Royalty Financing For Online Business with Andrew D'Souza | E025
How to finance your business without giving up equity or taking on debt.
In this episode of Financial Planning for Canadian Business Owners, Jason Pereira, award-winning financial planner, university lecturer, and writer, talks with Andrew D'Souza, Co-Founder and CEO of Clearbanc. Clearbanc is an online lender to businesses that helps them gain access to capital through royalty models that serve as alternatives to lending and venture capital. Clearbanc’s business model of lending isn’t one of debt or equity, but specifically one of royalties, which is important in an emerging market for lending options.
Episode Highlights:
● 01:24 – Andrew D'Souza explains Clearbanc.
● 02:29 – How did Clearbanc get started?
● 05:57 – How much of his time has been spent in just fund-rasing alone?
● 08:52 – What does the lending experience look like?
● 11:39 – Their goal is to fund businesses with less bias.
● 14:56 – What do their offers generally look like?
● 14:58 – Which niches seem to be some of the best fits for Clearbanc?
● 15:42 – Which verticals seem to typically meet Clearbanc’s needs?
● 18:35 – How much do they look at the founders themselves before making a decision?
● 24:02 – How does Clearbanc get their message out there?
● 26:04 – What is expansion looking like for Clearbanc?
● 27:40 – How have their risk models that they have built been holding up?
● 30:49 – How much repeat business are they seeing?
● 32:58 – What would he change in his business or industry?
● 34:47 – What have been the biggest challenges he has faced?
● 36:15 – What keeps him excited each day about his work?
3 Key Points
1. Clearbanc helps fund businesses for their online growth by getting a fixed portion of the revenue in return until Clearbanc gets their initial revenue back plus a fixed percentage between 6%-12%.
2. Over 2500 businesses have been globally and Clearbanc has provided over a $1 billion in funding to businesses.
3. Fundraising is typically a three month process that can be 20% of your time.
Tweetable Quotes:
● “We can fund a business to continue to accelerate their online growth.” – Andrew D'Souza
● “Equity capital is designed for high variability, a lot of uncertainty in both the upside and the timing of that upside, and that is why you want an equity partner.” – Andrew D'Souza
● “If you’ve de-risked your business and if you understand your sales and marketing and your inventory terms or your customer break-even points, and your return, equity is a very, very expensive way to fuel that growth.” – Andrew D'Souza
Resources Mentioned:
● Facebook – Jason Pereira’s Facebook
● LinkedIn – Jason Pereira’s LinkedIn
● FintechImpact.co – Website for Fintech Impact
● jasonpereira.ca – Website
● Linkedin – Peter Merrick
● Linkedin – Andrew D’Souza
● Clearbanc – Website for Clearbanc
Full Transcript:
Speaker 1: Welcome to the Financial Planning for Canadian Business Owners podcast. You will hear about industry insights with award-winning financial planner and entrepreneur, Jason Pereira. Through the interviews with different experts, with their stories and advice, you will learn how you can navigate the challenges of being an entrepreneur, plan for success, and make the most of your business and life. And now, your host, Jason Pereira.
Jason Pereira: Hello, welcome to Financial Planning for Canadian Business Owners. I'm your host Jason Pereira. So today, before we get started, just a little note, this interview was originally recorded for my other podcast FinTech Impact, where I speak to entrepreneurs in the financial technology space. The reason why I am actually purposing this content here is because it's an interview with the co-founder and CEO of Clearbanc, Andrew D'Souza. And the reason I felt it necessary to repost this is because Clearbanc's model of lending to businesses is not one of debt or equity, but specifically one of royalties. And that is something that's uncommon to a lot of entrepreneurs, but an important option that they need to know about in an emerging market for lending options. And with that, here's my interview with Andrew.
Jason Pereira: Hello, Andrew.
Andrew D'Souza: Hey Jason.
Jason Pereira: Thanks for taking the time today.
Andrew D'Souza: Thank you. Thanks for having me. I'm excited.
Jason Pereira: Well, my pleasure. So, Andrew D'Souza, co-founder and CEO of Clearbanc. Tell us about Clearbanc.
Andrew D'Souza: Yeah, so Clearbanc, we're aiming to help more founders access capital across the globe than has ever been possible before. And we do that through a non-dilutive revenue share structure. And so we can fund a business to continue to accelerate their online growth in exchange for a fixed portion of revenue until we get our initial investment back plus a fixed percentage, ranging typically between six and 12% back.
Jason Pereira: So basically, you're providing capital through a royalty model, essentially.
Andrew D'Souza: Exactly. And our goal has always been to help founders win, help founders be more successful, tilt the balance of power in favor of founders versus capital providers and banks and other people who may have had different interests and have had structures that are much more favorable to them. We're trying to tip that balance of power and democratize access to capital for founders, regardless of where you come from.
