Happy Sunday, friends. Several of you reached out in the last several days to ask what I thought of a couple of things: ClearCo’s announcement of Michelle Romanow’s departure; and Indie.VC’s imminent comeback. More on the latter at another time, as I hope to connect with Bryce soon to learn more. (If you didn’t see his announcement, he is planning to re-launch Indie this year, and he’s well on his way to doing so. I think that’s great news for entrepreneurs, and I’m excited to see Bryce’s next iteration.)

But let’s talk about ClearCo, shall we? Romanow’s departure is framed quite similarly to how Pipe framed the departure of its co-founding team back in November. Both companies suggest that they are leaving behind the days of growth-at-all-costs, and that they are in pursuit of growth and sustainability, and they need new leadership to get to their next phase. All of that makes sense. But the question I keep hearing is: is it too little too late for these companies? That is, are they going to fail?

Enter speculation. I have heard rumor after rumor about ClearCo. The cofounders absconded to a beach somewhere. (I actually did hear that rumor.) Their portfolio is blowing up. We’ve all heard the portfolio blow-up rumor about Pipe as well. I think all of that is interesting, but I think it may  be speculation fueled by competitors (and our human predisposition to focus on and amplify bad or scandalous news). For that reason, although they are entertaining, I don’t believe those rumors, and I try instead to see through to the real problems and the potential outcomes.

To that end, there are a few articles from the last few days that I think are informative, and that anyone doing alternative finance should read. 

Here is a quote from The Information: “Formerly known as Clearbanc, the startup raised $1 billion in debt and equity from Y Combinator, SoftBank Vision Fund, Silicon Valley Bank and Oak HC/FT, among others, according to PitchBook. Valued on paper at $2 billion in a 2021 funding round, Clearco became a poster child of the 2020-1 fintech boom and subsequent collapse as higher interest rates hurt online commerce firms. It generated close to $100 million in revenue in 2021 but its business growth ground to a halt since then, people with knowledge of the matter have said.” 

The Globe and Mail reports that “In addition, rival bankers say Clearco’s approach to lending leaves very little margin for error. The company’s profit margins are relatively skinny, reflecting the narrow gap between the interest rate Clearco charges on loans to customers and the price the company pays to borrow money.” 

Last, and also from The Globe And Mail, “The fall from grace at Clearco, Shopify and other tech business – private and public – reflects a 180-degree shift in investor sentiment, according to fund manager John Ruffolo at Maverix Private Equity. “Both the public and private markets were valuing growth at all costs from 2019–2021,” he said. Potential profitability and “near-term cash generation have returned as key factors in determining value.” This is not news, but it is worth reiterating that the good times are over. 

To sum up:

• ClearCo generated close to $100M in revenue and still had to downsize from 500 to 140 employees... Let that sink in for just a minute.

• ClearCo’s margins are skinny, and the likely cause of their need to downsize so substantially. Knowing how much they charge their customers I’m a little surprised by this, as I expected they would pass any interest rate increases in their capital stack along to borrowers, but maybe the market wouldn’t take that pricing. In any case, we all know the lending business is tough in this environment as rates increase and recession looms. It turns out interest rate arbitrage is not easy.

• Their new CEO is a former credit fund manager, someone who - at least ostensibly - has a deep understanding and appreciation of credit and risk. This tells me that they are serious about getting away from growth at all costs (similar to Pipe), and they are focused on fixing their portfolio. 

• Put another way, I think ClearCo seems to have learned what a wise man distilled down to this simple fact: Lending is hard.

The Globe and Mail article shares that Romanow pointed out that they grew too quickly and they are needing to right-size the business. Plus, ClearCo is now up for sale, and no one is emerging as a buyer. I imagine a buyer will emerge, but it might not be the banks most people expect. It could be any company with customers who could finance their purchases, and that needs an engine to underwrite. In any case, unfortunately, SoftBank and the other equity backers won’t earn their target returns given the frothy valuations at which they invested, so I think fintech valuations and general sentiment around alternative finance will likely remain…down for the next few months. 

Back to my original question: is it too little too late for ClearCo and/or Pipe? No, I don’t think so. I think both can probably be right-sized and acquired, but I think that will be a painful and difficult exercise, especially for their investors and employees. 

And not to be selfish, but it’s going to be painful for all of us too. Such high profile markdowns send ripples through our markets, and not the kind of ripples we want. I feel like I type the following sentence a lot lately, but here it goes again: Buckle up, friends; 2023 is going to be a wild one.