CC053: Andrew D’Souza of Clearbanc // revenue-based financing and the 20-minute term sheet

Andrew D’Souza 0:01
For a lot of founders, and I don’t know if, if successful founders feel this way or not. But in reality, if you’re a successful portfolio company and a venture capital model, you’re basically paying for all the failures, right? You’re paying for all the mistakes that those partners are making. And that’s your cost of capital.

Jay Clouse 0:20
The startup investment landscape is changing. and world class companies are being built outside of Silicon Valley. We find them, talk with them and discuss the upside of investing in them. Welcome to Upside.

Hello, hello. Hello, and welcome to the upside podcast, the first podcast finding upside outside of Silicon Valley.

I’m Jay Clouse, and I’m accompanied by my co host, Mr. Coffee delivery himself. Eric Hornung.

Eric Hornung 0:59
Every Thursday morning during quarantine Jay, we get coffee delivered from Red tree coffee and art which is right down the road from us here in Cincinnati in Oakley. Man, I love going to this place getting a bagel or getting a breakfast burrito. Nice little cup of joe have my laptop open just cranking out some work. Can’t do that during quarantine. So we got to support them a different way. They do drive bys and they just drop off coffee on Thursday mornings. It’s fantastic.

Jay Clouse 1:28
That was the closest pronunciation to bagel to what people normally say that I’ve ever heard you say usually you’re a bagel guy.

Eric Hornung 1:36
I know I am. I am. I got made fun of it last weekend. I got. I just get made fun of it a lot. And it’s not on purpose. And I’m not you know, I would love to say it normally. It’s just not how my brain processes a round, delicious breakfast treat.

Jay Clouse 1:53
That’s also sounds like a donut.

Eric Hornung 1:55
Sounds like a donut. Maybe Maybe I should rephrase that. A chewy, crunchy, seasoned bready breakfast. It’s bready. Yeah, bagels are bready, I guess. Yeah. By definition is breakfast experience. It’s an experience, J that’s how I feel about bagels.

Jay Clouse 2:10
Has it always been bagel for you? Or is that a New York thing?

Eric Hornung 2:14
No. It’s always been bagel. I actually don’t think people in New York say it that way. I got it from my dad. He also says milk and I I say milk. He says milk. He says bagel. You know, I picked up one left the other. So you win some you lose some.

Jay Clouse 2:29
I like that you’re supporting small with red tree coffee. Mallory and I just went through a makeshift curbside pickup at watershed distillery is very well done. spent a lot of money on a lot of different kinds of types of spirits. But in the name of supporting small and not in the name of bad habits.

Eric Hornung 2:39
Yeah, well, I mean, their revenues are all just getting hit so hard right now. And I think wherever you can support a small business that doesn’t have the infrastructure or the financial capital to kind of make up for those losses. revenues. It’s definitely worth it, especially if it’s somewhere that you know you really like and you want to see exist into the future.

Jay Clouse 3:07
Speaking of supporting businesses, today we are speaking with Andrew D’Souza, the co founder and CEO at Clearbanc. Clearbanc offers startups an alternative to venture capital in the form of non dilutive revenue share agreements, they coupled data with machine learning technology, and then make quick decisions about potential investments with the goal of backing 2000 companies by 2020. Through its latest campaign, the 20 minute term sheet, Clearbanc invests between 10,000 and 10 million dollars into e-commerce upstarts with positive adspend and positive unit economics. They charge 6% on their capital, they collect a portion of the company’s revenue until they’re paid back 106% on that original investment.

Eric Hornung 3:48
On April 4 2019. Jay, I sent over a article to you from TechCrunch saying that Clearbanc plans to disrupt Venture Capital with a 20 minute term sheet and said I want these people. This is on my new upside wish list. And here we are. Over a year later, we finally got them.

Jay Clouse 4:10
Finally got them. Andrew’s co founder, Michelle is a Canadian tech entrepreneur and one of the members of the Dragon’s Den, which is Canada’s equivalent of shark tank. So a pretty high powered team that understands marketing and getting the word out. And also a very unique model here, Eric, we’d like to explore some of the fringes of alternative finance. And this fits strongly within that.

Eric Hornung 4:35
So if you enjoy this interview of us exploring those fringes, you can tweet at us @upsideFM or if you have something a little longer, send us an email at hello@upside.fm. And we’ll get to that interview right after this.

Jay Clouse 4:50
Eric, how many people have you assisted in hiring?

Eric Hornung 4:53
I used to do some interviews back in the day hiring for a business fraternity. And now I do some interviews, hiring For my full time job, so I’d say I probably had a part in hiring or bringing on at least 100 people.

Jay Clouse 5:07
How many of those people did you do the work of actually finding to bring into interview

Eric Hornung 5:11
it’s way too much work, Jay, I don’t I don’t do that. That’s too much.

Jay Clouse 5:15
It’s a lot of work to find high quality talent to come in and interview. In our friends at integrity power search help you do just that they are the number one full stack high growth startup recruiting firm between the coasts. they partner with venture capitalists, private equity groups, and CEOs to build amazing teams for the world’s most disrupting companies. Eric since 2012, integrity power search has executed over 600 searches, and they’re on track to do more than 200 in 2019 alone, that means high quality candidates in front of you that you can interview without having to source them yourself.

