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Clearco, the Canadian e-commerce merchant financier co-founded by Dragons’ Den star Michele Romanow, is pursuing a complex recapitalization plan that would wipe out most of its previous US$2-billion-plus valuation.

The company, officially known as CFT Clear Finance Technology Corp., is in advanced talks with investors, led by past backer Inovia Capital, hoping to raise US$20-million to US$25-million in an equity deal that would value the company at US$200-million including the new cash. Earlier investors who don’t participate would see the value of their holdings squeezed to a fraction of their previous worth, three sources familiar with the matter said.

Clearco’s effective valuation could even be much lower than that, owing to the increasingly complex and harsh funding environment for cash-strapped technology companies. Two of the sources said investors in the round would get warrants granting two shares for the price of one. Investors who bought US$25.4-million of convertible notes last fall – including Inovia, Ms. Romanow and fellow co-chair Andrew D’Souza – would see their investment convert into equity at a similar discount.

With the possible new cash, the combined US$45.4-million-plus of equity would rank higher than prior investors, which means that if Clearco were sold, those who participated in the fall financing and new round would get the first US$90-million in proceeds after transaction fees and debt repayments. Whatever is left would be split among other investors, including employees.

Either way, the deal, which is not finalized, would amount to one of the steepest devaluations ever in dollar terms of a private Canadian tech company.

The Globe and Mail is not identifying the sources as they were not authorized to discuss the matter.

A Clearco spokesman declined to comment. Inovia chief executive officer Chris Arsenault also declined to discuss the financing, referring calls to Clearco.

The financing is contingent on Clearco sorting out the status of its relationship with the new owner of Silicon Valley Bank. Toronto-based Clearco has a US$70-million-plus credit line with the bank, which failed in March and which First Citizens Bank has agreed to buy. Two of the sources said Clearco is awaiting assurances there will be little to no change to its credit line before equity investors sign off.

There is a third piece to the discussions: Clearco is seeking a new off-balance sheet funding instrument in the range of US$200-million that it would use to advance cash to its customers. Those financiers are seeking assurances it can raise the equity and sort out its Silicon Valley Bank situation before making that available. Securing and expanding outside capital sources is vital to Clearco’s survival and growth.

Clearco is one of many financial technology companies, or fintechs, facing sharp devaluations after their cost of capital shot up and economic uncertainty mounted. Several private fintechs have recently raised funds at a fraction of their previous valuations, including buy-now-pay-later (BNPL) financier Klarna and online payments giant Stripe. Publicly traded fintech stocks are down 70 per cent or more from peak pandemic-era valuations, including Affirm Holdings, Inc., SoFi Technologies Inc., PayPal Holdings Inc., Block, Inc. and Canada’s Shopify Inc.

It’s a stark environment for once high-flying startups. Cheap capital is no longer freely available, interest rates have soared and companies have made deep cuts to preserve cash. Investors last year were willing to buy convertible debt from portfolio companies, giving them bridge financing at no change to their valuations in the hope of buying time. But conditions haven’t improved. Some companies with challenged business models (Clearco’s core customers, e-commerce startups, face their own trials as consumer confidence wanes) and unsure investors are seeking creditor protection or slashing more jobs.

Venture capitalists willing to invest now are demanding much more advantageous deal economics to compensate for the riskier bets. Their deals now typically come with “structure,” meaning those willing to put in money can exact tough terms that prioritize their payback if companies sell and substantially diminish the value of shares held by earlier investors unable or unwilling to put in fresh capital alongside them. That can include warrants for extra shares or “liquidation preferences” that guarantee that if the company is sold, they get a high fixed multiple on their investment – essentially a larger piece of the pie – before others get their cut.

Clearco was one of the best-known among the slew of Canadian companies to reach unicorn status at the peak of the tech bubble in 2021, when investors including Softbank Group’s Vision 2 Fund invested a combined US$315-million.

The eight-year-old company made its name as a provider of friendly funding for e-commerce merchants, cheaper than venture capital and less onerous than bank loans. Clearco offered advances mainly to cover its clients’ marketing and inventory costs. In return it got a daily cut of their revenues until advances plus fees were repaid.

Most of the advances came from off-balance sheet facilities backed by alternative or specialty asset managers. Prospective customers didn’t have to provide personal guarantees, give up equity or submit to credit checks, but they did have to give access to their business accounts to Clearco, which would assess their economics before offering financing. Last fall Clearco simplified and increasingly automated its product. It now funds specific expenditures based on uploaded invoices, and clients commit to fixed repayment periods.

Clearco’s challenges began early in the tech downturn with a slew of senior departures. Mr. D’Souza gave up the CEO job to Ms. Romanow in early 2022. The company cut costs and temporarily stopped offering new advances last July to tighten underwriting practices and raise fees for the second time that year. Clearco then cut one-quarter of its 500 employees and pulled out of markets outside North America just months after rapidly expanding to Europe.

The company hired U.S. fintech investment bank Financial Technology Partners last year to explore strategic options and brought on U.S. finance industry veteran Andrew Curtis as an adviser. In January he became Clearco’s third CEO in a year when Ms. Romanow stepped down and Clearco cut more jobs.

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