As Facebook and Google ads, the bread-and-butter of many direct-to-consumer brands’ customer acquisition efforts, become more expensive, there’s also been a rise in companies eager to give money to cash-strapped DTC companies — for a fee.
One of the most prominent of these companies is Clearbanc.
With what they call the “20 minute-term sheet,” Clearbanc says it’s built a series of algorithms, that, by analyzing data from a company’s Facebook ad spend, bank accounts and payment processors, can determine which companies would make good investments.
Clearbanc then takes a portion of the company’s revenue until the advance is paid back. Clearbanc is projecting that by the end of this year, it will have invested $1 billion in 2,000 companies. Companies its invested in to-date include LeTote, Leesa Sleep Untuckit and Public Goods. To build its business, Clearbanc has also taken on about $300 million in venture capital.
Even though it has only been funding DTC companies for a couple of years, it’s quickly shot to fame thanks to a famous face (one of its co-founders, Michele Romanow was an investor on the Canadian version of Shark Tank, Dragons Den) and its pledge to help founders build their company without taking equity.
Here’s how the origin story goes: co-founders Romanow and Andrew D’Souza bonded over the shortcomings of venture capital. They came up with what they thought was a more fair way to determine which types of companies to invest in, and without forcing them to give up a stake in their company.
The idea is that the company is best at figuring out how to fund digital advertising for startups, said Romanow who is also Clearbanc’s president.
Clearbanc isn’t the only place e-commerce companies that don’t want to take venture capital funding can turn to for funding. Shopify Capital, Square Capital and Stripe Capital all compete with Clearbanc, in addition to traditional banks. But the fact that Clearbanc focuses solely on e-commerce companies shows both how quickly the DTC and subscription e-commerce economy has grown, and how hungry these brands are for cash.
Some investors, like Lerer Hippeau’s Andrea Hippeau, have said that too many DTC companies are taking on venture capital funding who will be unable to provide the 10 to 20x returns that venture capitalists need to see. One e-commerce investor who spoke with Modern Retail has suggested to brands that may not be a fit for VC funding to look into Clearbanc. But taking on Clearbanc funding doesn’t make it any easier to build a profitable e-commerce company.
Piggybacking off the DTC economy
Clearbanc has cycled through several business models since launching in 2015. Initially, it launched an instant pay tool for Uber drivers. It also experimented with giving capital to Airbnb founders who wanted to make renovations to their rental space.
“Our view was always: how do you build a bank for the new economy,” said Romanow. The company got the most traction with providing capital to e-commerce companies to spend on digital advertising, so Clearbanc pivoted to focusing solely on them after a couple of years.
According to its website, Clearbanc only looks to invest in companies that have an average monthly revenue of at least $10,000, and have at least six months of “consistent revenue history.” It can give companies anywhere from $10,000 to $10 million. Clearbanc charges a flat fee of 6% to 12.5% on top of the money that a company takes from Clearbanc depending on how they spend the money.
The lowest rates go to companies who only use Clearbanc funding on advertising spend. So, if a company borrows $100,000 from Clearbanc to spend on Facebook ads, they would owe Clearbanc $106,000.
Clearbanc then takes between 1% to 20% of a company’s revenue (Clearbanc says it’s up to the company to decide how much revenue they want to forego) until the money is paid back. On average, Clearbanc said it typically takes companies between 5 to 8 months to pay back its advances. Clearbanc does not share how many companies fail to pay back their advances.
Clearbanc calls its capital “advances” not “loans” because there’s no exact repayment timeline, and there’s no compounding interest rate. Shopify Capital also follows offers merchant advances. It’s also worth noting that Square Capital had a similar model when it unveiled its merchant financing offering in 2014, but has since pivoted to offering traditional loans.
Romanow said that she didn’t want to build Clearbanc as a traditional lender because they didn’t want founders to “put their own credit and livelihood on the line to fund their businesses.” But that also leaves Clearbanc at risk — particularly if there’s an economic downturn — and companies fail to pay back their advances in a timely manner.
What founders think
Danny Taing, the founder and CEO of Japanese snack subscription company Bokksu, is one of Clearbanc’s earliest customers. He first took an advance from Clearbanc in June of last year. He said he took an advance from Clearbanc because “no one else was willing to loan to me at the time.”
Since then, Taing has taken on three additional capital advances from Clearbanc to both hire a couple of new employees, and to pay for Facebook and Google ads. Bokksu currently has 12 employees, and is on track to do $7 million in annual recurring revenue by the end of the year.
Taing said that the biggest benefit of Clearbanc has been not just the capital, but how Clearbanc has “elevated and supported my brand.” Clearbanc has featured him on its website, and invited him to represent Clearbanc on panels and industry dinners.
“I’m a first-time founder with not a lot of connections in the VC world, so to have any type of intros is super helpful,” Taing said.
But other founders, particularly those of bootstrapped companies, have foregone Clearbanc because they’ve been able to get more favorable rates from banks. Patrick Coddou, the founder of DTC razor brand Supply, looked into taking funding from Clearbanc, but ultimately ended up taking a loan from American Express’s lending program because in his calculations, it was a better deal.
With Clearbanc, Coddou said, “you click one button and you get the money — but you end up paying for that for sure,” Coddou said. Romanow said that Clearbanc is “always trying to lower its rates” but maintained that its biggest value proposition was how quickly it can get companies money, often within 24 hours.
Another founder of a lifestyle apparel brand was hesitant about giving over data on Facebook advertising spend to Clearbanc. “They may not do anything with the data,” the founder said, adding that “I imagine the data that they’re getting from that could be pretty valuable in terms of what [advertising] works and what doesn’t.” The brand has not yet taken funding from Clearbanc
Romanow told Modern Retail that “today, we are only using this data to understand the companies that we should invest in and the companies that we shouldn’t.” She said that Clearbanc may look at sharing learnings from aggregate data in the future, like “Pinterest is doing well,” but that “anything that could be specific [to one company] we wouldn’t share.”
Building a network of e-commerce entrepreneurs
In order to convince more startups to take money from Clearbanc, it also has to convince them that they can offer them more than just money.
So in August, Clearbanc launched a venture partner program, where companies that have taken Clearbanc funding can get advice from e-commerce entrepreneurs like Jack Abraham of startup studio Atomic and Jesse Horowitz of Hubble Contacts. It also has a program to match ad agencies with some of its portfolio companies.
And, it’s building close relationships with digital advertising platforms who are eager to get an increasing slice of. Taing said he was part of a pilot program where he wasn’t charged a fee for any Clearbanc money he spent on Twitter ads.
Romanow said in an email to Modern Retail that, “we’re always looking for new ways to help our companies expand and unlock new marketing channels. This was a small, invite-only program where Clearbanc paid the fees for this experimental spend so companies like Bokksu can test and ideally unlock new channels risk-free.”
Partnerships like these will become important to Clearbanc as more founders look to diversify their ad spend away from Facebook and Google, which could threaten Clearbanc’s business model. Brands like Bombas and Eight Sleep — which once spent roughly 85% and 60% of their marketing budgets on Facebook respectively — now spend roughly a third of their marketing budget on Facebook and Google.
But Romanow said she doesn’t see DTC brands diversifying their ad spend as a threat to Clearbanc’s business, because Clearbanc’s capital can be used to fund any type of advertising. Still, like its customers, Clearbanc is diversifying — it’s looking to create finance offerings for other industries, and is currently conducting a pilot with software-as-a-service startups.
“Everyone knows that is a natural risk to your business, to only have customers coming from a couple of different channels,” Romanow said.