesn't work, founders have been coming to us, asking us for like, Hey, this is great, but what do I do with the capital? How do I grow my business?

So the next focus of the company is using data and insights to really be sort of an advisory board member, without the strings attached to a board member -- just a sounding board to say, here's what you can do next. Here's how we can coach you to improve your business. We want to be in your corner -- we want to fight for you. And we want to be able to use technology to do that at massive scale and to do it globally.

The other big investment we're making is, as hard as it is for founders in the US and in the Western world to access capital, everywhere else in the world is an order of magnitude harder. The banks are more conservative. There's not as much venture capital. In places like India, you've got to take a personal guarantee if you raise venture capital, so if your business fails, they take your family's home. There's just so many places in the world where the cards are stacked against founders, that we think there's really important work for us to do going global. That'll be a big part of this investment round.