Jason Pereira: Excellent. So we can dive into some of those other providers and why the limits to capital are there and how that's changed. But let's first dive into the history of Clearbanc. So, tell me about the origin of it. What was the need that in the market that needed to be served, that you found?
Andrew D'Souza: I'd studied engineering and spent a couple of years at McKinsey in a consulting firm and then got involved in startups. And so moved out to Silicon Valley, built a few tech companies in a number of different spaces. And between Silicon Valley and Toronto is where I spent the last 10 years of my career in a couple of roles. One was in a go to market, leading sales and marketing. And then about half of my time was actually spent fundraising. And that meant getting on planes and flying to all the major cities, pitching investors.
Andrew D'Souza: You'd take a hundred meetings and you get two or three investment proposals over a few months. And then that's for the right to give up a chunk of your business ownership and control to an investor. And then, your job becomes investor management and board management. And so, I've found most founders, one, they don't even know, they don't have access to the networks to get the meetings. They didn't go to the right school or they don't have the right family members or connections. And then once they get the meetings, they don't have three months to take off running their business to go fundraise. And equity, particularly in venture capital is a very expensive form of capital because it's designed for high risk investments.
Andrew D'Souza: And I think there's certainly a place for that, but once you've de-risked your business to a certain point, and you know a dollar in equals more than a dollar out over a fixed period of time, it starts to feel very, very expensive for the risk that these investors are taking. But there hasn't really been a better alternative for businesses that want to continue to invest in growth. And so that's a big part of what Michelle, my co-founder and I had designed. Michelle had almost the opposite experience. She bootstrapped her first four businesses. She sold her last company to Groupon. And then, for the last five years, she's been an investor on a show called Dragon's Den, which is our version of Shark Tank in Canada. And so she would see [crosstalk 00:04:04]
Jason Pereira: We had her first. And for the record, it's our version of Shark Tank from the UK, which was actually a version of a Korean show called Tiger's Den or something like that. Anyway.
Andrew D'Souza: Yes, that's right. It has moved across the world, continent by continent. But Michelle would see all these entrepreneurs from across Canada come and pitch their businesses and give up 20, 30, 50% of their company, really for just incremental budget to buy inventory and invest in marketing. And then after a while, it started to feel pretty unfair. And so we designed a structure that we thought was much more fair for them and better for us because we didn't need to wait until they sold their business or something to get our investment back. And so that's been working really well. We've funded about 2,500 businesses globally, over a billion dollars and are continuing to accelerate.
Jason Pereira: Excellent. So let's talk first about the other forms of raising capital. And we've already started talking about VCs. We're going to go that and to banks. And we'll dive into how it is you execute. So I often have a lot of startups come to me just by nature of the podcast and early guys who've never done it before. And to them, the concept of VC money is sexy and it's almost like a badge of honor that they capture it. And some of it is getting to realize the reality of it. Yeah, it can be wonderful. It can be rocket fuel to your hockey stick if that's what you have, but realize that you take VC money, you're on a treadmill.
Jason Pereira: And you're basically, as you said just now, three months to raise capital and the hundreds of meetings to get there. And then your only job, once you take that money, is to basically use that money to get to the milestones, to get to the next level of being able to do the next three month cycle of marketing your business yet again. And I'm wondering, so in the past experience, how much of your time would you say, of the entire time you were at some of these companies, was spent as a percentage of your total allocation in just fundraising alone? Because that can be pretty daunting.
Andrew D'Souza: Yeah. If we were fundraising every 12 to 18 months, and it's typically a three month process. And that's if you're efficient and if you've done it before. So it's 20% of your time. Pretty easily, it can be 20% of your time. And if you're in the midst of a fundraise, you're not really doing anything else. You write that quarter off from your own productivity perspective. And so that's hard for a lot of businesses where the founder is pretty instrumental to running the business and continuing to grow it.
Andrew D'Souza: And so I think one of the biggest things is, VCs have done a great job of branding themselves and being able to say there's a correlation between me investing in your company and your company being successful. It's hard to prove whether there's much causation in that, but they're good at picking winners. And they're good at convincing those good companies to take their money.
Andrew D'Souza: I think the one thing I would say for founders is, think about the use of funds. Think about, am I investing in something that is highly uncertain with a very long payback period? If I'm investing in R&D and I've got to get a team of scientists to go into a room for two years and come out with something that could revolutionize my industry, but may never work, that's a pretty good use of venture capital. That's what equity capital is designed for is high variability, a lot of uncertainty in both the upside and in the timing of that upside. And that's where you want an equity partner.
Andrew D'Souza: But if you've de-risked your business, and if you understand your sales and marketing and your inventory turns, or your customer break even points and your churn, equity is a very, very expensive way to fuel that growth. So I think it's really about where are you investing. And there's a place for equity and certain types of investments, but it's not everywhere.
Jason Pereira: Not every business is built for venture capital. I actually had a really good interview with a VC on my other podcast, Financial Planning for Canadian Business Owners that Stephanie Choo of Portage Ventures, where we very much talked-
Andrew D'Souza: Yeah.