Eric Hornung 5:45
600 sounds like way more than a 100

Jay Clouse 5:47
way more than a 100 and think about all the hours saved, not finding those candidates yourself. So if you guys are interested in working with integrity power search, you can go to upside.fm/integrity to learn more about that their team and how they can help you with your hiring.

This episode is sponsored by RIMS. RIMS is a global organization dedicated to the profession of risk management. For nearly 60 years RIMS has delivered the latest strategies and resources that allow risk professionals to grow innovate and succeed in any business. RIMS works with industry leaders to produce content and online training that business professionals turn to. Topics include business continuity, cyber risk, risk management techniques, the fundamentals of insurance, and more. There is also a private members only site where people can discuss sensitive issues and get honest answers. In that members only site members have been leaning on each other as we all navigate the global pandemic. If you’re concerned about the safety of your employees and the sustainability of your organization, you need the resources and connections that RIMS provides. Learn more at go.rims.org/upside. That’s a go.rims.org/upside, and you can save 25% off a year long membership.

Andrew, welcome to the show.

Andrew D’Souza 7:11
Thank you. Excited to be here. Thanks for having me.

Eric Hornung 7:13
So on upside, we usually like to start with the background of the guests. But you have such a very wide ranging background and we want to dive into Clearbanc. Uhm, so can you to take us on a rocket ship on to how you got to Clearbanc.

Andrew D’Souza 7:26
Yeah, yeah, no, absolutely. Super quick version, my background. I studied engineering, worked in management consulting for a couple years and then moved out to Silicon Valley, and over the last 10 years have built a few different tech companies, between Toronto where I’m based now and San Francisco, my job in in all those companies was to lead the sales marketing efforts, and at least half of my time was also to lead the fundraising efforts. So we spent a lot of time on planes, spend a lot of time you know, in fancy offices of VCs pitching the business. And you know, saw the I think, recognize a few things. One was just how sort of opaque that fundraising process is, if you didn’t go to the right school, you didn’t have a rich uncle, it was connected to somebody, if you didn’t have the right introduction to the right investor, it was hard to get your foot in the door, especially if you’re not if your company, it’s not based in Silicon Valley, or, you know, you know, it doesn’t run in those circles. And then once you do, it takes a lot of time. So I was the person getting on the planes, because, you know, the founders that had hired me on the company, so that they could actually run the business and build the products. And so, but most companies, you know, you can’t afford the founder can afford that kind of time to jump on a plane and spend three to six months away from their business to go raise capital. And then the cost, you know, both from a control perspective and a financial cost perspective, you know, you give up equity in your company, to to run, you know, sales and marketing and things that you can never really get that and so there’s a real cost to it, and then you’re managing investors and boards and all of that stuff. So, you know, as, as Michelle and I were starting to think about what to build next? And how to help entrepreneurs was like, do you want to build a new type of you want to build a new VC firm, if we want to help more founders who were starting to invest together and, and things and ultimately realized that, you know, there’s probably a better way to capitalize companies, you know, especially once they’ve sort of found product market fit, you know, it’s one thing when, when companies are, are in their early stages, you’re looking for real partner, you’re investing in R&D and product development. And then you’re really looking for a partner and an equity partner. That’s, that’s there for the long term. There’s a lot of, you know, unknowns. But once you’re like $1 is equals $3 over 12 months, you’ve kind of de-risked it, it’s, it’s painful to give up a big chunk of your company to be able to do that, you know, consistently,

Jay Clouse 9:39
Man, this is queued up so well to keep going down the Clearbanc path, but I have to ask one question, which

Andrew D’Souza 9:43
Yeah, please.

Jay Clouse 9:44
You went to Nanyang technical, Technological University and the University of Waterloo both for engineering it looks like in the companies that you started you led sales and marketing.

Andrew D’Souza 9:57
Yeah, yeah, it was an interesting, interesting journey for sure. So I studied systems engineering, which was, it was kind of a fancy word for the engineers, they didn’t know which type of engineer they wanted to build, wanted to be. And so I spent, I spent some time in manufacturing, spent some time in software development, you know, even, like, worked in capital markets and financial, a couple of financial institutions, and then ended up in medical consulting, which is sort of an extension of, I don’t know exactly what I want to do. And so I loved I always loved the way that things fit together. And I think that was the that was the fun part about about systems engineering is, you know, there’s a mechanical system that’s tied to an energy system and electrical system is tied to a software system. And, and, and it all fits together in a nice way. And I think, for me, that translated reasonably well to thinking through go to market structures, right, and organizational structures around that. And so even now, you know, our VP, our VP of Sales probably gets irritated, but I’ll jump in and be like, Hey, we thought about structuring the team in this way and setting the you know, set of structures to be able to so you know, it’s just like, how to people how to how to complex systems fit together to achieve an objective, right? It’s a lot about optimization. It’s a lot, you know, I’ve found that I’ve actually really enjoyed the sort of human psychology part around organizational design, which is really important in sales marketing, which I didn’t, I didn’t think I was going to enjoy coming out of engineering school. But you know, a lot of it, it’s just, there’s complicated systems in the world. How do they how do you how do you represent them in a simpler model? And then how do they all fit together to achieve what you’re trying to, uh whether that’s in sales, whether that’s in product development, whether that’s in software, there’s a lot of analogies there.

