Inovia, Founders Circle double down on Clearco with debt buyback from SVB, $60-million USD Series D.
Toronto-based FinTech startup Clearco has completed a series of significant financial transactions designed to strengthen the company’s balance sheet, enabling it to continue providing revenue-based financing to e-commerce businesses.
As part of a complex recapitalization strategy, Clearco has now secured a new asset-backed financing facility from Pollen Street Capital and $60 million USD in Series D funding led by existing Clearco backers Inovia Capital and Founders Circle Capital. These moves, part of a plan first reported by The Globe and Mail, were made possible by Inovia, Founders Circle, and SVB Capital (SVB’s fund-management arm) buying back Clearco’s $60-million term loan from the bank’s now-liquidated Canadian branch.
The company hopes its recapitalization and renewed product and market focus will help it achieve cash flow break-even within the next 12 months.
“It’s no surprise that Clearco is not worth what it once was.”
– Andrew Curtis, Clearco
Clearco has struggled as economic conditions have worsened, interest rates have risen, and venture capital (VC) and debt financing have become even harder to secure. Over the past 18 months, the well-funded and previously high-flying unicorn executed multiple rounds of layoffs, pulled out of overseas markets to focus on North America, shifted its focus to a single product, changed CEOs, and contended with the collapse of Silicon Valley Bank (SVB).
In an interview with BetaKit, Clearco CEO Andrew Curtis acknowledged that Clearco has faced significant challenges and undertaken “an enormous amount of work” over the past year. He argued that these transactions represent “transformative changes” for the embattled e-commerce merchant financier, calling the company “very fortunate” to be in this position.
“Clearco grew very rapidly, very quickly, and that growth was being rewarded by VCs back then, but like many companies, Clearco is now focused on a lot of financial discipline and rigour in the way it runs the business,” said Curtis.
Officially known as CFT Clear Finance Technology Corp, Clearco provides growth capital to e-commerce merchants, helping them expand their businesses without equity dilution. Founded in 2015 by executive chairs Michele Romanow and Andrew D’Souza, the FinTech firm underwrites e-commerce companies using artificial intelligence, providing cash advances to cover businesses’ inventory and marketing costs in exchange for a cut of future revenue plus a fee.
To support its growth, Clearco has raised over $400 million in equity financing over the last decade from a group that includes Inovia, Founders Circle, and many others, achieving a valuation of more than $2 billion in the process. To date, Clearco has advanced over $2.5 billion in financing to more than 10,000 businesses.
But Clearco ran into difficulties as the economy began deteriorating last year, and started quietly downsizing in early 2022, per The Logic. As BetaKit reported, Clearco made layoffs in June and July 2022, cutting 25 percent of its team in the latter month.
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That August, Clearco pulled out of overseas markets, including the United Kingdom, Ireland, Germany, and Australia to focus on North America, shedding another 16 percent of its workforce. One month later, Clearco adjusted its product strategy, discontinuing its other offerings and launching a simpler revenue-based financing product called Invoice Funding.
This January, Curtis, a New York-based investment banker, replaced Clearco co-founder Michele Romanow as CEO, and Clearco laid off another 30 percent of its staff. In March, Clearco’s situation became more difficult with the collapse of SVB, which provided Clearco’s term loan before the debt was purchased by Inovia, Founders Circle, and SVB Capital.
Despite this turmoil, Curtis said that Clearco has never stopped originating and making advances to its customers. Up to this point, Clearco was “somewhat constrained” by financing capacity, but the CEO said that this is no longer the case since the company has closed its Series D round and secured a new off-balance-sheet funding instrument.
With these changes, coupled with the new transactions that Clearco has announced, the company has set its sights on growing sustainably and profitably and expects to reach cash flow break-even in the next year.
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Curtis believes that the startup is in a much better position today than it was a year ago, as do some of its investors, including Inovia partner Karam Nijjar. “Over the past 12 months, Clearco has completely transformed and restructured, going from a growth-at-all-costs mindset to one of sustainability and scale,” Nijjar told BetaKit.
Per The Globe, had been seeking a deal that would value it at around $200 million—90 percent less than its $2-billion valuation back in 2021. The Globe reported that existing Clearco investors who did not participate in the firm’s latest round were expected to see their Clearco holdings reduced to a fraction of their previous worth.
Curtis and Clearco declined to disclose which other Clearco investors participated in the firm’s latest all-primary, all-equity Series D financing, what impact it would have on existing Clearco backers that did not take part, or what valuation it gives Clearco exactly. However, Curtis did indicate that it was a down round relative to Clearco’s prior $2 billion-plus value.
“It’s no surprise that Clearco is not worth what it once was,” Curtis said, noting that lots of FinTech firms have seen a significant chunk of their valuations wiped out during the downturn.
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Meanwhile, Clearco’s new asset-backed facility with Pollen Street gives it access to up to $100 million in financing capacity. It plans to use this to fund revenue-based advances to e-commerce businesses approved for funding through Clearco’s AI-backed underwriting model. Clearco expects this to support $850 million in originations over the next two years.
This funding instrument requires Clearco to contribute some cash of its own, which Curtis said will represent a significant use of the startup’s Series D capital. Clearco has raised several such financings in the past to support its advances. According to Curtis, the others have all either been wound down or are in the final stages of winding down.
Clearco is also recapitalizing the company and reducing its debt load by converting “the bulk” of the term debt purchased from SVB into equity.
“This would never have been possible without the support of those three funds,” Curtis added. “We’re just very fortunate to have had Inovia, Founders Circle, and SVB Capital do something that’s quite unusual and creative and innovative, especially in venture capital financing.”
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Speaking to why Inovia decided to double down on Clearco by co-leading its Series D and helping purchase its SVB debt, Nijjar said that Inovia is “confident in the company’s management team’s commitment to sustainable, scalable growth and believe[s] that their recent operational changes and newfound discipline and focus will bring success to the company and 10,000-plus customers.”
“We’re focusing today, very clearly, on a single product in a single geography … and that’s enabled us to exercise a lot of discipline around what we do,” said Curtis. “Today, Clearco makes decisions based on rigorous analysis and a lot of healthy back-and-forth debate, and we pay a lot of attention to the company’s unit economics.”
For his part, Nijjar noted that the underlying unit economics of Clearco’s business over the last 12 months have been the best in the company’s history.
“We feel like our role today is more indispensable than ever.”
– Andrew Curtis, Clearco
Still, Curtis acknowledged that Clearco still faces an uncertain economic environment as monetary policy and consumer spending continues to shift, noting that the firm’s focus on business sustainability is higher now in light of these conditions. Meanwhile, while e-commerce is still growing, its growth has decelerated from COVID-19 pandemic highs as customers have returned to buying goods in person and the economy has lagged.
But despite these challenges, Nijjar believes that demand exists for Clearco’s offering, “especially in the current venture capital and credit environment.” These broader economic conditions have cooled VC investment and led financial institutions to tighten up their underwriting, making VC funding and loans harder to obtain for tech startups and e-commerce merchants alike, including Clearco’s customers.
In this environment, venture debt deals have declined and lenders have been losing their appetite for riskier loans, and expect to tighten loan standards across the board during the second half of 2023. After recent bank failures like SVB, some banks are also holding onto their cash amid fears of a continued slowdown and regulatory changes.
For his part, Curtis sees room for Clearco and its refocused and recapitalized business to grow amid these conditions. “We feel like our role today is more indispensable than ever,” said Curtis.
Feature image courtesy Clearco.
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