Startups are preparing for fundraising to become even harder to secure, due to a venture market slow down caused by COVID-19. The pandemic has led to less market activity, which means fewer liquidity deals for investors, which translates into less fresh capital (or dry powder) to put into startups.
As a result investors have told already-funded startups that they need to extend their runway until deal flow bubbles back up. Investors say this could take a couple of quarters, and looking at 2008 data, it could take a couple of years.
Canadian company Clearbanc has launched Clearbanc Runway, a new financing product to help startups secure money.
On Clearbanc’s website, founders can input the amount of their current runway, as well as cash balance, overhead, revenue, margin, growth rate and other criteria. Clearbanc will analyze the data and offer money in the form of non-dilutive capital. Founders can repay the cash through a revenue share agreement. In order to be eligible, companies must have a minimum of $10,000 monthly revenue and at least six months of consistent revenue history.
If Clearbanc sounds like a loaning company, it’s because it (almost) is: the company gives money to startups and charges interest above a repayment plan. However, the company says it can’t legally be described as a loaning platform because is not regulated as such. While loans include fixed payment timelines. compounding interest, and maturity dates, Clearbanc has none of those factors. Instead, Clearbanc takes a fixed percentage of sales and if a startup slows down, Clearbanc just has to wait longer to get paid back. It claims no penalties for founders.
The company’s revenue share agreement charges a 6% flat fee, with repayments already a part of the funding plan. And if the startup that has taken an investment from Clearbanc is doing better month to month, the funding total that they can access will reflect that.
Clearbanc Runway is very similar to the company’s flagship product the 20-minute term sheet.
Clearbanc created the 20-minute term sheet to help companies get non-dilutive capital for advertising spend on Google and Facebook advertisements. The premise there was that startups should spend valuable venture capital money on other expenses since equity is involved. Clearbanc Runway fulfills a broader goal.
“Originally, we were just focused primarily on ad spend. Now we can fund any expense that used to maintain your company,” said Andrew D’Souza, the co-founder of Clearbanc. Clearbanc Runway will fund enterprise and software businesses, along with e-commerce businesses.
The subtle difference between the two products is that the new launch has a hint of conservatism in it. Clearbanc is in a unique position during this pandemic because it largely funds e-commerce businesses. Those internet businesses are experiencing an increase in traffic as brick-and-mortar stores close amid the COVID-19 pandemic.
But, noted D’Souza, “there’s a lot of volatility and a lot of uncertainty.”
“We’re certainly going to be more conservative than we would have been six months ago. It probably looks like us writing smaller checks, more frequently.”
Clearbanc isn’t competing for deal flow with venture capital firms. Instead, the company is going up against fintech companies that loan money to small businesses. And that’s neither a rare or new focus.
Last month, Plastiq raised $75 million to help small businesses pay for items with credit as an alternative to traditional lending resources. Payment processing giant Stripe also has Stripe Capital, its lending product that gives money to internet businesses for a flat fee.
In January, Lighter Capital raised $100 million to lend money to other startups, similar to Clearbanc’s revenue sharing agreement format. It all goes to show that there are a lot of players willing to give out loans, and it’s up to small businesses to decide which terms are the friendliest.
Not all small business loans will be accessible for venture-backed startups. For example, the $2 trillion stimulus package provided by the U.S. government shows that $349 million was set aside to loan out to small businesses. However, new guidance shows that most startups are still excluded from getting monetary help. Still, some are applying for the loan because it will be distributed on a first come, first serve basis.
Clearbanc says it can differentiate from competitors because of its speed.
“It’s great that people apply for [SBA loans], but it can take a long time,” D’Souza said. “There’s a huge backlog and it depends on your bank and what their systems are set up to do.”
Almost exactly a year ago, Clearbanc’s co-founder Michele Romanow was talking in terms of IPOs and unicorns. Clearbanc Runway has gone noticeably less grandeur, as D’Souza was talking in terms of helping companies avoid shuttering or undergoing mass layoffs.
The firm has invested, or dealt money into, over $1 billion across 2,200 companies.
Clearbanc has traditionally pitched itself as a way for e-commerce founders to grow their startups without giving up as much ownership as a traditional equity deal would include. Now, the company is pitching itself as a way for all founders to stay afloat, as venture capital becomes less of an option across the world.
Update: Clearbanc has said that it cannot be legally considered a loaning platform due to a different financial structure from traditional loaning companies. The story has been updated to clarify this.