Jason Pereira: Yeah, I'm sure you guys definitely crossed paths. And we talked about when is it you should be, and when is it you shouldn't be? And understand what the realities of that are. And I think it's anyone who is interested in raising VC capital should really take a listen to that one. So that's the VC route.
Jason Pereira: Again, the next option is, of course, the banks and that's the traditional method of borrowing. And, as I always say with banks is, people have a misconception that these companies will actually take risks. They are as risk averse as anything that exists out in this world. And even more so since regulatory changes happened post 2008 where their capital ratios have to be very much tilted towards almost riskless assets. The old saying is, if you want an egg from a bank, you better give them the chicken.
Andrew D'Souza: That's right.
Jason Pereira: And so, you want money to help fund your business, you're signing over your own personal welfare or personal assets in order to secure those loans. And it is not easy. It gets harder and harder with every business I talk to about just to secure that kind of lending. So there's been a big boom in alternative lenders in spaces like this. And I'm glad to see people like you are doing that. So let's talk about how you implement your solution. So what is involved from a vendor standpoint? I find I need to raise funding. I'm very early stage. I find Clearbanc. I turn to you. What does that experience look like?
Andrew D'Souza: Yeah. So we try to make it as seamless as possible. It's connect your online accounts. So we just focus on online businesses and that means you find your customers online, you deliver your service online, they pay you online. So we connect your online accounts that you use to find your customers, whether those are ad channels or billing platforms or what have you. For eCommerce companies, it's their eCommerce platform. For B2B companies, it's usually a billing system, the way that you process your payments. And then we connect your online accounting systems and bank accounts. And through all of that data, we get a pretty good picture of the inflows and outflows of capital from your business. And an incremental dollar spent on sales or marketing or inventory, we can tell what that turns into in revenue over what period of time. And that's what our model is attuned to.
Andrew D'Souza: And so we try and say, "Look, within a few minutes you can connect your accounts and we can present you a couple of offers that on which terms we could fund you." And so we try and remove all of the headache and all the hassle of dealing with banks. And like you were saying, banks are not really in the business of taking risks. That's not their business model. They are designed to not lose money. And they're designed to make sure that the security that they take, insures they don't lose money. And so, for most small business owners, that means a personal guarantee. That means you're basically putting a second lien on your house and all of your other assets in case your business fails, because banks are just not set up to understand the viability of a business being successful. And they're not taking the upside of that business being successful either. And so they're really just focused on locking in capital with almost zero risks. And that's how they've been regulated as well.
Jason Pereira: Yeah. It's interesting. I've had people come to me say, "Okay. So if I come to the bank with $250,000, how much will they lend me?" I'm like, "Well, they'll take your money, put it in a GIC and then give you a line of credit for $250,000." And they're like-
Andrew D'Souza: It's exactly,
Jason Pereira: "Why would I do that?" It's like, well, "I go to them with a down payment to buy a house and I get this much lent to me." I'm like, "No. You go to them for the down payment to buy a house. You enter into a partnership to buy an asset worth that much money. And then they take the entire thing as security."
Andrew D'Souza: Exactly.
Jason Pereira: "So you have to understand it's the exact same thing." And what I will say is the trend I've seen lately that's been even getting worse is that there's really multiple levels to entrepreneurs in banking. And there's a small business banking, which is, "Hey, these companies are small. These loans are small. We're not going to spend that much time on them. So here's a checklist. And if you're a business that fits the checklist, fine, we'll lend to you. But if you don't check every box on that list, oh, there's nothing we can do for you."
Jason Pereira: And only when you get to the level of commercial banking where they actually get to loan sizes and business sizes, where you have to have loans in the seven figures or plus to get their attention, do they take the time to understand how your business works. In which case, then it becomes, they may have said no to you when you were a little bit smaller, but they'll say yes to you now.
Jason Pereira: The way I see your business is working in some degree is that you've digitized that entire due diligence process to be able to allow lending that a bank would not do, would only do a commercial basis down to the small business basis. Does that seem like a fair statement or about right?
Andrew D'Souza: Yeah. I think our goal is to provide capital at the very, very earliest stages. Once we have enough data. We want to basically take the bias out of this. And so we're not going to look at you and say, "Okay, well, where did you go to school? And who do you know." We're just like, "What does your business look like? And do you know how to find customers? I'm not going to pass judgment on the product that you offer. If you know how to find your customers and they're willing to pay you and you can run an efficient business, our models will pick that up and we'll continue to fund you."
