Founded in 2016, Afore Capital makes pre-seed investments of between $500k and $1 millionRead more...
The Canadian firm aims to provide an alternative to traditional venture capital
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
We're highlighting key members of the community to find out.
Michele Romanow, who co-founded Clearbanc, is not your typical VC.
While some may recognize her as one of the angel investors on CBC’s hit show Dragon’s Den (Canada’s Shark Tank), she has launched a few e-commerce-related startups on her own without outside funding. Among them was a discount coupon digitizing app SnapSaves, acquired by Groupon. Another was Buytopia.ca, which made the list of the fastest-growing Canadian companies and acquired 10 of its competitors.
The idea of Clearbanc was born from Michele’s founder-friendly vision that selling equity is not the right fit for every deal. With a serial entrepreneur Andrew D’Souza, the two launched the company in 2015 to provide capital to startups in return for revenue share, as opposed to controlling interest and board seats.
Michele has received a number of honors, among which were Angel Investor of the Year, and was named one of WXN’s 100 Most Powerful in Canada. She was also among the millennials on Forbes’ “Millennial on a Mission” list, the only Canadian there. She co-founded the Canadian Entrepreneurship Initiative to encourage more women entrepreneurs. In addition, Michele has advised Fortune 100s and governments on innovation, AI, blockchain and the new economy.
Currently, Clearbanc backs startups in the United States, Canada, and the U.K., with plans to expand further. Its portfolio includes more than 500 e-commerce brands, including Buffy.co, Teysha, Vinebox, Piglet, VNYL, and Bokksu.
Recently, Clearbanc launched a process to expedite the approval process and take bias out of investment decisions. With this new product, it plans to invest $1 billion in 2,000 companies this year. Here is how.
VatorNews: What is your investment philosophy or methodology?
Michele Romanow: Our philosophy at Clearbanc is that investment should be truly data-driven.
We have this product called the 20-minute term sheet. We require founders to give us access to data like their Facebook accounts and, in an algorithmic way, we understand their business and then make an offer of how much we’re willing to invest. That’s done in 20 minutes.
The advantage of having truly data-driven investment, where there is no pitching, where you don’t have to meet anyone, is we’ve actually taken the bias out of the decision-making that usually comes in venture capital. Venture capital is so much about pattern recognition and for us its about data.
If you have good economics and you have a digital way of acquiring customers, we can fund you. And one of the nice side-effects of that is we’ve gotten rid of some of the bias. We have funded eight times more women than the venture capital industry average – probably because we’re not doing meetings, which is an amazing accomplishment, and that’s not because we do different sourcing or anything else. It was just because we looked at data. And the second thing is we funded entrepreneurs from every pocket of America.
There was an exciting Bloomberg story I just read a couple of weeks ago that showed that 80 percent of the venture capital dollars were given to companies in four states in the United States: California, Massachusetts, New York, and Texas. And then there were nine states in America last year that had zero companies that got any venture capital. The logical conclusion is not that there are no good entrepreneurs in those states. The conclusion is that you have to take a completely different approach.
VN: What's your investment thesis and categories/stage of interest?
MR: Today, Clearbanc invests in e-commerce businesses.
If you can acquire a customer online through a digital channel, and you’re positive on economics, we can back you. That can be physical e-commerce or goods, or it can be things like apps, where you get a subscription. And we will be launching a few more, but that’s our primary focus right now.
VN: What stage do you invest in, why and what kind of traction do they need?
MR: We start as small as a $10,000 investment and go all the way up to a $10 million investment, which means that we work with companies as small as doing $10,000 of revenue per month. Our largest investment was a company that had $400 million in revenue annually.
And we can grow with companies.
There was a military veteran out of Baltimore who had this idea to build a murder mystery subscription box. It was a cute idea. Every month you would get a box with a handwritten love letter and a bunch of clues to run a murder mystery party. And he had positive in economics and he was acquiring his customers on Facebook and Instagram. So we gave him $10,000 two years ago. Last year, he had 60,000 subscribers.
He owns 100 percent of his business, and we gave him an additional $8 million in funding. So, we try and start small and then grow with companies.
VN: What other signals do you look for, in terms of team, product, or the macro market?
MR: That’s the nice part of our model is that we don’t look at any of those other things.
We look at a company’s ability to acquire customers through digital channels because our capital almost always gets spent directly on digital marketing, whether that’s Facebook, Google, Pinterest, or Twitter. We also make sure that you haven’t penetrated your audience and we look that you are positive on economics.
Our criteria – we’re not looking at a team, not looking at a specific market, and we’re not making personal judgments on a product, either, which is a cool way to see interesting opportunities. I mean, I’ve seen a shoelace company and I thought the shoelaces were really not that good-looking, but they were doing $20 million in sales, so it was hard to argue with that.
VN: How do you differentiate your fund to entrepreneurs?
MR: Our biggest differentiation is that we don’t take a piece of your company that you might never get back.
We can give you the capital to grow and do it as a revenue share. That means never taking control of your company, never giving up a board seat, and on exit, owning more of your company. Founders today typically own about 3.5 percent of their company each. Our ultimate goal is that if founders are wanting more of their company at exit, that’s much better for everyone.
And we only make 6 percent on every company we invest in. We need all of our companies to do well.
We think venture capital is an amazing tool, especially when it’s used as true-risk capital. If you are building a new crazy piece of AI or solving a disease, its zero-to-one risk. But if you’re doing something that’s repeatable and scalable, like buying Facebook ads when you know that $1 in is going to get $4 in sales out…
We think we can provide a better alternative for traditional venture capital. In fact, many VCs are sending us referrals, which is a really cool way of working with the ecosystem.
VN: As an entrepreneur and investor, what were some lessons you learned?
MR: The first thing I learned is that it’s a lot harder to be an entrepreneur than an investor. So I try and always come in with that empathy.
I think the next part is understanding both. It is really hard for founders to raise money. It is hard because it is a completely subjective process that takes between three and 24 months to do. A lot of market variables are going on as that’s happening. I really cared about how do we enable more entrepreneurs who might not have the Stanford MBA background and really democratize access to funding for everyone.
Andrew D'Souza and Michele Romanow, co-founders and CEOs of Clearbanc
That was kind of the insight I took. I didn’t raise any money for my first three companies. My co-founder, Andrew D’Souza – he came at it from the background of having raised lots of venture capital but finding it an incredibly time-consuming process. Between the two of us, we came in with a view of how hard it was to build a company without bootstrap financing and how much slower we had to go. And our view from that is that we could build a totally different type of capital provider.
VN: What excites you the most about your position as VC?
MR: Entrepreneurs solve the greatest problems in the world.
And I always use the example of the world governments have now spent trillions of dollars investing in climate change, while the biggest difference is being made by entrepreneurs that are building clean cars and trucks that people want to drive. That is one analogy that applies to so many. When you invest in founders all over the world from so many different backgrounds, I think they have the greatest shot at solving some of the greatest challenges.
We have funded 700 different companies so far. To be a part of their journeys is a real gift.
Read more from our "Meet the VC" series
Brendan Baker was the second employee at AngelList before becoming a Director at GreylockRead more...
Ackerman is also the co-founder of cybersecurity investment foundry DataTribeRead more...