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Michele Romanow, co-founder of Clearco, addresses the audience during the last day of the Web Summit 2021 in Lisbon.Bruno de Carvalho/Reuters

Dragons’ Den star Michele Romanow is feeling the heat of worsening market conditions at the high-profile lending startup she runs, CFT Clear Finance Technology Corp.

Michele Romanow’s Clearco cutting a quarter of staff as financier battles tech slump

The Toronto e-commerce merchant financier, known as Clearco, stopped originating cash advances on July 18 to tighten its underwriting practices and increase fees. It resumed on Monday.

The company has cut its monthly “burn” – its net use of cash – in half this year by slashing costs. It has also made job cuts, although its 500-person head count hasn’t changed, as it kept hiring. The cuts include 10 salespeople at its Ireland office and closing a site in Israel. More substantive belt-tightening efforts are imminent.

Michele Romanow now CEO of Clearco as ex-partner Andrew D’Souza becomes chairman

“This has been the hardest three months of our last seven years,” Ms. Romanow, Clearco’s CEO, said in an interview. “It’s hard to know where we are going” in the event of a prolonged recession “or how bad that will be. It’s my job as an operator to brace for the worst.”

The changes are part of an effort by Clearco – one of many Canadian technology companies to reach “unicorn” status in 2021 by securing 10-figure valuations – to gird itself in the face of mounting economic worries.

Across the finance industry, credit and risk standards have tightened as capital providers try to safeguard themselves as interest rates rise and the threat of a recession grows. The tech sector itself is also struggling. This week, Shopify Inc. CEO Tobi Lutke admitted he was wrong to believe e-commerce growth would keep soaring at the same rate as early in the pandemic. That, plus a worsening outlook, prompted the Ottawa commerce software provider to lay off 10 per cent of staff and warn of losses this year.

Valuations for tech companies have dropped, including those of digital bank challengers known as “fintechs” that face rising capital costs. Swedish “buy-now-pay-later” consumer financing provider Klarna Bank AB raised money privately at a US$7-billion valuation this month, down 85 per cent from its prior level, and Power Corp. of Canada and a subsidiary recently devalued their stakes in Wealthsimple Technologies Inc. by 20 per cent.

As venture capital funding has dried up during the tech downturn, Clearco, which advances funds to e-commerce companies that repay it, plus a fee, out of future revenues, received a surge in demand in May, Ms. Romanow said. On June 1, Clearco quietly increased its fee range to between 8 per cent and 14 per cent, from six to 12.5 per cent.

The May surge triggered last week’s pause in originations, which Ms. Romanow said was to give Clearco time “to re-examine our pricing and our underwriting” given the rapidly shifting economic and credit environment and its potential impact on customers. “We’re trying to figure out how we keep up with demand, how we price the product correctly, how we make sure we’re not taking undue underwriting risk,” she said.

Aside from macroeconomic pressures, Clearco has lost senior executives over the past year, including chief financial officer Curt Sigfstead; vice-president of finance Michael Munroe; capital markets heads Lindsay Corlett and Marissa Desrochers; Ben Brideaux, general manager of banking and payments; and Tal Marantz, head of payments. The Globe and Mail has identified at least 17 people in management-level roles who have recently left the company.

Two of its five co-founders, Tanay DeLima and Charlie Feng, have also left in the past year, while chief strategy officer Gilad Rom, and Timothy Ryan, vice-president of operations and people, departed in May. Ms. Romanow, previously the president, succeeded co-founder and ex-partner Andrew D’Souza as CEO in February. He is now executive chairman.

“I’ve never said it’s an easy place to work,” Ms. Romanow told The Globe last month. “We describe two years at Clearco as 10 years in your career. That means some people don’t fit and some exit the organization.”

The changes come as Clearco navigates a sharp turn away from a “grow at all costs” mentality that had prevailed in the tech sector fuelled by cheap money and a pursuit of fast revenue growth at the expense of profitability. “Culturally, you have to do almost everything differently,” Ms. Romanow said. But “we have to respond to what the market is valuing.”

Clearco, which has doubled in size every year since its founding in 2015 and reached US$100-million in revenue last year, hired nearly 300 people and raised US$315-million in venture capital in 2021 at a time when a global talent crunch put upward pressure on pay. Its burn rate, or monthly net use of cash approached the high single-digit millions at one point last year, according to a source familiar with the company, although sometimes that was due to cash transfers into off-balance-sheet funds that Clearco uses to finance its clients. (The Globe is not identifying the source as they are not authorized to discuss the matter.)

As part of its cost-cutting, Clearco is subleasing out some of its downtown Toronto office space, tech-news website The Logic reported this week, and has cut spending on such things as software. Early this year, Clearco shut a money-losing venture called ClearAngel that had provided funding for fledgling e-commerce entrepreneurs.

Clearco raised about US$60-million in equity this year from existing investors and tapped Silicon Valley Bank for tens of millions in added financing. It now aims to achieve break-even cash flow this year.

The company started out in 2015 trying to build a banking alternative for digital entrepreneurs. It now provides $10,000 to $20-million in advances to e-commerce companies mainly for marketing on digital channels. In return, it receives a daily cut of its clients’ revenues until the advance and the fee are repaid.

Prospective customers don’t have to provide personal guarantees, give up equity or submit to credit checks, but they do have to give Clearco access to business data from their bank accounts, online payment processors and online advertising accounts. Clearco then assesses the economics of the business and produces automated financing offers within hours. The funding for clients comes mostly from three off-balance-sheet facilities backed by alternative or specialty asset managers, including National Bank of Canada unit Credigy Ltd.

Clearco has marketed itself as a provider of friendly funding that is cheaper than venture capital and less onerous than loans that require personal guarantees. It says its data-oriented approach has removed discriminatory biases common in venture capital, resulting in more funding for women and BIPOC entrepreneurs. Clearco has advanced more than US$5-billion to 10,000-plus companies to date.

But its capital is not cheap. Until this year, Clearco advanced the money for fees of 6 per cent to 12.5 per cent. Successful customers typically repay in six months, meaning their effective annualized cost could exceed 12 per cent.

During the pause, the company and its credit providers made several changes to reduce their risk. Clearco increased the upper end of its fee range to 16 per cent and now insists customers have higher liquidity ratios, better performance in converting paid advertising into sales and a more diversified supply chain.

The company has also renegotiated with its credit providers to free up cash it can use to fund operations, said two sources familiar with the matter. The Globe is not identifying them because they are not authorized to discuss it.

Ms. Romanow said defaults remain low in North America, which accounts for 80 per cent of Clearco’s business, but are “measurably worse” in other markets. She said Clearco hasn’t “currently pulled out of any markets yet” but added: “Everything is on the table.”

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