Andrew D'Souza: And I think one of the other things that we've just started to see is, even at the higher ends, the banks, the way that they mitigate their risks on the large deals is they put in a bunch of covenants. And they basically say, "Look, if anything goes wrong in the world, that may or may not be your fault, or it goes wrong with your business, we are actually going to pull our capital back." And we're starting to see that now, especially in this pandemic. And it's been interesting for us as a business because we're now getting companies that are doing three, four, $500 million in sales. And they would certainly qualify for lower cost capital from a bank, but they've had such bad experiences with their banks during time of crisis, even though their own business is doing well, because they're eCommerce, the banks got spooked, pulled all their credit lines, all their warehouse facilities. And they're like, "Okay, I'm never signing." They now understand the actual capital cost of those terms, which I think it was hard to quantify in the past.
Jason Pereira: Yeah. I think more and more business owners are beginning to understand that their relationship with their bank doesn't go very far once things go badly. When things are great, they're wonderful to you and you have this great relationship. And the second you need them, they're the fairweather friend of all fairweather friends. It's only something I think we're going to see intensify. And again, like I said, I've spoken to a number of people in nontraditional lending spaces, lending to businesses. And far superior experiences, far superior lenses on the business, because they're taking in data. Your comment about, "I'm not going to judge what it is you sell." Because I'm sure you've seen some of the craziest things to make money over the years. I've seen things, I'm just looking at them and saying, "This is a 10 figure business how? I don't understand."
Jason Pereira: And so the proof is in the pudding. And you guys, by nature, yourself and Michelle, you've guys have done this. Like you've seen what it takes to create lead gen and what the conversion cycles look like and the payment cycles. So all that data coming in is stuff that, with a language you were speaking the entire time. So to me, it makes perfect sense that you solved the problem that you had in the past. So, well done in that regard.
Andrew D'Souza: Yeah. And it doesn't end with me and Michelle. Our entire company, everybody you interact with in our company has been a founder of some kind. They've either come from a family business-
Jason Pereira: I only know about the two of you.
Andrew D'Souza: Yeah. But we hire entrepreneurs. So top to bottom, anybody you talk to within the company on the product team, on the engineering team, on the sales team, marketing team, everybody has been an entrepreneur and a founder and has lived and breathed the struggles that our customers or the founders that we back, face every day. And so we have a pretty high level of empathy for what they're going through and a real connection to the mission of the company. And I think, more than anything, I think that probably comes across when customers are interacting with our company, because we exist for them. We exist to help them be more successful in what is a pretty unfair world for founders. And I don't think banks would say the same. [crosstalk 00:14:47]
Jason Pereira: No, they would not. Okay. So I go through this, you guys are taking it, sucked in all my data. You come back. What are you coming back with? What does the offer look like?
Andrew D'Souza: Yeah. So it's a range. It basically depends on your margins and how much revenue share you can support. But could be X percent. It could be, here's $50,000 for 5% of your sales until we get our money back, plus 6%. Or, a hundred thousand dollars for 10% of your sales. But typically, it's an investment upfront. And then it's a rev share percentage until we get our investment back plus a fixed fee.
Jason Pereira: You've done the math. You understand what their bottom line looks like. You know that they can support X percentage coming off the top per month. I'm guessing the size of what they're looking for and the amount of time to get paid back determines the upside you're looking to see on that. And then they're free and clear.
Andrew D'Souza: Exactly.
Jason Pereira: Fantastic. So, in general, you're seeing all kinds of online businesses. Any verticals in particular that seem to focus in or zero in on your needs.
Andrew D'Souza: Yeah. We see a lot of online consumable businesses that are doing really well. Subscription businesses do incredibly well, especially if you've got a product people love and you become part of their daily habits, whether those are food and beverage or staple goods or health and wellness and supplements and nutrition and things like that. I think those businesses do incredibly well. If you can build a longterm relationship with your customer, continue to listen to your customer and introduce new products into that customer base. We love those types of businesses. And then, things that traditionally haven't been eCommerce focused that are really starting to break in and that's apparel and furniture and home goods.
Andrew D'Souza: I think we're starting to see, especially in this environment, that people are learning to buy those things online and are having a pretty great experience. So we're seeing a lot of shift into that side as well. And then on the B2B side, anything software as a service, we help people basically turn monthly recurring revenue into annual recurring revenue, pull those cash flows upfront and continue to reinvest in growth without having to take further equity dilution.
Jason Pereira: From your standpoint, you're accepting the risk and variability of the businesses you're lending money to. Because, if you're taking a slice off the top, that top drops by 15%, COVID hits, whatever it is, there's a cut there. You suffer from that cut as well. Is there anything you're doing to mitigate that risk or is it simply just through diversification?
Andrew D'Souza: Yeah, a lot of it, it comes down to our models. So we build a revenue prediction for all of the companies. And our revenue prediction is probably a little bit more conservative than the founder's, just because founders are by nature optimistic. And I totally get that. But because we have really unlimited downside on these deals, we project out the revenue and we say, "Okay, well what's the range that we think this revenue could materialize in?"
