Clutch financing in works would slash online car seller’s valuation by 97 per cent from peak

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Canadian online car seller Clutch Technologies Inc. is in advanced stages of securing funding that would slash its valuation to a tiny fraction of its $575-million peak in late 2021.

Toronto-based Clutch is raising $20-million in a deal led by past backer Stamford, Conn.-based Canaan Partners that would value the company, prior to the receipt of the new funds, at $15-million, according to details shared by three sources. Existing investors who don’t participate will see their stakes cut to a fraction of their former size and lose some rights in what is known as a “pay to play” deal. Those who do participate will get a larger share of proceeds if Clutch is eventually sold.

Clutch chief executive Dan Park confirmed a financing was in the works and expected to close soon but declined to disclose details, adding that it would take “a two page essay” to explain the “super complicated” deal. He also confirmed Clutch received a lowball buyout offer recently in the low tens of millions. He declined to specify the amount but said “it wasn’t an offer we wanted to consider.”

The deal has surfaced tensions among backers of one of Clutch’s early investors, BrandProject Capital Fund LP, prompting the Toronto financier to scale back its participation in the financing after it proposed borrowing money secured by its other investments to do so, said the three sources.

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The Globe and Mail is not identifying the sources of deal terms or matters pertaining to BrandProject as they are not authorized to discuss the matter.

The deal comes as BrandProject, one of Clutch’s largest shareholders, tries to raise its second fund with a US$75-million goal.

Clutch is one of a swath of high-flying startups challenged by the tech sector crash that started in late 2021, wiping out valuations and leading to deep job cuts. Many still need outside financing, but investor appetite for risky startups has diminished. That has forced many to abandon a “growth-at-all-costs” approach and do what was necessary to survive and reach profitability. Several startups have failed; many more are expected to run out of cash soon.

At the same time, venture capital firms that had backed high flyers at lofty valuations have been loath to write down those investments and disappoint their own investors. That has prompted many to strike complex structured financing deals that give them a greater economic stake of companies they back while enabling them to minimize the hit to their fund performance metrics.

Clutch was founded in 2016 by ex-investment banker Stephen Seibel to sell cars online. BrandProject invested in 2018 and recruited Mr. Park to be CEO. Clutch expanded quickly across Canada, raising $60-million in 2020 and $75-million in fall 2021. Revenue ballooned to $202-million in 2022 from $3.3-million in 2018.

Clutch, like its peers, enabled buyers to browse, inspect and buy cars on their screens, paying non-negotiable prices. Clutch had no salespeople or showrooms; vehicles were delivered free of charge to buyers’ homes a day after purchase with a 10-day money back guarantee.

Clutch used data science to inform what it paid for cars and would inspect and fully recondition the vehicles before reselling them. With a $40-billion used car market in Canada – not to mention insurance, warranties, parts and service and consumer finance – Mr. Park figured Clutch faced an open road of opportunity.

Then the downturn hit. Clutch cut 22 per cent of its 350 employees in spring 2022 and tried to raise $50-million in a Canaan-led deal that would have slashed its valuation to $275-million. But that deal failed to come together. Mr. Park cut 150 more jobs in January and pulled out of Western Canada.

Clutch has overhauled its business. It stopped sourcing cars from auctions, where prices are higher, and only buys from individuals through its website. Clutch has halved its spend on reconditioning without hurting customer satisfaction and cut inventory by 80 per cent in May from the same period a year earlier as revenue that month dropped just 30 per cent, to $12.9-million.

Retail gross profit per unit hit $2,918 in May, up from $48 a year earlier, while marketing and customer acquisition costs fell by two-thirds. Clutch started charging $199 to delivery purchased vehicles locally. It secured a new, less costly inventory lending facility.

“We’ve had four solid months and we’re on track to get to break-even cash flow in the next 12 months,” Mr. Park said. “Despite the turmoil and challenges of the last year we’re coming out on the other side in a healthy position.”

He dismissed concerns about the reduced valuation, saying the funding will put Clutch on the right footing. But the deal has left BrandProject in a tricky position.

The fund, a spinoff of BrandProject LP, a company-creation business led by veteran consumer product executive Andrew Black, was an early Clutch backer. The fund had already put US$4.7-million, or 13.7 per cent of its US$34-million investible capital behind Clutch and was out of fresh capital. If it didn’t participate, it would see its stake shrink from 12.5 per cent to just 1.14 per cent – and lose rights, leaving it with less of a claim on proceeds if Clutch sold. The book value of BrandProject’s stake in Clutch had already shrunk to US$5.7-million last December from US$52.8-million in September, 2021.

So on June 23, Mr. Black made an unusual request for a venture capital fund: he asked his backers if they would agree to change their partnership agreement, allowing BrandProject to borrow money – secured by its other holdings – to invest US$2-million in the deal. That would leave the fund owning 8.65 per cent of the recapitalized Clutch and in position to recoup more of its investment even if it sold at a lower valuation.

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The sources familiar with the matter say some BrandProject backers were incensed as there was no mention of the financing at the fund’s annual meeting the day before, and because they only had 48 hours to respond to the e-mail received late Friday. They weren’t comfortable with the idea of a loan – paying 14 per cent to lenders, including potentially Mr. Black – secured by the fund’s other investments. They questioned why BrandProject was buying more than its pro-rata share, leaving it with about 20 per cent of its invested capital concentrated in one company.

It’s not clear if BrandProject LP – the affiliated company-creation entity – is also buying its pro-rata share. That entity sold part of its stake in 2021 for roughly $10-million, another source familiar with the matter said. The Globe is not identifying the source as they are not authorized to discuss the matter.

Mr. Black declined to comment. But on Sunday he told investors BrandProject would take a more conservative approach, investing just US$1.32-million, leaving the fund with a 6-per-cent stake in Clutch. BrandProject will lose its board seat and the smaller loan would be paid off “as soon as possible,” he told investors in an e-mail obtained by The Globe.