Monday, July 6, 2020

Every journey of a thousand miles starts with a single step. For the world’s largest e-commerce investor, that happened in an Uber.

It was the definition of a captive audience.

“Our first product was serving Uber drivers and we took Ubers and we pitched our product,” Michele Romanow, Clearbanc founder and President told me. “As a founder, you have to pitch your own product.”

The company has pivoted a few times, but $350 million in venture capital later and with over $1 billion invested in 2,800 e-commerce companies, Romanow is still looking for innovative marketing techniques. Like for an earlier daily deal business, Buytopia, where she and other early employees chalked the next day’s deals on the sidewalks by every major building in downtown Toronto.

A major challenge for many entrepreneurs and startup founders, however, is bias.

Founders may not look like typical venture capitalists. They may not have the same skin color or gender. They may not have gone to the same schools. They may not speak with the same accent. And they probably don’t live in the same states, either.

Or even country.

I recently had the chance to interview Romanow on her advice for startup founders during Covid-19. As a “dragon” on Canada’s Dragon’s Den (think Shark Tank) as well as a founder of novel startup funding venture, she’s more in tune with what startups need now than most.

One thing that was obvious: Clearbanc has a different way of deciding how to invest than most venture capital firms. It’s automated, it’s quick, it’s data-driven, and it’s blind to what a startups’ founders look like.

“We started out thinking that we were going to build a bank for the new economy,” Romanow told me in a chat that is now available on the TechFirst podcast. “The thing with investing is, when you make mistakes, they’re very big, they’re very expensive.”

So Clearbanc built technology to connect to all the software businesses use to run their marketing and operations and figure out in minutes what traditionally takes months if not years: if a startup is ready for rocket fuel.

AKA, cash.

The interesting thing is, by building a better mousetrap for investing, they also just may have built a better way of taking inherent bias out of the investment industry.

“A founder needs to connect a bunch of different data sources … their payment processor, their bank account, where they’re buying ads, so, you know, Google, Facebook, etc.,” Romanow says. “And then we take that and we use AI to figure out effectively the same type of diligence that VCs used to do. What’s your return on ad spend? What’s your unit economics?”

The old world of investing was all about people. Who you knew. Who you knew who knew somebody else. And while human relationships are great and necessary, they’re also very vulnerable to bias.

One aspect of that is simple geographical bias: 80% of venture capital dollars get invested in four states, Romanow says: California, New York, Texas, Massachusetts. Nine states had zero companies that received venture dollars. Unless somehow those four states have a lock on all the human talent in the entire country, there’s something wrong with this picture.

Another aspect of that is gender bias.

If 91% of venture capital decision-makers are men, that’s likely to have an impact on who they fund, and what kinds of businesses they invest in. And that might be why, as recently as 2017, female founders got just 2% of all VC funding. Similar realities apply to where VCs went to school. According to one study, 40% of VCs attended either Harvard or Stanford. Startup founders, however, go to school all over the world. And, along the same lines: if only 3% of VC funds employ black or other minority professionals, can we really be shocked that black founders and Latino founders encounter higher barriers to venture capital?

“We’ve seen that by just using data to make these decisions we’ve backed eight times more women than the venture capital industry average, which I’m really proud of,” Romanow told me. “We have backed founders in all 50 states in America.”

What she’s essentially saying is that in spite of traditional barriers to investment for startup founders who didn’t fit the mold either by virtual of color or gender or location or socioeconomic background, an unbiased data-driven investment strategy drives more investment to traditionally overlooked founders.

The old world of investing — which is still very prevalent — is biased towards founders who intersect with VCs on a lot of different levels: social, racial, economic, and so on.

The new world is biased to success: are your numbers good? Is your business viable.

This doesn’t solve all startup equality problems — better education and opportunities for all youth might help with who even think they could succeed at starting a business in the first place — but it’s a start.

Founders who want to raise money connect their business systems to Clearbanc, and Clearbanc’s software determines if there’s a good fit. Romanow calls it the “20-minute term sheet,” highlighting that investment decisions in the old world often take three to six months of connecting, schmoozing, and story-telling.

AI, however, is fast.

“We’re seeing the same thing … with minority founders,” Romanow says. There’s so many systematic barriers that if we can use data to take the bias out of the decision making, I think in years from now we’ll see companies that will continue to change the landscape,”

Expanding who can be a founder and who can access financing is good thing for everyone.

Theoretically, it results in better decisions: less focused on bias and more focused on numbers. It also values ideas and execution more than location, allowing innovative companies to grow wherever they are. And it values drive and determination over pedigree, allowing founders of all kinds to succeed.

One piece of good news for those who weren’t born with a silver spoon?

“Sometimes when your life has been a lot harder and a lot grittier, you’re a much better founder because you’ve built so much more resilience into your life,” Romanow says.

Get the whole transcript of our conversation here.

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