Dusseldorf Most start-up financing follows a clear pattern: Investors give money so that young companies can grow faster. In return, the investors get shares that they sell again in good time – preferably at a profit. However, this type of financing is not suitable for every start-up.
There are founders who do not want to sell any shares. And others who are usually not financed at all by traditional investors because they start at the wrong locations, studied at the wrong universities, have a migration background or simply because they are not men.
At least that’s what Michele Romanow and her husband Andrew D’Souza experienced. In order to enable a new type of start-up financing, the two Canadian entrepreneurs founded the fintech Clearco, which will be launched in Germany on June 1st.
The approach of the two founders is based on two elements: Clearco does not require any shares for the financing of start-ups, but a share of the sales. An artificial intelligence calculates how high this is annually. Overall, however, the fees amount to at least six percent of the financing amount.
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And the two investors also take a different approach when selecting the start-ups: They guarantee that the capital decisions are made by artificial intelligence – the gender, origin, education or location of the founders are irrelevant. In Germany alone, Clearco wants to invest 500 million euros in German start-ups specializing in e-commerce or software-as-a-service in the coming years.
“Ma’am, you don’t understand loans”
The idea for a new type of start-up investment came to them after several rejections: “My co-founder Andrew and I spoke to around 100 people on Wall Street – and received 100 rejections, mainly from white men,” says Romanow in an interview with the Handelsblatt. “We didn’t have the traditional background and that made the process of raising capital difficult,” she recalls. Romanov has Ukrainian roots but grew up in Canada. Some investors had rejected her request harshly, she says: “Ma’am, you don’t know anything about loans.”
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At that time, the search for sponsors took up an unnecessarily large amount of time. “We would have preferred to put them directly into the development of the company,” says Romanow. “The world isn’t structured in such a way that good ideas are financed everywhere.” If you don’t know the right people or haven’t studied at Harvard or Stanford, you won’t get any money.
Romanow came up with the idea for Clearco seven years ago after she had founded several start-ups herself and was an investor in the Canadian counterpart to the investor show “Dragons’ Den”. Romanov found the price that start-ups sometimes paid a few hundred thousand dollars by selling shares was quite high, she recalls.
In the meantime, 7,000 start-ups have used Clearco’s so-called “revenue-based financing”. Clearco has invested the equivalent of more than three billion euros – in Canada, the USA, Australia, Great Britain, Ireland and the Netherlands. Since mid-2021, the Japanese technology group Softbank has also been one of the investors, which has invested 215 million dollars in Clearco.
Financing through a revenue share is not entirely new in this country, but has not been widespread to date. Competitors like Re-Cap also have big-name investors like Project A behind them and follow a similar model. And with Purpose Ventures, the investment arm of the Purpose Foundation, which advocates steward-ownership and deliberately invests without voting rights, there is also the possibility of financing through revenue sharing. With Clearco, a new, major player is now entering the German market and is hoping to further establish the form of financing in Europe’s largest economy.
This is how revenue-based growth financing works
With revenue-based growth financing, start-ups assign future revenue shares to investors. In contrast to normal credit financing, however, they do not give any guarantees. When selecting the start-ups, Clearco therefore attaches great importance to generating a significant turnover of at least 10,000 euros per month. In return, startups can use Clearco’s committed capital to run advertising or fund other marketing expenses. This is the typical financing case, explains Romanow.
How is it checked and billed?
The investors get access to the company accounts and use artificial intelligence and data analysis to check the amount of money that can be made available and then also the monthly repayment amounts. This should not only be possible with Clearco, but according to the website also with the competitor Re-Cap within a few days. Investors can basically see how the start-up’s earnings are developing in real time. At Clearco, founders can finance amounts between 100,000 euros and a maximum of 20 million euros.
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What are the advantages?
When it comes to small sums of money, start-ups can raise money relatively quickly and is purely data-based. At Clearco, only the business figures count, regardless of the company headquarters or the origin or gender of the founders. As a result, half of the Canadian fintech’s previous financings worldwide have gone to female founders – significantly more than with classic start-up financing.
And Romanow has another surprising finding: Clearco’s financing is not so heavily concentrated in the usual metropolitan areas, but is also more evenly distributed geographically.
What are the disadvantages?
First, the start-ups have to make themselves completely transparent. Not only do they have to connect their accounts with banks, but also those at Amazon, Shopify, Paypal, Big Commerce, Facebook, Google with the provider. Therefore, the financier sees all sales, earnings, ad spend. The data generated in this way then leads to a payment offer. The aggregated data flows into the calculations, which the founders can then access again.
Second, the founders have to pay back the money fairly quickly, at Clearco, for example, it usually happens within six months. However: If sales grow less quickly, Clearco also has to pay back less.
How much does revenue-based financing cost?
The fee that Clearco charges is six percent if you want to get marketing costs financed. If other costs are involved, the percentage could be higher, according to the fintech.
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