Andrew D’Souza and Michele Romanow. Image: Clearco
We spoke to Daniel Lipinski, CEO of Outfund, the company taking over Clearco’s international clients, about the future of RBF as a business model.
Less than six months ago, Toronto-based Clearco announced it was creating 125 new jobs in Ireland to add to its team of 75 already based here. Last week, the revenue-based financing company said it is shutting down its business in Ireland entirely, focusing instead on the US and Canada.
A drastic U-turn in such a short span of time begs the question: what happened?
Co-founders Michele Romanow and Andrew D’Souza told employees the decision to pull out of Ireland, the UK and Australia was because of unfavourable market conditions, with inflation rising steadily across the world – especially Europe.
While Clearco heads back to the other side of the Atlantic to focus on where its business is seemingly performing better, its many European clients will now come under the wings of UK-based rival Outfund, another revenue-based financing business.
Based in London, Outfund also has offices in Spain and Australia with around 90 employees overall. It provides capital to e-commerce companies with investments ranging from £10,000 to £2m in what is fast becoming the dominant model of lending capital to small businesses.
What is revenue-based financing?
Capital investments in businesses have traditionally been in the form of big investments that expect a lump-sum return in a fixed number of years. However, macroeconomic events such as the Covid-19 pandemic, the Ukraine crisis, supply chain issues and general inflation have popularised new forms of financing among lenders and borrowers.
Revenue-based financing (RBF) is a model of paying back lenders in which the amount being paid back in fixed intervals is tied up with the business’s ongoing revenue. This form of payment continues until a fixed and predetermined amount is reached, which includes a fee.
RBF firms have seen a steady rise since 2005, with 32 US firms managing around 57 funds representing an estimated $4.31bn in capital, according to a TechCrunch report from last year.
Daniel Lipinski, CEO and founder of Outfund, told SiliconRepublic.com in an interview that the rise in e-commerce enabled “a new wave of businesses” to get capital that it couldn’t get before using the familiar merchant cash advance business model that was well established in the US.
“RBF is literally just taking a merchant cash advance and utilising payment processes, open banking and modern APIs to pull data and get information about that business to make a lending decision. That’s essentially how it emerged from the old world to the new,” he said.
“And obviously, most entrepreneurs these days, by and large, go ‘I want to start a business’ and the first thing they do is go to Shopify, create a webstore and try find a product to sell. So, it’s only a natural incarnation of that original business model to what it is today.”
Pragmatic approach
But if market conditions are not favourable now, then why did Outfund take on rival Clearco’s international clients? Lipinski said this is because his team’s pragmatic pessimism has been preparing them for such market conditions for a long time.
“I think we were expecting a downturn for a long time, basically. We’ve taken maybe a pessimistic view on the market for many, many months, if not way before any of this started happening,” he explained.
“Essentially, when Covid struck and lots of businesses were getting government funding, we were of the opinion that not too long after that, there’s going to be a shift in the market conditions because lots of businesses that probably didn’t have product-market fit were getting propped up by government funding.”
A challenge for companies based in the US and Canada – such as Clearco – is that it is hard for some of them to understand local market conditions in Europe and other areas, according to Lipinski.
“I’m sure they do their own risk modelling and whatever else, but I think it’s always hard to operate in a market that isn’t your local market because there’s nuances to each territory that we’ve even had to learn when launching in the Netherlands, for example, where they have a different culture to risk and capital, or Germany, which is very risk-averse as a nation,” he said.
“So, I think we were planning this for a long time. And therefore, we weren’t just trying to acquire market share like some other companies – which is a very different approach.”
The future of revenue-based financing
Clearco’s retraction spells good news for Outfund and its business in core markets such as the UK, Europe and Australia, but does its exit signify a slump in the popularity of RBF? Lipinski thinks it’s quite the contrary, who swears by RBF as the business model of the future.
“Some people might think that revenue-based financing doesn’t work because one of the biggest players in the space has pulled out of the market. It does work, because Clearco has seen major success in the markets it has operated in, and other players such as us are also operating profitably and running a good team,” he said.
“We are acquiring customers all the time, and those customers are extremely happy. It’s a booming business model. And the fact that we’re using open banking means that we can operate in a bigger addressable market than before.”
With Clearco now gone, one of Outfund’s major competitors that remains in the European revenue-based financing market is Irish unicorn Wayflyer, which has been growing at warp speed.
Since flying past a $1bn valuation earlier this year to become one of Ireland’s latest tech unicorns, Wayflyer has had two significant funding rounds for its growth platform, raising $300m in May and another $253m just last week.
“I think Wayflyer have done an amazing job at what they do, even though they may have taken a different approach to us. It’s a good thing because it attracts more attention, educates more people about RBF,” Lipinski explained.
“And at the end of the day, that’s all we want – education of this new product, because there’s lots of people that still don’t know about it. And the more people thinking about it, the better.”
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