Eric Hornung 11:31
When you think about those kind of psychological hurdles. You mentioned that, okay, this company is coming to you they have $1 in equals $3 out, that’s maybe a traditional series, a style raise. Psychologically, it’s a lot. It feels a lot better to say, Oh, yeah, we raised an A from Sequoia. What pushback Have you seen from that aspect?

Andrew D’Souza 11:50
Yeah, I think a lot of it has to do with with the signal, right? And a lot of it actually to be honest, if you go even before the signal. A lot of it is psychological. Right? When you’re a founder when You’re running a business doesn’t matter how objectively successful that business is, it’s pretty scary. It’s a pretty lonely process. And you don’t know if you’re doing well, right? You have no idea like, how am I doing versus my peers? How am I doing versus where I should be at this stage? Have I created anything of value with my blood, sweat and tears over the last X number of years. It’s a it’s a pretty lonely and pretty scary place. And there’s no real easy way for you to sort of benchmark and understand where you where you fit in that world. Literally just being able to have somebody that has seen thousands of companies and said, Nope, you’re doing really well, you know, that is coming, I think, for a lot of founders is okay, like, I’ve got some some validation that what I’ve put into this is valuable, and I should continue to do it, and I’m making good decisions. So I think there’s like a first step that is just some, you know, third party validation, that is like, Hey, you know, I’m not completely out to lunch. I’m not crazy. This has actually been worth my time and effort. And very storied VC firms can offer that in states. I think beyond that, there’s the signal of, Hey, we, you know, the the counter point, or the other side of that, that is they provide a signal to the press, to employees, to future investors, to customers, sometimes depending on your type of business and who you’re selling into, to your mom and dad, right? It’s literally like, you know, who, hey, you know, these people who select the 1% of the 1% of the 1% of companies that they see, have chosen to annoy me in the company. And that’s really what they charge for, right? They’re not charging for their capital, they’re charging for the signal. And that’s why their cost of capital is so high. You know, I had a really good conversation that somebody recently about, in every other part of the world, raising, you know, if you have to give up part of your company, in order to, you know, make payroll or pay your expenses, it means that your company wasn’t stable or valuable enough to get debt or like a fixed like a just a, you know, or a fixed income sort of product. And we’ve sort of reversed that, you know, particularly in technology and in, in sort of Silicon Valley centric world where if you’re if you raise equity, it’s seen as a positive sign. And if you raise debt, it’s seen as negative, when in reality, it means that your company’s probably more stable if you’re raising sort of a more secure instrument to fund your company. And so it’s kind of an interesting paradigm that we’ve, we’ve created around and it really comes down to this the quality of those signals.

Eric Hornung 14:21
What do you think created that paradigm?

Andrew D’Souza 14:24
You know, I think it is, I think there’s, there’s there’s been a ton of great, you know, marketing and thought leadership, there’s a lot of very smart people that are that are venture capitalists, you know, they’ve done a great job of sort of equating their personal brand with the value proposition of venture capital with sort of the. Yeah, with sort of the value proposition of venture capital and their firm their firm’s value and and the brand. And then I think there’s a little bit of a self fulfilling prophecy, right, because you create signal those companies end up doing well. Was it really the value that the company? Like? Wasn’t the value that the VC brought? Or was it the signal that the VC brought? Or was it the you know, like, are they just coming along for the ride? Are they good at selecting and those companies would have been successful, regardless of the VC or not, but but they’ve been able to align themselves in a way that bestows some of those benefits, you know, both to the firm and to the company. And, yeah, I think I think it’s, it’s been, it’s hard to disentangle sort of, are they really, are they really adding value and increasing the odds of success? Are they just really good stock pickers? You know, the correlation causation is almost it’s almost impossible to run that run that analysis subjectively at this point.

Jay Clouse 15:39
You and Michelle are both based in Canada, correct?

Andrew D’Souza 15:42
We are, yes.

Jay Clouse 15:43
What types of opportunities or challenges has that brought when we’re talking right now about a lot of American investors? Does it feel like you guys are in the same arena with some these investors we’re talking about or do you have to kind of cross some sort of psychological or geographical bridge to play in that arena.

Andrew D’Souza 16:03
I think it’s kind of nice to be outside of the bubble in the echo chamber, to be honest. I mean, I’ve spent a lot of my time in Silicon Valley, a lot of the investors in Clearbanc are Silicon Valley investors. So we have a lot of great partners. And we know a lot of people in the ecosystem. But it’s kind of nice to be a little bit removed, for a few reasons, right? We actually we started the company went through Y Combinator, started in San Francisco and then moved back after a while a big part of that was talent. You know, Michelle is on the Canadian version of shark tank. And so we were you’ve got a great sort of brand reputation. I’ve built a couple companies here. So we’ve got we’ve got a good network and and people want to work here. And so I don’t think we could have amassed the caliber of talent and the de-dedication of the people. If we were sort of fighting with the Google’s and the Facebook’s, and folks, you know, in Silicon Valley, day to day from from a talent perspective, and then I think we’re building a global company and Toronto is probably one of maybe the most global city in the world. You know, while we are focused on, you know, the US and Canada. You know, we also operate in the UK and number of other in a number of places globally. So we’re building a global company, we fund we fund businesses around the world, and we’re continuing to expand that international footprint. And I think us not, we realize what it’s like to not be in a major city or a or a major sort of capital center. And we know what that’s like, you know, a lot of our customers, the companies we fund aren’t part of those circles, so they can’t get those meetings and things like that. And we understand what that means. And that’s, that’s the value proposition that we built.