Andrew D'Souza: And then, the other thing is, we really try and help the founders decide how to spend their capital and which channels to spend. So we have a lot of data now. We've got over 10,000 businesses connected. We see what works for what types of businesses at what stage. And so now we're starting to provide those insights back to them, to help them really understand at this stage, what should my media mix be? What should my mix between my revenue and my spend and my inventory? So we're actually doing what we can to help them be more successful in the way that they capitalize and spend their capital.
Andrew D'Souza: And we even price that a bit differently. So when we know that there's a channel that's working, we'll offer a lower cost capital than on something that we don't know, we're not as certain about.
Jason Pereira: Interesting. So you're basically providing them with benchmark data, almost consultancy service at the same time, which is again, another valuable component of this. And then again, I love the fact that you've incentivized the right actions through lower costs of capital. It's the Charlie Munger saying, "If you can work on incentives, work on nothing else."
Jason Pereira: So, you guys are very data-driven clearly. I'm curious, you're looking very clear at the business, so you're not judging the product, all that sort of stuff. Traditionally, the banks have the four CS that they look at, is what they typically look at. How much do you look at the borrowers themselves? How much attention are you paying to who it is is borrowing you beyond just the economics of the business itself?
Andrew D'Souza: Like the business owner?
Jason Pereira: Yeah.
Andrew D'Souza: We think that there's a lot of systemic bias in the way that financing decisions are made, both on the equity and on the debt and banking side. And our goal is to eliminate that bias because I think the more you look at the founder and you say, "Well, does this look like somebody else who's paid me back in the past?" The more you ingrain that systemic bias and that inequality, and you shut out people who don't look like the people that have been successful in the past. And our view is, we want to support and capture the economic opportunity of serving that underserved class of people. Because I think that's where a lot of the creativity comes from and a lot of the untapped opportunity.
Andrew D'Souza: And so our system, we don't look at the founder. We don't pull your personal credit score. We don't look at you face to face. We don't look at where you went to school. We don't look at like your personal track record because people have all kinds of different backgrounds. And inspiration and motivation can be struck at all different times in life and different situations. And so our goal is really just to say, "If you've built a business and if you've got a product that people want and you know how to find those people, I don't care what you look like, and I don't care where you come from." So that's our almost founding hypothesis. And so we'll see how it all plays out. But so far it's working.
Jason Pereira: So for the record, that was something I pitched to you underhand, so you can lob it out of the park. Because just in general, just based on the preliminary conversation and the answers and what I'm seeing here, I totally expected that answer. And again, no matter what you say, there's tons of inherent biases, evidenced by the lack of funding to female founders, evidenced by the fact lack of funding to minority founders, as evidenced by the fact that if you don't have the conventional look or style of success, you're not going to get as much money out of people. And part of it is, it's not necessarily systemic racism or sexism.
Jason Pereira: It's just, we're all biased in some way, shape or form consciously or unconsciously to whatever it is we've experienced in the past. And unfortunately the first thing people judge you on is when they see you, when you walk in, by taking the approach of just through your system of, we're just going to take in the data. And that's the first thing you see. Even if you do have to have a Zoom meeting at the end of this with someone, you've already taken away all the inherent bias of the business before... You're putting them in a position of strength with a strong business as opposed to a position of, I lent to someone who looked like this two weeks ago and it blew up in my face. You got rid of that.
Andrew D'Souza: Yeah. We fund this fantastic business based in San Francisco called Farmgirl Flowers. Everybody knows the brand. It's the bike courier of fresh bouquet of flowers to you. They're fantastic flowers. And the founder was a high school dropout and went to pitch a bunch of investors on the business model. And everybody was, immediately as they looked at her background or whatever, were like, "No, we can't. There's no way we can invest in this company." And it's a fantastic business. It's doing incredibly well. I don't want to disclose their sales, but it would put most venture backed companies, consumer brands to shame.
Jason Pereira: Again, I never judge. Bicycle flowers. I never judge, but I'm often astonished.
Andrew D'Souza: But she was just passed over by the [inaudible 00:21:35]. Has been a great partner, great advocate of ours and we're big supporters of what she does. And it's just those types of business. I wouldn't have guessed either. How big can that business get? But that's why we exist.
Jason Pereira: It's interesting. As someone who's whose day job is financial advising, predominantly, mainly business owners, I hear this story about people getting passed up because they didn't fit whatever profile. I'm sorry, most of the millionaires I know who are self-made, multimillionaires I know that are self-made, did not go to the best schools. The majority of them are immigrants who came here with a high school education at best. And just through sheer... Some of these people, you hear them talk about business, they understand it inside and out and could teach a freaking masterclass on it because they learned it in the school of life.
Jason Pereira: I look at that and I wonder how much of the system self-selects out for just what they think looks high probability of success versus what actually is high probability of success. And I don't have an answer to that. I wonder if there's some sort of study done. It's interesting. It's a very limiting view. Unfortunately.
