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Clearco CEO Michele Romanow speaks onstage during TechCrunch Disrupt San Francisco on Oct. 2, 2019.STEVE JENNINGS/AFP/Getty Images

Clearco has cut a quarter of its staff and signalled it could retreat from several foreign markets as the e-commerce merchant financier became the second prominent Canadian technology company this week to admit it expanded too quickly in anticipation of growth that hasn’t materialized in a worsening economy.

“This isn’t an easy time for credit businesses; it isn’t an easy time for my business,” Michele Romanow, CEO of the Toronto company, officially known as CFT Clear Finance Technology Corp., and a star of TV’s Dragon’s Den, said in an interview. “We had hired expecting the economy to grow at a certain rate and the economy has not delivered. The last thing a founder wants to do is lay off people. It’s devastating. There really are no other words I have for that.”

Ms. Romanow echoed Shopify Inc. SHOP-T CEO Tobi Lutke, when he admitted on Tuesday he had been wrong to believe e-commerce growth would keep soaring at the same rate as early in the pandemic – a miscalculation that prompted the company to lay off 1,000 people.

The e-commerce boom is fizzling out

Shopify and Clearco join a slew of other technology companies in Canada and abroad that have responded to sharply rising interest rates and inflation, plummeting valuations and a worsening economic outlook by cutting staff and shifting focus from growing at all costs to achieving profitability. According to layoffs.fyi, a website that tracks job cuts in the sector, 420 startups have cut nearly 60,000 jobs this year globally so far.

Clearco on Friday informed 125 of its 500 employees they would be leaving the company immediately, although they were offered severance pay, extended health care and two years to exercise equity. The cuts primarily affect staff in North America, where the company does about 80 per cent of its business, and are across several functions, particularly a sales organization of roughly 160 workers that two people familiar with the company said was too large and complex for a credit business. The Globe and Mail is not identifying the sources as they are not authorized to discuss the matter publicly.

Ms. Romanow said the company is “considering alternative strategic options for our international business,” which includes operations in Australia and several markets in Europe the company has recently entered, such as the U.K. and Germany. Ms. Romanow wouldn’t elaborate on what that could entail or whether the options include selling all or part of its international business, exiting certain markets or partnering with others.

The company had long had eyes on global expansion, but hastened its move to Europe after Dublin-based rival Wayflyer Ltd. grew rapidly and raised large amounts of venture capital, giving it a valuation, like Clearco, of well over US$1-billion.

“We grew very quickly anticipating all these markets to grow,” Ms. Romanow said of the “very expensive” international foray. “I don’t think us considering different things internationally necessarily means the business model is unsustainable. It means this year it is unsustainable for us to grow and be developing new markets.”

Clearco temporarily stopped offering new cash advances to merchants for a week, ending this past Monday, to tighten its underwriting practices and raise fees for the second time in two months, The Globe reported on Wednesday. The changes were a response to unusually heavy demand from customers in May and sharply rising defaults in some of its newer markets.

The company has also been cutting costs and has halved its monthly “burn,” or net use of cash, in 2022. Clearco has also lost several senior executives in recent months, including its chief financial officer and vice-president of finance, chief strategy officer and vice-president of operations and people. Ms. Romanow, previously the president, succeeded co-founder and ex-partner Andrew D’Souza as CEO in February. He is now executive chairman.

Clearco started out in 2015 trying to build a banking alternative for digital entrepreneurs. It provides $10,000 to $20-million in advances to e-commerce companies mainly to pay for marketing on digital channels. In return, it receives a daily cut of its clients’ revenues until the advance and the fee – which now ranges between 8 and 16 per cent – 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.

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. That few-strings-attached approach, however, also means it is an unsecured creditor when clients become insolvent, with a lower claim on assets than secured creditors. It has advanced more than US$5-billion to 10,000-plus companies to date.

Although many other companies, including Shopify, finance similar retailers and startups, Clearco’s singular focus helped it grow at a dizzying pace, attracting heavy-venture capital backing. In April, 2021, a US$100-million equity raise brought the company’s valuation to nearly US$2-billion – and was followed by a US$215-million round led by the Japanese giant Softbank Group Corp.’s Vision 2 Fund last July. Clearco was on pace to double in size again this year until recently, but now “we are going to keep growing at a far slower pace than we had probably anticipated,” Ms. Romanow said.

Among the changes, Clearco has renegotiated with its credit providers to free up cash it can use to fund operations, The Globe reported this week. The company raised about US$60-million from existing investors earlier this year and tens of millions of dollars more in debt capital from Silicon Valley Bank.

Ms. Romanow said she doesn’t expect the company to need to raise money for another year, and that it is aiming to be generating positive cash flow by the end of 2022.

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