Eric Hornung 17:02
We kind of talked a little bit about and maybe in broad strokes, what Clearbanc does, what the value prop is, we haven’t really dove down into specifically what Clearbanc is and what it does. So can maybe for the listeners who aren’t familiar with Clearbanc, take a step back and explain it.

Andrew D’Souza 17:49
Yeah, yeah. So we we’ve created a financial instrument that is, you know, not equity and not debt. It’s basically a revenue share agreement. And the structure is, you know, maybe the way that it works for customers is plug in your data, we look at your online systems, how your business runs, how you get your customers, how those customers pay you, and we build a revenue prediction for your company. And then we are able to fund provide you funds today in exchange for a portion of future revenue at a cap. So, you know, the cap is usually about 6%. So we’ll say we’ll give you $100,000 today to spend on growth, we’ll take 5% of sales, till we get 106 back, however long that takes and what that allows us to do, particularly in very volatile times, is we ride that revenue curve, right. So if you have a good day, we take that same 5% through bad day, we take that same 5% but obviously the dollar the actual dollar figure is much lower. It provides a ton of flexibility to the entrepreneur, you know you don’t have if you need the capital, great, we can fund you. If you need capital every month we can continue to fund you every month. But as soon as you paid us, you know that revenue share after the cap. You don’t you know, we can part ways you can go on to other things and it’s it’s been particularly helpful, I think when we talk to the founders in the back now, they’re either thinking about raising capital, and they want to be able to, you know, accelerate their growth and their numbers as they go into the capital raising process, they might have wanted to raise capital in Q2 of 2020 and realize that, you know, maybe this is not the ideal time to go out the market. And so we can help them extend the runway, without them taking bad terms or more equity dilution during that period of time. And so, so that, you know, there’s a bunch of benefits that we want to be part of sort of the capital structure, particularly once you’ve found product market fit and understand unit economics. If you make more than six cents on every dollar that you spend on growth and customer acquisition, then we can continue to keep you funded and it’s a it’s a, it’s a good decision.

Jay Clouse 19:44
Can you give us a picture of what the typical Clearbanc customer looks like?

Andrew D’Souza 19:50
Yeah, it’s a it’s quite a wide range, you know, we fund anywhere from as low as $5,000 to 10 million. So on the small end, Our smallest customers are making 5-10 thousand dollars a month largest customers are doing over 100 million in sales. To date. It’s yes, we’ve got we’ve funded about 2,200 companies so far the majority of them have been consumer ecommerce consumer companies. So they’re selling a product online, they’re advertising online, they sell they sell to their customers online. Increasingly, we’re seeing you know, apps and digital products that are selling you to transactional based or subscription based, starting in the beginning of this year and, and accelerating now. A lot of B2B, B2B SaaS companies as well. But basically you’re selling you find your customers find you online, you sell your product online, you’re doing anywhere from 100,000 to 100 million in sales, and, and you fit our fit our window.

Jay Clouse 20:44
Let’s say you provide funding to a startup company, eight months from now 12 months from now they go out to raise institutional investment. Is that signal? How is that signal perceived by investors after Clearbanc has invested money into that company?

Andrew D’Souza 20:58
Yeah, you know, and it’s changed even over the last year. So I think originally it was seen as you know, the same, like, people have ventured dead and they have other sort of sources of capital and people like, Okay, well, this is just some other thing. Now, because because of the models that we’ve used, and because of the success, we’ve had a number of companies that have come through, you know, they’ve worked with Clearbanc, they’ve gone on and raised, you know, a sizable series A or an equity investment, and then we continue to keep the funding. And so now we’re getting VCs coming to us saying, hey, what are your thoughts on this company? And and so like, they’re actually they’re actually asking for what, how much capital would you give this? Or if I write this, this, you know, $3 million check, could you provide them another two, two and a half million dollars on top of that, to fund their, on their growth? And so we’re actually starting to factor into people’s investment thesis is they’re like, Look, I want my good really good investors want their capital used for R&D, product development, like equity type risk, right? But they don’t want their capital being poured into repeatable sales marketing and growth. And so If if they can write the same size check, but actually get more bang for the buck, we come in to that round alongside them or continue to fund that company, then they’re actually pretty excited about it. So it’s certainly changing. And our goal is, we actually want to supplant some of that signal based on what we can provide these companies.

Jay Clouse 22:17
The interesting thing about your company is, you know, you mentioned you went through Y Combinator, you have these these models and the software that you built. You’re both a SAS FinTech company, as well as a capital partner in in the investment space. We often talk about startups and investors. How do you guys think about your own identity? And how like, what is Clearbanc to you? Are you a capital partner? Are you a FinTech SAS platform?