Andrew D'Souza: It is. And I think, people that control the capital, they come from certain circles. And they've always decided what got funded and what got built. I talk about this with our team, but even if you think back to medieval times, the people with the capital decided which castles got built and which roads got built. And today it's which university projects get funded and which companies get built. And if we can flip that, if we can say no, the people that are taking the risks, people with the ideas, people that are putting their blood, sweat, tears into these businesses, they should get to decide. And capital is really just a commodity. You're coming along for the ride. And so you don't get to call the shots anymore. That's our mission.
Andrew D'Souza: So I get heated on some of this stuff when I think about it, because it just seems so unfair. Maybe for the first time, you can actually use an unbiased data set to help make these decisions. So it feels like an inevitability for there to be an almost upending of the way that capital has been allocated to entrepreneurs and founders. And we're just hoping to pierce that veil and create this flood behind it.
Jason Pereira: I could think that one of the challenges you do face though, has to be just an education piece altogether. Even with other different versions of funding that exist outside the normal ecosystem, people think of the bank, even if they've never, even if they've watched a single episode of Shark Tank, they've at least heard of venture capital. They don't necessarily understand that options like you exist. So how do you get out there? How do you get your message done? What is the typical reaction you get from someone who didn't know things like you existed?
Andrew D'Souza: Yeah. So, a big part of it is, this is why we do podcasts, this is why we do press. We have an outbound and sales team. We have a great partner network, and it's actually interesting. We've got actually some great venture capital investors who... The average VC sees a thousand pitches a year and invests in five companies maybe. And so they see a lot of businesses and they're like, "Look, my capital is not the right fit for you, but we know Clearbanc." So we actually have a network of VC partners and ad agencies and people that send us referrals.
Andrew D'Souza: And so when you're trying to create a new financial instrument, new asset class, there is some heavy lifting and we do have to go tell the world and tell the story. But it's starting to change. And people are realizing that there's different ways of capitalizing the company and there's trade offs. And if you want to maintain ownership and control, then dilution and ownership and control are important things to consider.
Andrew D'Souza: So we're starting to see a generation of founders who are coming at this from a different angle. And then I think when you combine that with, did you really get into your business to raise capital or did you get into your business to build great products and serve your customers, that starts to get very clear for people. So, it's an uphill battle for sure. We're certainly trying to educate people on the options available to them, but we're not the only ones that are doing it. And I think we're already starting to see the tide turn a bit.
Jason Pereira: Yeah. And I'll go back to the comment about, you didn't start a business to raise funding, especially when you have technical founders where so much of success rides upon their attention to the product. I almost feel like it's this problem without a solution to some degree. They're given so much runway, but then they got to raise more money. And of course, if you're the people cutting those checks, you want to talk to the technical founder to understand the capabilities of that person. But then you're simultaneously taking them off the project, which just sets them back further.
Jason Pereira: And it's just this ridiculous yin yang counterintuitive thing that's happening there. And I've talked to several founders who they're just like, "Yeah, so just closed the last round. I'm going on vacation. Then I can work for 12 months. And then I got to start again." It is painful. But for the right kind of business, it is the right solution. And it is what it is.
Jason Pereira: So, this is where you guys are currently. Any thoughts towards how you can expand into other types of lending or other verticals or anything of this sort? Or just maybe other industries?
Andrew D'Souza: Yeah. So there's a couple. So we started in consumer products, direct to consumer brands, online brands. We've expanded into B2B. So we fund a lot of B2B SAS companies and online software companies. And then we're expanding globally. So we're expanding into different countries and different geography. As hard as it is for founders to raise capital in Canada and the US, it's an order of magnitude harder in every other country in the world.
Jason Pereira: Oh, God. In Europe and everywhere. Oh my, yeah. No kidding.
Andrew D'Souza: So that's expanding our market. And then, I think what we look at is, how do you expand to be even more equity like? How do we actually create products that take a longer time duration, higher risk profile, higher upside? And then how do we look more bank like where we say, "We understand the downside security. And we actually understand the stability of the company. We take a lower cost of capital, but mitigate the downside." So those are the initiatives that I'm pushing our finance capital markets and data science teams on. Can we meet the needs of lower risk companies with a lower yield product and higher risk companies with a higher yield product basically, or higher risk investments? And what those look like, they'll probably be pretty novel because we think we can design new financial instruments instead of taking the traditional equity and debt products. So we think we can design better products for today's online businesses.
Jason Pereira: [inaudible 00:27:15] what a different paradigm of business. And frankly, I think that requires different thinking on how we do fund these things. And it makes sense. I can't imagine the data sets you're building from taking in all this information and the risk models and how robust they're becoming. And actually, that's a really good question all together. So in general, the risk models that you built to date, how have they held up? Especially in times like today. Without divulging trade secrets, how happy are you with that?
Andrew D'Souza: Yeah. No, we've been incredibly happy and our capital providers have been incredibly happy. We've seen almost every other, whether it's bank or small business lender, shut down during this time because their models didn't perform. We've been fortunate enough to be almost exclusively funding online businesses. We've had some businesses that are highly correlated with travel and live events. And they've certainly struggled. But the majority of online businesses, I think on average, have seen an increase in demand. And so that certainly works in our favor.
