Revenue-based financing is gaining traction in the beauty industry.
Founders are trading equity stakes for revenue share, as companies such as Clearco rethink traditional investment models. Clearco, which raised $215 million from SoftBank over the summer, invests in beauty e-commerce businesses in exchange for a fee and a percentage of revenue. The company has already seen success, investing $2.5 billion in more than 5,500 start-ups worldwide since it was founded in 2015.
“We have seen this explosion of companies in the beauty space that have needed this,” said Michele Romanow, who cofounded Clearco with Andrew D’Souza. “These companies are becoming very valuable, but there has been no one interested in finding them.”
Romanow came up with the financing model for Clearco, formerly known as Clearbanc, after joining “Dragon’s Den,” Canada’s version of “Shark Tank,” as its youngest cast member.
“When I asked founders what they needed the money for, it was always the same reason — customer acquisition and growth,” she said. “I remember talking to Andrew, and we were like, ‘It doesn’t make sense that founders are using the most expensive capital, which is always going to be equity, to do something that’s repeatable and scalable. I didn’t even ask the producers, the next day I was like, ‘I’ll give you that $100,000 you’re looking for, but instead of taking 10 percent of your company that I would own forever, I want 10 percent of your revenue until you pay me back my capital, plus 6 percent.”
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Contestants asked Romanow to clarify whether she was offering personal loans, the entrepreneur recalled.
“A loan would have a personal guarantee,” Romanow said. “I don’t need that. I want to be founder-friendly. There’s no fixed payment timeline, there’s no compounding interest. It’s not debt, because if you don’t pay me back, I’m not going to bankrupt the company, which is what all forms of bank loans do.”
Clearco employs more than 100 data scientists and engineers who have helped the company develop what it calls its “20-minute term sheet.” The technology works by connecting with all of the applications — payment processors, e-commerce platforms and Facebook ads, for example — a brand founder uses for business.
“If you remember your passwords, it takes you 10 minutes,” Romanow said.
Clearco uses that information to determine how much capital it can invest in a business, no pitch deck necessary.
“We’re looking at your growth rate, your unit economics, we want to make sure that for every item you sell, you are making money on that unit after the cost of your ads and the cost of the product,” Romanow said. “It’s not about being a profitable company, it’s about making sure [that] on a unit basis, you’re positive.”
One of Clearco’s biggest success stories to date is Glamnetic, which sells magnetic, reusable lashes. Glamnetic launched in 2019, reaching $1 million in revenue in five months, according to Kevin Gould, Glamnetic’s cofounder. Gould is also the chief executive officer of Kombo Ventures, which co-owns and operates Glamnetic, Wakeheart and Insert Name Here Hair.
“[Glamnetic] got good traction scaling [in 2019], and then in 2020, we went from one million to 50 million in revenue year-over-year,” Gould said. “It was hyper-growth.”
Prior to the onset of the pandemic, Glamnetic employed five people. It now counts 70 employees, all of whom work remotely.
Glamnetic uses Clearco funding for marketing and acquisition, as well as inventory, Gould said. He was considering an equity growth round prior to working with Clearco, but “couldn’t justify why we would raise equity so early,” he said.
Taran Ghatrora, CEO and cofounder of “clean” self-care brand Blume, said she raised venture capital during the first holiday season after Blume’s launch. She has started working with Clearco for “the flexibility that we get” and the company’s thousands-strong network of founders, she said.
“The ability to increase our lines of credit over time as [Blume] scales is great,” Ghatrora said. “If we mention something is happening, like we’re looking to do certain brand or retail partnerships, the team is always quick to connect us with another brand founder who has done something similar.”
Having extra cash to put into inventory has also helped Blume combat global supply chain challenges, Ghatrora said.
Like Glamnetic and Blume, Vanity Planet also puts Clearco funding toward inventory. Alex Dastmalchi, CEO and founder of Vanity Planet, said he had been eyeing private equity groups prior to working with Clearco.
“Although the cost of capital is on the higher side, it’s still cheaper than giving up equity,” Dastmalchi said. “There are a lot of great [private equity firms], and there are some deals that unfortunately don’t go in the right direction. Private equity fundraising becomes quite risky.”
Clearco’s tech-enabled, revenue-based model has so far led to more investments — and more diverse investments. The company reports that in 2020, it funded eight times as many female founders as traditional venture capital firms.
It is also outperforming venture capital in terms of investing in Black- and Latinx-owned businesses. In 2020, 13 percent of Clearco funding went to Black and Latinx founders. In 2019, 1.8 percent of venture-backed founders were Latinx, and only 1 percent were Black, according to a report by RateMyInvestor and Diversity VC, which surveyed 10,000 founders.
“There’s no way we can deploy this much capital unless we make this process automated,” Romanow said. “We figured out that this takes a lot of the bias out of these decisions that we’re making. That’s not because we did anything special, like sourcing or finding these companies. That’s literally because we’re just looking at data.
“We see no pitch deck, we don’t meet the founders, we don’t need to know what you look like, we don’t even need to know what product you sell,” she continued. “We have backed founders in all 50 states in America. That doesn’t seem impressive until you realize that 80 percent of venture capital dollars gets deployed in four states — New York, Texas, Massachusetts or California.”
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