Andrew D’Souza 22:41
Yeah, no, it’s uh, you know, we go we go through this often, our strength is really in technology and data science, right. Our strength is not in in, you know, capital markets and, and financial engineering. So our market hypothesis when we built Clearbanc was, there’s a lot of great data about these companies. It’s not being used effectively to make good funding decisions. And so instead what people are doing is saying, you know, I’m going to look you in the eye, and I’m going to see if you match if you look like Mark Zuckerberg, and then I’m going to invest, right? Like, like people are using, you know, pattern matching and intuition rather than actual fundamental data about these businesses to make these decisions. And so that was our market hypothesis was that we could unlock better data to make make decisions. And then the second was that there was a better financial structure than venture capital or equity to fund at least part of the spent, right. I think as long as you’re investing in r&d, and you’re investing in product development, equity, it is like equity, equity, like risk, but when you’re investing in sales and marketing, there should be a better financial instrument. If there was a bank or fund or investor that had that financial instrument, we would just say, Alright, we’re just going to send them to you, right? We’re going to send our customers to you, but there hasn’t really been and so that was the reason why we had to go create our own, because people didn’t believe us when we started, right. People didn’t believe that you could actually structure a deal like this and not completely lose money because, you know, the failure rate of a lot of startups was was pretty high. And so now we’re starting to prove that you can, you know, with the right set of data and the right engine to find those customers, you know, we can actually add a ton of value and make very good decisions, funding decisions. But when we got started, we had to create our own financial, you know, our own funds and our financial instrument to be able to prove that out.

Jay Clouse 24:22
How often is your revenue prediction? for a company that comes in to get an investment? How often is that in line with the founders predictions of their own revenue?

Andrew D’Souza 24:32
It’s interesting. I mean, there’s, there’s certainly some where, you know, I look at, I’m a founder, and I’m an optimistic founder, right. So I think founders are always thinking about everything that could go well, and their prediction is, is generally the best, you know, the most rosy picture of where the market could head, we’re certainly going to be more balanced with, you know, with the founders in those cases, and so yeah, so so we’re typically like a little bit more conservative than the founder. That said, oftentimes the founders will actually look to us and they’ll say, look, I, you know, I’m not actually 100% sure, what I should be planning for in the next, you know, six months or 12 months. And you know, what are you guys thinking? What are you seeing? What are you seeing in my market? And, and and how am I doing versus and it’s it goes back to that sort of signaling? How do I benchmark versus other people in my industry? How should I be planning my year? So we’re starting to develop a plan. We’re also we’re just starting to test this, actually, I don’t even know they stuck with us on the podcast. But But anyway, I’ll tell you guys, and we’ll figure out if we want to include it. But we’re starting to actually incorporate their predictions in our prediction, right? So starting to actually look at like, Okay, well, what are the founders that are really good, and which are the ones that are actually very, very good at predicting? And can we actually use that as a as another data source, so that if you’re very good at predicting your, your revenue, you know, we give you credit for that. And if you’re always overly optimistic, then maybe we discount your projections a little bit more. So we’re starting to we’re starting to think through that that a little bit, a little bit more. And that becomes a really interesting data data source.

Eric Hornung 25:59
When you’re looking at data in general, and it’s coming from a founder, this is your first interaction with them. How do you validate the data and whether it’s good? And are you looking at cross section? Are you looking at historical time series? What are you looking at? Because in in finance usually look at like an audited financial statement, and you can dive into these numbers. But do these companies even have that when there’s the small like, Yeah, what is the baseline for for these assumptions?

Andrew D’Souza 26:26
Yeah, so so we typically will look at system of record data. So we will look at payment processing transactions, we’ll look at your ad accounts. So if your consumer app or your billing accounts if you’re in b2b, and then we’ll look at your bank accounts. So we’ll actually you don’t need to have audited financials, we look at the actual systems that you use to run your business. And that’s the data that those are the inputs that we use to to make our decisions.

Eric Hornung 26:49
And what about like the downside for a founder, so you’re taking a percentage out of revenue? And if revenue isn’t the rosy picture, it isn’t the base case, but it’s significantly below what does that look like,

Andrew D’Souza 27:00
yeah, so and we typically try and do this, we try and make sure that our percentage of revenue is small enough that it doesn’t impact your like, it’s not, you know, it’s not more than your gross margin, for example, it’s, you know, it’s significantly less than your gross margin in your company or your contribution margin after sales and marketing. You know, and that way, it’s actually it’s a much better product than a traditional debt instrument, which you’re making fixed payments, regardless of whether your revenue is up or down. So our percentage, you know, our percentage is flat, but the, you know, if one month you make $100,000, and we take 5%, and we’re taking 5000 if the next month you make $10,000, then we’re only taking you know $500 in that in that case, right? So so our payments fluctuate with the revenue of the company and as long as that percentage is low enough, you know, then we’re not then it then the payments become very small. In the downside case, which we’re seeing happening in certain certainly some of our companies is you know, we thought we were going to be getting what we thought the revenue is gonna gonna do well, Covid hit and the revenues are significantly lower than any of us had predicted. And we’re just writing out that storm with them getting small payments, you know, each day or month but, but significantly less than we were two months ago.

Eric Hornung 28:10
So these payments come through on a daily basis, this isn’t paid in arrears.

Andrew D’Souza 28:14
Yeah, this is it’s just plugged right into their, into their processing. So some percentage of their sales.

Eric Hornung 28:20
Sorry, that was a little nitty gritty pull out for a second. And so when we think about the traditional venture capital model, it’s kind of your 3, 3, 3, and then one model where you got three losers, three kind of one x, three, hopefully, to two to five x and then one that’s either a home run or zero, and that’s gonna make your fund what is the like, equivalent scene for Clearbanc’s model?