Andrew D'Souza: But then, beyond that, we've been plugged into the data. So you're actually able to understand... And even for the companies that struggled, we actually often knew when they were going to face difficulties before they did. So we came in proactively and said, "Hey, your business is probably going to slow down. We're going to cut your repayment rates for a period of time to help you get through it." And then 70% of those companies have actually emerged. And they've pivoted their business model around serving a different customer base or they've pivoted to making PPE and stuff like that. And they're doing well again. And we provided them that relief. We helped them get ahead of it. And so we're just uniquely positioned to do that.
Andrew D'Souza: We were very worried in March. We were like, "Hey, what's going to happen?" We slowed down a little bit from mid-March to mid-April. We saw the models and the performance continue to be predictive and work. And since then, we've just been accelerating. And so it's been where we feel like we're in a really good spot and our capital providers who have been exposed to other places have basically come to us and said, "How much more can you deploy? Because you're the only place that's still writing checks and the only place that can still deploy our capital." And so it's a good place to be in this environment, for sure.
Jason Pereira: That is the most remarkable thing you've said this entire interview. We got ahead of it. We detected there were problems. We contacted them. We work collaboratively with them to lower their cutback on our take in order to make them more robust, as opposed to doubling down on security, which is the typical traditional model. That frankly, if anyone listening is looking for financing and contemplating using Clearbanc, that sentence, that little blurb alone should be enough to sell you on the fact that this is a partnership and not a vendor experience. This is fantastic. I cannot commend you enough on that attitude in general. You're definitely walking the walk with that one.
Andrew D'Souza: I appreciate it. We want you to win. We understand that there's risk. There's risk in funding, a business there's risk in starting a business, and whatever we can do to make you successful and establish a long term relationship, that's in our best interest. Our goal is not to say, "All right, well, things are getting bad. Let's grab whatever we can and try and get cents on the dollar for whatever and decimate your business." Our goal is, do whatever we can to help you make it out the other side. And even if it hurts our return for a period of time, we'd rather get a long term relationship, a long term customer out of it than try and pick your business apart from scraps.
Jason Pereira: That is such a refreshing thing to hear at this time, when we're hearing all kinds of stuff about the lack of rent relief being granted to tenants and all kinds of other shortsighted things being done by partners and suppliers of capital. This is restoring my faith in humanity a little bit more in a darker period, Andrew. That's a-
Andrew D'Souza: I appreciate it.
Jason Pereira: Remarkable thing. So another question for you. Out of curiosity, so these loans get paid back, how much repeat business are you seeing from the same businesses that borrowed from you previously?
Andrew D'Souza: Typically, we'll fund a company about three times a year. It's still early to know how many years they'll stay with us, but they keep coming back. So even before they've fully paid off, if their business has grown, we'll top them up with even more attractive terms. And our goal is again, to just be part of your budgeting process. We want to say, "Look, I've got this new initiative I want to invest in or this new growth campaign, Clearbanc can fund it and de-risk that investment [inaudible 00:31:11]"
Andrew D'Souza: And so we're starting to embed ourselves into the planning process. There's some companies we fund every month. We're like, "What's your monthly budget? We'll just keep you funded." And that's the way we want to think about it because once we're plugged in, we don't go through an underwriting and negotiating process every time we make a top up or a new investment. It's just like, "Oh yeah, you have a standing offer that's sitting there ready for you." And so that's our goal is to just change the way people think about capitalizing the company. And instead of it being, I'm going to take 18 months worth of capital today at today's prices, just take what you need for the next month, week, whatever. And if you can remove the friction, then it becomes much more efficient.
Jason Pereira: It's refreshing to hear a funder of businesses talk in this manner, especially, you're literally, "We're going to fund you every month because we're getting the data. We can see what's going on. Clearly, you're pulling it off. Here you go." It's like a vote of endorsement on a monthly basis for some of these business owners. So, remarkable, and I think commendable as well. It's amazing that in, especially, Canada, the US wherever else you looked at, so many nations, the lifeblood of any economy is small business. And unfortunately, so many of the capital systems are almost stacked against your... "Congratulations. You want to start a business, you got a remarkable idea. That's fantastic. Here, mortgage your entire house."
Andrew D'Souza: Exactly.
Jason Pereira: It's like we're asking people to take disproportionate risk. They may get disproportionate gain if they pull it off. But wow, what a lopsided offering in some cases. And then you're finding ways to legitimately be a partner. Again, I commend you on that. I can't say enough positive things about that.
Jason Pereira: So, before we wrap up, Andrew, there's three questions I ask everyone on the podcast before we wrap up. The first one is, if you had one wish for something you could change in your business for the industry as a whole, what would it be?
