A New Era for Entrepreneurs

Michele Romanow thought the venture capital model was broken. So she fixed it.

By Breanna Mroczek

Fast Growth

Michele Romanow, one of Canada’s most impressive entrepreneurs, is originally from Calgary, Alberta, and studied civil engineering at Queen’s University in Kingston, Ontario. In an early demonstration of her entrepreneurial mindset, upon graduation 21-year-old Romanow moved to Canada’s East Coast to start a fishery business in order to serve the worldwide demand for caviar created due to over-fishing of the Caspian Sea. Romanow’s ingenuity paid off and she had a captive market—until the 2008 recession.

Michele fished for opportunities elsewhere—this time, in the booming e-commerce space. Along with two former classmates, she self-funded Buytopia—a website where consumers could find daily deals for local businesses, and businesses could acquire new customers at a fast rate and low cost. In less than five years, Buytopia was one of Canada’s fastest growing companies and acquired ten of their competitors, including three companies who had collectively raised more than $50 million in venture capital.

After Buytopia, Michele founded another four companies before she turned 33, joined the boards of directors of Freshii and Vail Resorts, and helped to fund the Canadian Entrepreneurship Initiative. She has been a cast member on the CBC reality television show Dragons’ Den since 2015 for four seasons—on the show, Romanow and other established Canadian entrepreneurs listen to pitches from Canadian small business owners hoping to gain expertise and funding from one or more of the “Dragons” in exchange for equity in their business.

Now, at 34, Romanow is the co-founder of yet another company—this time with fellow entrepreneurs in mind.

Risky Business

Startups and entrepreneurs are familiar with the idea of being disruptors in their industries, but Romanow noticed an opportunity to really change the way that startup businesses were being funded. From her first e-commerce business to her five years (and counting) as an investor on Dragon’s Den, she noticed some familiar patterns and challenges that entrepreneurs are often faced with.

“The number-one barrier that entrepreneurs have is access to capital,” Romanow says. “It always seems to be the case that there are folks with ideas, and then there are folks with money.

“Entrepreneurs have really only ever had two choices. They’ve had the choice of going to a bank and getting a small business loan—for every company that’s under $10 million in revenue, that means giving up a personal guarantee which means that if your business can’t pay the capital back, you have put your house up on the line. I never thought that was very fair to entrepreneurs. Then the other option you had was taking equity investments from venture capitalists.”

During the filming of each season of Dragon’s Den, Romanow sees about 250 pitches back-to-back over the course of 17 days. The highly concentrated timeline for the pitches makes it easy to spot patterns. Romanow noticed that most of the entrepreneurs—whether or not their pitch makes it to air—want to sell their product or service online rather than get distribution in a retailer—and most were using all of their capital to fund user acquisitions costs. Likewise, when Buytopia was able to acquire businesses who had previously earned tens of millions of dollars in venture capital funding, it was because those businesses had burned through most of that capital on user acquisition costs.

“There was something after hearing so many pitches that sounded like that, where I thought, equity isn’t the right fit for these companies because they’re going to be really resentful when I own 20 per cent of their company,” Romanow recalls. Plenty of promising businesses with good profit margins for their products would be pitched but, regardless, often the business was still limited in its potential growth. Romanow knew that many of these companies wouldn’t become billion-dollar, or even hundred-million dollar, businesses, but that they still needed capital to grow their acquisition spending. Romanow thinks venture capital has value for high-risk projects like those related to new explorations of, and applications for, artificial intelligence and medicine. But, when it comes to projects in the e-commerce space, Romanow determined the venture capital probably wasn’t the best fit.

“It’s crazy to me that when Microsoft went public, Bill Gates owned 49 per cent of Microsoft. But the founders of Lyft [rideshare app], which is a great success story by any measure, owned only three and a half per cent of the company by the time it went public,” Romanow says.

“40 per cent of all venture capital dollars are going straight to Google and Facebook [for marketing], which is a huge, huge, huge number. There’s such a desire [from entrepreneurs] to grow quickly, which is the right thing to do, but what it means is that founders are using the most expensive capital, which is equity.

She didn’t want other startups being forced to trade equity in such drastic ways. So, on Dragon’s Den, Romanow thought of a new way to help these entrepreneurs: instead of trading venture capital for equity, she would propose a revenue sharing agreement where the business would pay back a cash advance through a small percentage of their revenue. Unlike a traditional loan, Romanow’s cash advance doesn’t include a fixed payment timeline, personal guarantees, or compounding interest.

Romanow soon realized that this funding model would be a good fit for more entrepreneurs other than just the ones on the show, and co-founded her current company: Clearbanc.

Taking an Idea to the Banc

Co-founded by Romanow and fellow entrepreneur Andrew D’Souza in 2015, Clearbanc is a funding model for e-commerce businesses that provides between $5,000 and $10 million in marketing capital, without any exchange of equity. Instead, business owners repay the advance and a flat fee that is a percentage of the funds, and there’s no deadline to pay the advance back by. The amount of funding a business is eligible for is based on revenue history and performance.