Andrew D’Souza 28:46
Yeah, so I think this is, look for a lot of founders and I don’t know if successful founders feel this way or not, but in reality, if you’re a successful portfolio company in a venture capital model You’re basically paying for all the failures, right? You’re paying for all the mistakes that those partners are making. And that’s your cost of capital. So a VC firm could make 1000 X on their investment in you. And that gives them license to make a bunch of other mistakes. And so, so I think, you know, we’re not set up that way, right? Like the most, the biggest multiple we ever make is 1.06 of the capital we’ve given you. Right? You know, so we’re fully capped in terms of that, which means that structurally, we need all of our companies to succeed, right? We can’t like we’re not taking flyers on companies, because, you know, they might be they might produce a 10 x, we need to get the right companies the right amount of capital to make sure that, that that money comes back. And so it’s a very different sort of, it’s a different paradigm that we have, but we’re very much like, you’re never part of the portfolio where we’ve given up on you. It’s like hey you know, like, we need all every company to make this make it through this for our model to work. And we need to we have a pretty thin margin. error, right, which is why we have to get the data has to be right. And we have to make sure that we’re making really good decisions around it. So, yeah, it’s, you know, there’s no way that we make a 10 x on capital invested, or even a two x, right? Like, it’s 6%. Really. And so it needs to be. It’s just a different paradigm for sure.

Jay Clouse 30:17
How’d you land on 6%? Why not? 10%? Why not 15%?

Andrew D’Souza 30:21
Yeah, we looked at a bunch of different models. One of the big things for us is we actually, it depends on how you spend the money. And so we it ranges typically between six and 12%, depending on how you’re spending the money. And so when you’re spending on marketing spend, or like things that generate revenue, we know that $1 spent is generating revenue that day, or kind of in an immediate future. If you’re spending on longer term things like you know, inventory or payroll and things like that, that’s less highly correlated or less directly correlated with immediate revenue, which means that the time to revenue will be longer, which means that the cost of capital is bit higher. And so that’s sort of how we’ve, how we’ve how we’ve navigated it. But again, you know, we basically tried to go as low as we possibly could to still operate the business. That’s effectively the goal.

Jay Clouse 31:07
Would you guys rather take on a bunch of companies that are more mature require more capital that seem de risked, or even more companies who are lower end of the risk spectrum? Smaller dollar amounts, given that the payoff is just about the same? In any case,

Andrew D’Souza 31:24
we’re equipped to do both. I think the difference is if you think about the way that whether it’s venture capital or banks or other sources of capital, they have a pretty manual process. They have a bunch of people and underwriters and analysts and folks looking at every deal, and that is, that doesn’t work at lower dollar figures. And so there’s a whole segment of the market that is just generally cut out, or companies that just don’t need that much capital, right. So there might be large companies, they only need, you know, half a million or less, you know, $20,000 at a time and they don’t want to go through the process of raising, you know, the amount of capital that is required. for, you know, the work that goes in. So we have, I think we have a, we have a real advantage at the smaller end of the market for sure. On the flip side, founders of, you know, multi million dollar companies don’t have a ton of time. And so it’s interesting, because while they may have more options, all of those options are pretty time intensive for the founder for the finance team. And so, we also, I think, that’s the value proposition to larger companies is, look, I mean, connect some accounts, and we can make Apple available to you without you having to, you know, nobody’s getting on a plane but like, you know, without you having to get out of bed like really, and and put your have your you or your finance team jump through a bunch of hoops to get access to it. And so, so I think the value proposition changes depending on the size company, but, boy, yeah, we’re trying to try to be fair and reasonable, you know, all up and down the spectrum.

Eric Hornung 32:55
I’m curious. So we’re sitting here in mid April, and we’re recording this In the COVID crisis and your data set, I’m guessing across your portfolio, you’ve already mentioned revenues are down for a number of businesses, there’s been a lot of quotes that small business revenues down 30 to 70%. How do you think about that coming out of COVID? And what it does to your model?

Andrew D’Souza 33:18
Yeah, so we’re, you know, we’re in the fortunate world where all of our companies are online businesses. So you know, we’ve got some companies that have been really focused on or a lot of their revenues tied to events or to travel. And so those those companies have been materially down. But the vast majority of our companies are continuing to operate, and many of them are seeing an increase in demand as well. And so the way that I think about this is like, this sort of COVID shelter in place, self isolation world, as train people to buy online and introduce a lot of people to new brands, and they may not go back to retail, coming out of COVID. And so what we’re trying to figure out is for the company that we’re seeing increased demand for is that sustained demand? You know, is that going to be a structural change in the market where there’s an acceleration to e-commerce in this segment? Or is that, you know, COVID related demand that will likely fall back down afterwards. That’s what we’re really trying to tease out is what is the demand look like? And I think from for most categories, we’re actually going to see a structural shift, especially for like things like food and consumables, even fitness, you’re going to see people that realize that maybe it’s actually better to buy to buy the home gym or the subscription to the fitness app than my gym subscription. I think that’s that’s what we’re trying to tease out. But I actually think that for online businesses and e commerce, we’re likely to see probably sustained demand, which which is going to be quite different than I think we’ll see. and in the broader sort of small business and brick and mortar market, which there’s a lot of uncertainty around what it looks like post COVID

Eric Hornung 34:54
Do you ever have regrets when you see a company come through and you get The 6% return and they do like a 500 x?