Andrew D'Souza: One wish? I think if every investor had to make a decision without ever looking at the founder and their resume or their face, I think very good things would end up happening. And whether that's venture investor or that's banker, I think it would force everybody to actually look at fundamentals of a business and the operational success that a business has faced and immediately eliminate bias. I'd love to see a version of Shark Tank that looked much more like The Voice. I think that would be awesome.
Jason Pereira: That makes sense. It's interesting. People say things like, "The guy had a hard time looking me in the eyes." Or whatever it is. This could be their own personal anxiety. And I can't remember, I think it was in a Malcolm Gladwell book or where I heard it, but there was the entire story of the New York Philharmonic Orchestra, how they basically were very disproportionate gender wise. And they started having everybody audition behind a screen so that no one could tell if it was a male or a female, what the person looked like. And once they started doing that, the gender balance just immediately changed overnight. The new hires were, it was almost 50/50. It wasn't quite, but it was a massive shift.
Jason Pereira: And, again, not calling out those people who were judging them, sexist. It was just maybe in your mind, there's something that a cellist looks like, and oh, that person does not. And it came up, it was in Moneyball, the most ridiculous thing that I ever heard in baseball recruiting is the good face. He's got a baseball face. That's literally something that recruiters, that scouts actually said. And it's just, you think about how ridiculous that sounds. But subconsciously so many of us succumb to those inherent biases. So I agree with you. What was it that Bill Belichick said? Your record is what speaks for you or something like that. [inaudible 00:34:38] the other day.
Andrew D'Souza: It's exactly right.
Jason Pereira: So, second question I have for you, what's been the biggest challenge in getting Clearbanc to where it is today?
Andrew D'Souza: I think there's been a lot. We're introducing a new financial instrument, a new asset class into a very, very traditional industry and raising capital. We've raised $400 million for this product, which was not easy and it was expensive. It was painful. And just educating Wall Street on there is a different way to allocate capital. And there's a lot of untapped opportunity if you can figure it out and use technology to figure it out. A lot of people pay lip service to that idea. But when it really comes to writing a check against it, it was very, very difficult. So that has been a real challenge for us and proving that we knew how to find a different set of businesses and fund them in a new way and not lose our shirt doing it was... And yeah, we lost a lot of money in the early days and we had to learn a lot of lessons, but that is all part of training up an AI model is, you've got to have negative signals to do that as well.
Jason Pereira: It's interesting because I feel like it's a problem that I'm sure every VC or banker would acknowledge existed. And just someone comes along and says, "I'm going to solve it this way." And it's still compelling to understand that that is possible. So I've got to think hopefully the ones that, if I was in that position hearing this, thinking, "You're right. This does exist." If I'd have the bravery to say, "Yes, okay, we've got to try something to fix it because the opportunity is enormous."
Andrew D'Souza: Exactly. It was a scary time for sure. I'm not going to lie.
Jason Pereira: That's a big, big number to raise, so good on you for doing it. So last question I have for you is, what excites you the most about what it is you're working on and keeps you getting up in the morning every day to fight the good fight?
Andrew D'Souza: It's the founders that we back. I try and get on the phone with multiple founders a week and just talk to them about their business and their plans. You see the opportunity and you see their passion and their vision for what they build. And we can just make their lives a bit easier. And if we can just put our thumb on the scale for them. I honestly think that's how you solve most of the world's problems.
Andrew D'Souza: And whether that's Elon Musk, founders that are solving climate change and space travel, or just people that are building a business for their own community and their own family, they're living the lives of inspiration for the people that they interact with every day and their employees. And they're creating something for themselves and that's how you lift communities out of poverty. That's how you lift families into safety. And so that's what gets me excited is, if you can really democratize access to capital, you can really tip the balance of power in favor of founders, then I think you do a lot of good in the world and inherently solve some of the problems that we're facing as humanity right now.
Jason Pereira: It's interesting. I think there's almost a universal acceptance of the fact that economic empowerment is the way towards a better future. Yet when it comes to the enablement of that economic empowerment, we have still all these traditional obstacles and hurdles. And big believer in everything you just said there. And so thank you. This has been a great conversation. I encourage anyone who's in a situation where Clearbanc can help, to take a good look at them. I think if Andrew's clear mission and purpose didn't come resonating through this podcast, then you weren't paying close enough attention because, if you're looking for a partner, great, this is the place to go. If you're looking for someone to squeeze you, got to the bank.
Andrew D'Souza: No. Appreciate that. No. It's very personal for me and I care a lot about the mission. So thank you for having me.
Jason Pereira: Fantastic. Well, thank you so much for taking the time.
Andrew D'Souza: Thank you.
Jason Pereira: So that was my interview with Andrew D'Souza of Clearbanc. I hope you enjoyed that. And if you are a candidate for his company's products, I hope you take a look because frankly it's a great alternative to conventional lending. As always, this has been Financial Planning for Canadian Business Owners. I'm your host, Jason Pereira. Until next time, take care.
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