Romanow decided to provide funding for marketing budgets because she personally knows how important, and expensive, it can be for an entrepreneur to invest in that area. “If you were to break down where venture capital dollars go, there’s a lot of small line items, but probably the biggest line item that’s universal with so many of these start-ups is customer acquisition costs. We’re building a solution to tackle that problem, and I had personally experienced it. I had run an e-commerce company for five years and we struggled always to get enough capital to keep re-investing in customer acquisition. It is a problem that I deeply understood.

“Facebook and Google made it so easy to reach a worldwide audience, so now we think about the other things that can benefit founders. Founders get into business to share their vision of the world and deliver great products and something that’s totally unique. They don’t get into business to be their own accountants or to do test managements or to do all the other stuff. What our view [at Clearbanc] is, is that everything from the way you get capital, the way you ask for it, the way you fund your growth, we should have a totally different way of looking at businesses.”

Since its launch, Clearbanc has invested in over 1000 companies, and in 2019 alone it will have given $1 billion in capital to entrepreneurs. They’ve helped fund Buffy comforters, Le Tote clothing subscriptions, and Hunt a Killer—a murder mystery subscription box that now has over 55,000 active members.

“We gave [the founder] $10,000 two years ago, and he still owns 100 per cent of his company and he’s built an extraordinary business, and he’s done it without having to take equity dilution, which is a really great story.”

This year, Clearbanc launched a new product, The 20 Minute Term Sheet, to help entrepreneurs save another valuable resource: time.

“Another challenge of being a founder when you’re trying to raise capital is that the process of raising venture capital s incredibly time consuming. You’re going to a hundred different meetings, you’re going to fly to three different cities, you’re going to, hopefully get, a couple people interested and then finally it will culminate in someone giving you a term sheet. Our take on this is that founders should have an alternative that’s much faster than that. With this product, in twenty minutes, you can give us your data and we can give you a term sheet of how much capital we could give you and you can have that as an option as your fundraising. We’ve seen tons of new companies come through that way.”

AI to the Rescue

Romanow determined that not only is venture capital not the best way of funding most startups, but that it also has some significant limitations to it—especially in terms of its distribution and who receives funding.

“Women get only two per cent of all venture capital dollars, which is a totally staggering statistic,” Romanow says. “The other weakness of the [venture capital] system is that some people are really limited because it’s a true relationship-making deal. In the United States, 80 per cent of venture capital dollars gets distributed in four states: Massachusetts, New York, California, and Texas, which is crazy, right? There are nine states that have no companies with venture dollars. I think traditional venture capitalism needs a totally different approach [to create equity]. I don’t think this is just about hiring a female partner to solve all the problems.”

To combat any bias in how Clearbanc selects which entrepreneurs to fund, the team uses AI to assess the data provided by the companies. That way, Michele and her team are looking only at core metrics—the same sort of metrics a venture capitalist would request, only without the addition of subjective and/or demographic content. When Michele and her team look at a pitch, they don’t know whether a man or a woman owns the company, whether the owner is 18 or 48, and whether the company’s core product is a makeup line or a pair of shoelaces or anything in-between. Then, Romanow’s team analyzes the AI-provided data and recommendations to determine whether they should fund a company and, if so, how much capital they should provide them.

The use of AI has seen Clearbanc provide much more equitable funding than traditional venture capitalists.

“We’ve backed eight times more women than the venture capital industry average, which I’m really proud of,” Romanow says. “I think that’s just because we use a completely data-driven approach and take the bias out of decision making. It’s been a big advantage for us. We’re trying to give every kind of founder the option to raise capital far more quickly and on far different terms than what has been available before.”

Michele and her team also avoid product bias, as they are only looking at metrics and not thinking about whether or not they would personally use a product.

“There’s a reason Peloton got so much venture capital funding—it was because every venture capitalist could imagine their wife buying a $5,000 stationary bike with an iPad on it,” Romanow laughs. “There’s nothing wrong with Peloton, I’m just saying it was a product for that demographic. There’s a company that we back that sells $20 million a year in shoelaces. I literally had a venture capitalist say, ‘I would never wear these.’ And I’m like, ‘that’s not the point.’ It is about finding your audience and understanding if these companies have good unit economics. It’s not about anything else.”

Likewise, Romanow isn’t concerned with looking only for the next Uber or the next Facebook to fund. Clearbanc will fund companies of all sizes and structures if they have potential.

“We don’t need to pick lottery winners. When you talk to a venture capitalist, one of their main criteria, because of the way their funding structure is, is: ‘could this company be ten times the size in three years from now?’ In my mind, you don’t need to place that type of insane growth on every company. Some companies can grow slower and that’s okay, you can do just fine. I think we’re looking at other things to make the lives of founders a lot easier in terms of how they do their finances, which I think can be a big deal as they continue to grow. I think the great part about being an entrepreneur is that you get to choose your own definition of success. There’s no blueprint that we force on any of our entrepreneurs. We are looking for them to all reach their goals in whatever way that means, whether it’s growing ten times or two times the amount of their capital. My definition of success has always been, ‘am I working on problems I care deeply about with people I really love?’ and I think that creates both a happy life and fulfilling life.”

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