Andrew D’Souza 35:04
Oh, for sure, for sure. Right. I look, I think at the end of the day, like, we think about our mission, and it’s like, hey, how do we help? How do we help the founders win? How do we help them own more of the company through this this period? We’re certainly thinking about, like, Are there ways for us to, to, like if they if they did want to rate we, and we’ve certainly had people who have been like, Hey, you know, we’d also love to raise equity. And so we’ll be there introduce them to venture to VC partners and folks, but to the extent that our companies want us to continue to work with them and participate, now we’re trying to figure out if there’s a if there’s a good, you know, long term relationship that we can continue to maintain with our companies. But, you know, those are all like, interesting future opportunities right now. It’s just like, hey, let’s just stay focused. Like I love it when when people are incredibly successful in our platform, because, frankly, like, they were going to be successful, you know, these companies, they figured out their model, they built a product that their customers liked we’re willing to pay for and we’re able to find those customers efficiently. All we did was help them accelerate their their existing business plan. Like, we didn’t take the level of risk. That was like true equity risk, right? We didn’t help them develop the product. So at the end of the day, I mean, I think that’s really the, what I’m hopeful for is like, because we exist, everybody else in the market has to be able to look better, right? You know, if you, I talked about this to my team, but if you didn’t even like 500 years ago, the people who just had the money decided what got built, right, which castles and roads got built, which universities got funded, which research projects get funded, which companies got built. And now we can actually shift that balance of power a little bit, we can come in and say no, you know, what, the people that have the products that customers want, and know how to find those customers, they decide what gets built, and we’re just there to help them accelerate that plan. And it means that everybody else in the ecosystem has to respond. Because previously, they didn’t have you know, the cards were in someone else’s head. And so I think that’s, you know, if you think about the broader mission and is really about sort of leveling the playing field And shifting that balance of power in favor of the founders.

Jay Clouse 37:03
Last question from me, I saw a quote from you in a TechCrunch article saying that you have no doubt you’ll raise billions and billions for funds in the coming years and you think you can be even bigger than SoftBank. Crystal ball a little bit for me here and talk about the future of capital investing. If Clearbanc continues on this path.

Andrew D’Souza 37:22
Yeah, yeah. So that SoftBank, you know, I didn’t think it was gonna happen that fast, but it’s actually that SoftBank that SoftBank quote had been had been circulated a bit. It looks actually more within reach than then it might have a year ago. But no, in reality, I think, I think what’s going to become really interesting is we’re going to get much more granular around the stage of company, the risk profile and the use of funds. The idea that where your company is, how de-risk it is, and how do you risk your spend, you know, and where you’re actually investing is, should be tied to capital structure, public companies with you know, sophisticated capital markets and finance And Treasury Department’s have gotten pretty good at that at matching their sources and uses of funds so that they’re investing on the same time horizon as they’re expecting the payouts to be, but there’s no reason now in today’s world that that can’t happen, you know, even for a company that’s doing five or $10,000 a month in sales, because what’s traditionally been is like, Okay, I’m gonna raise 18 to 24 months of capital, increasingly, people are saying 24 to 36 months of capital at today’s price, right? For whatever uses I might need over those 24, 36 months, I think that model is is broken, right and, and is pretty unfair to the founder in today’s world. And so if we can, if we can break it down and say, Actually, I need to, I need to hire three engineers to build this product. This is how much it costs. And this is how much I’m willing to pay for that capital and I need to spend X dollars on ads in the next quarter. And I need to spend this much and like actually getting much more dynamic around your uses of funds and the risk associated that use is going to lead to a much more interesting sort of capital market for founders and investors.

Eric Hornung 39:03
And last question for me, how do you think about funding Clearbanc going forward? Are you thinking about still raising more equity from traditional venture capital sources? Or if someone offered you the same terms you offer to other companies? Would you take that?

Andrew D’Souza 39:18
Yeah, I would love to. I keep trying to convince our investors that, you know, guarantee them a 6% return on our on our capital. So yeah, I mean, I think it’s going to be interesting, right? And and, as you think about, you know, we’ve got fixed income investors who invest in our funds, and then we’ve got equity investors who invest in the operating company, as we get larger and larger, those pools of capital start to look more and more similar, right, if you think about all the like, you know, public hedge funds and and late stage growth equity funds. And so we’re now starting to have very interesting conversations with people who are excited about, you know, the upside and potential sort of disruption that we’re bringing to the to the market, but are also intrigued by the downside protection and the fixed income dimension of this And so I’m trying to push investors to think about things in a different way than than they may have. Historically, more creative investors are, you know, it’s resonating. So we’re having a lot of interesting conversations. We’re well capitalized now but as we start to think about, you know, new frontiers, we want to push into new products, new markets, international expansion, you know, we are going to we’re going to continue to raise capital and I think it could be more interesting structures than exists right now.

Jay Clouse 40:28
This has been awesome Andrew Thank you for taking the time if people want to learn more about you or Clearbanc after the show where should they go?

