A presentation from Michele Romanow of Clearbanc.
Speaker: Michele Romanow, Clearbanc
Introduction: David Kirkpatrick, Techonomy
The following transcript has been lightly edited and condensed for ease of reading.
(Transcription by RA Fisher Ink)
Kirkpatrick: Michelle Romanow who is quite a well-known entrepreneur and TV personality in Canada, is basically here to tell us about a new company she is launching today called Clearbanc. I’m really pleased that she’s doing that, she’s one of the stars of Canada’s Dragons’ Den show which is a big, big success in that country, helping to do entrepreneurial encouragement. So, Michelle, let’s launch Clearbanc.
Romanow: Well, thank you, David, for that great introduction and it’s really wonderful to be here. So, for the last 100 years there’s really only been two ways that entrepreneurs could grow their companies. They either gave up a piece of their company with equity, went to venture capitalists, that was a lot easier when you live in California because we all know venture capital is a relationship game. And you still had to give up a piece of your company that you would never get back.
The second way to raise money for your company was to look for debt. Which in the first 10 years as a company meant you were giving up a personal guarantee. Meaning, that if your business didn’t do well you had to give up your house as well. That always felt fundamentally unfair to me. At the later stages, debt gets even more complicated with warrants and covenants and all sorts of deals. And as David said, I’ve known this for far too long and far too well because I’ve been a serial entrepreneur for more than the past decade. I’ve built everything from a caviar fishery to one of the fastest growing e-commerce companies to a consumer app called SnapSaves that got acquired by Groupon in 2014. And with all of those companies, I tried to raise capital and was pretty unsuccessful myself, having had to bootstrap all of them.
So, after I sold my last company, I had a chance to switch sides of the table and become a venture capitalist on the Canadian version of Shark Tank, that’s what he was saying before. We call it Dragons’ Den up North, but it’s the identical format. And so during that time, I got to see a lot of entrepreneurs in a very short period of time. We film the whole show in three weeks and see about 250 pitches. And every pitch kind of starts to sound the same. It’s maybe a father and son team or two co-founders that got together, they’ve created a great e-commerce product like, let’s call it custom cell phone cases, they can make the product for $10, sell it on the internet for $50 and it probably costs them $10 on ad spend to get a resale. So, they’ll come on the show and say, “Look, I’m looking for $100,000 in exchange for 20% of my company to really go buy more Facebook and Google ads to extend my growth.” And I just kept sitting there being like, “Is equity really the right model to fund these companies?”
And so I started throwing out that I would do their deal as a revenue share. So, I would give them the $100,000 they were looking for, but instead of taking equity, I’d take 5% of their revenue until they paid me back $106,000. So, I was basically making 6% on my capital which wasn’t very much but I was getting to deploy it quite quickly.
Entrepreneurs loved this. They got to keep the piece of their company they wanted and this didn’t act like debt. There wasn’t a fixed payment timeline, there wasn’t a personal guarantee and there wasn’t a time that they had to give it back to me. So, I thought—I was an engineer myself, and so as we were doing these deals, started building a little bit of technology to look at all of these metrics. Because when I started doing the deals on the show I was literally going through their acquisition data myself and seeing if their unit economics made sense.
And we thought this would work for really small companies, the types of companies you see on Shark Tank that are just getting going, maybe at their first $10,000 of revenue a month. But what we found is that companies that were a lot larger liked this idea as well, companies like Hunt A Killer. Hunt A Killer was started—it’s a murder mystery subscription box you can get in the mail every month, it was started by a military veteran in Baltimore. And two years ago, Clearbanc gave him $10,000 to go buy more Facebook ads to grow his business. Today Hunt a Killer has over 40,000 subscribers and Clearbanc will give him $8 million to fund his growth. He still owns 100% of his company and we are the only capital in the business.
The thing that got me really excited about us being able to scale is realizing today that 40% of venture capital dollars go straight into companies to buy more Google and Facebook ads. So, when you think about that, entrepreneurs are using the most expensive capital to do something that should be repeatable and scalable and that’s what we see as our entire market size.
So, the last question is how are we able to do this? Well, what we’ve been able to do is automate so much of this decision-making. We’re looking at lots of disparate data sources, your financial data, your ad spend data, combining those all together and then choosing to fund a company based on that data. And as a result of that, we didn’t know this was going to happen, but we took the bias out of decision-making and as a result have funded eight times more women than industry average. I think that’s pretty great.
In addition, we’re at a reasonable scale now. Clearbanc in 2018 already has given entrepreneurs more than $100 million in capital that has gone to over 500 different companies in unique parts and corners of America. So, here at Techonomy we’re announcing for the first time that we’ve raised $70 million in our own equity capital to help accelerate our growth. Don’t get me wrong, I fully appreciate the irony that I’m raising money from VCs to disrupt VCs, but I think our VCs share the same vision for us which is that venture capital should be true risk capital. It should be going into funding true research and development and solving the problems we have talked about on this stage today. Solving some of our climate issues and energy issues and discovering drugs and hopefully powering the AI machine learning to better allocate capital to entrepreneurs which is what we’re doing. Thank you.