Andrew D’Souza 40:34
Check us out at Clearbanc.com. You know, I’m Andrew at Clearbanc can shoot me a note if you’d like to or find me on Twitter, Andrew D’Souza, we also we’ve just launched this runway extension products I know that’s on its top of people’s mind quite a bit whether you have investors or whether you’re thinking about your own business, we want to be able to help you figure out what your runway is and help extend it so that you can hit that hurdle and achieve your objectives. So check that out as well. But yeah, please please go find us so we can help. We’d love to.

Eric Hornung 41:03
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All right, Jay, we just spoke with Andrew from Clearbanc. And you know what, I’m gonna start with a hot take. I don’t want your hot takes. Actually, this is more of a chilly take. This is a northern latitude take. I’m just impressed with Canada. You know, every company we’ve talked to from Canada, every ecosystem I hear about in Canada, the competitive advantages of working in Canada. We should do more Canada man.

Jay Clouse 42:54
That’s what I’m saying. This feels a little bit like a generalization. I’m impressed Toronto. I feel like we don’t have that much data outside of Toronto, Canada is big.

Eric Hornung 43:02
Yeah. But like 90 some percent of the population lives within 100 miles of the US, right? So it’s like big upwards, but it’s not that big, but it’s big across to all right, Canada’s big fine.

Jay Clouse 43:12
I agree. I’m impressed with Toronto, I really didn’t ask how long anyway, I really, really like the potential of Clearbanc. And not simply because of their 6% return on capital model. But because of everything behind the scenes as they’re doing that, I think is the most impressive, interesting, long term valuable aspect about this company. And I know this was a coffee chat, not a standard episode, but you know, they are themselves a startup company that went through Y Combinator that is building this SAS toolkit alongside with their ability to invest I think that itself is is I think they’re a very potentially valuable company because of that, and I’m really impressed with what they’re doing behind the scenes.

Eric Hornung 43:58
It’s weird because I think we’ve talked about this before. You and I are human, true. And we come into each episode with expectations, things we like things we don’t like. And my expectations around Clearbanc were framed specifically by what I was seeing in revenue based finance, and I just could never get fully bought in to revenue base finance. It always felt a little. You know, when you don’t have the right word for something.

Jay Clouse 44:30
Like right now?

Eric Hornung 44:31
Yeah, like right now. It just felt a little map. That’s how it felt to me. But this interview definitely changed that for me for Clearbanc specifically. And I think the question about how are you doing right now in the midst of this COVID crisis when we see some companies having 50, 70% drops in revenue? And he said, Yeah, a lot of our competitors are getting hurt, but we’re actually we’re doing fine. I mean, we actually there’s some companies that are struggling but our model hasn’t broken because of that. That is that’s wild.

Jay Clouse 45:02
Yeah, I mean, I understand, I think what you’re getting at with the map, because it It feels like it would be painful to have revenue based financing for a company that then becomes like Shopify, you know, that has this huge upside that you kept your own upside because of it. But that’s exactly why I was so excited about what Andrew was sharing, because based on the information that they’re building on the back end, it seems like there’s a very clear potential future where on some of these bets for some of these companies that they’re backing, they can structure a different relationship. That also sounds like it would be welcomed by those companies because they are building a positive relationship with Clearbanc. That is also what makes me excited about this. If it was just purely revenue based financing that wasn’t building some of these predictive models on the back end, that didn’t have the opportunity to make those investments. I would probably be whelmed but because of that, I am I’m all in.

Eric Hornung 46:00
I love that we’re on upside developing a toolkit of financing options now. Right we have, we understand seal and the type of company that that may work best for we understand the traditional venture capital game and the way and the companies that might work best for we understand a little bit about revenue based financing now, and the companies that might work best for I wonder what we’re missing in the startup funding space?

Jay Clouse 46:31
Well, we’re missing a fund.

Eric Hornung 46:32
We’ve talked to funds. Oh, you’re saying you and I don’t have a fund?

Jay Clouse 46:36
Yes, that’s what I’m saying.

Eric Hornung 46:40
I, you can’t solicit.

Jay Clouse 46:43
I’m not soliciting. I’m just saying we don’t have one.

Eric Hornung 46:49
I’m not saying I’m robbing this bank. I just really need the cash.

Jay Clouse 46:53
That’s what I’m saying. You’re saying what are we missing? And that’s it. That’s a clear thing that we’re missing. But yeah, I agree. I like that. We are creating this portfolio of financial options for the founders that we have on the show that we can point them to, that we’re sharpening our own sword here. And you know, I’m sure we’ll continue to do that. I’m sure we’ll continue to see some innovations in this space, which I welcome. I think it’s about time. Yeah, we’ll continue down our alternative financing trend.

Eric Hornung 47:19
What I was really hoping you’re gonna say is, oh, Eric, no, we should have someone on who’s going to talk about venture debt. And that’s what I was gonna say. But you know, he didn’t go there. I set you up. I thought I put it right on a platter. You went a whole different way. Jay,

Jay Clouse 47:33
True venture debt, corporate venture capital, we’ll get some corporate VC coming up soon. But yeah, let’s get some venture debt, put on the to do list. If there’s anything else that you think we’re missing in the financial instruments space, you can let us know @upsideFM or emailing us hello@upside.fm. Otherwise, we’ll talk to you next week.