Founded as a bookkeeping automation company, Toronto-based FinTech firm Paperstack pivoted into e-commerce lending last year when the economy was beginning to deteriorate.
In January 2022, Paperstack began offering revenue-based financing to online sellers. It fuelled its first million dollars worth of loans using a combination of equity funding, personal savings, and traditional bank loans (both personal and business) obtained by company co-founders, CEO Assel Beglinova and CTO Vadim Lidich.
“Securing financing is much more challenging across the board.”
-Vadim Lidich, Paperstack
Since then, economic conditions have worsened and traditional financial institutions have tightened up their underwriting amid a flurry of market headwinds, and larger FinTechs focused on e-commerce lending, like Clearco and Wayflyer, which Paperstack competes with, have struggled.
Amid this challenging market environment, Paperstack sees “a lot of opportunity” to expand its e-commerce lending operations and help fill the gap as other players cut back, and the startup has closed $9 million CAD in equity and debt hoping to do just that.
Founded in 2021, Paperstack is a revenue-based financing startup headquartered in Toronto with an office in New York. The startup provides working capital to e-commerce brands across North America, which use this funding to purchase inventory, invest in advertising, and hire.
Paperstack focuses on private-label brands that sell high-margin products on platforms like Shopify, Amazon, Etsy, and WooCommerce, as well as wholesale and retail channels. The startup serves brands with over $250,000 in annual sales, including Desert Farms, EATABLE, and Thrilling Foods.
In an interview with BetaKit, Lidich noted that the $9 million round involved a “pretty substantial lending facility,” but declined to disclose the amount or how much of this total consisted of equity. The CTO noted that Paperstack plans to use this credit facility to support the company’s operations and build up its lending portfolio.
The financing, which Paperstack classified only as an “investment round,” closed in late December, and comes about a year and a half after the startup closed $250,000 in pre-seed funding—back when its focus was on bookkeeping and tax filing tech.
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In comparison, Clearco and its competitors have secured hundreds of millions of dollars to become leaders in the e-commerce lending market, but still face a challenging path forward. Clearco has raised close to $400 million CAD in equity and over $300 million in debt, while Wayflyer, per Crunchbase, has secured more than $300 million in equity financing and nearly $900 million worth of debt.
Paperstack’s debt was provided by Star Strong Capital. The equity component of the company’s latest round was financed by Gaingels, Techstars Ventures, Ontario Centre of Innovation, as well as undisclosed former executives at Clearco, TD Bank, Wealthsimple, Sezzle, and employees at Shopify, Google, and Apple.
As Sifted notes, revenue-based financing is, by nature, more founder-friendly than venture capital but riskier than traditional secured loans, which are backed up by assets or collateral. In addition to Clearco and Wayflyer, the revenue-based financing space also features other emerging players like Uncapped, older firms like Liberis, and new entrants like Paperstack.
Since Paperstack first entered e-commerce lending, rising inflation, interest rates, and a slowdown in online shopping and consumer spending have had a heavy impact on both the tech sector and the industry it serves. E-commerce demand, which skyrocketed during COVID-19, has also decelerated amid a rebound in physical retail.
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Amid these conditions, Toronto’s Clearco and Dublin-based Wayflyer—two of the biggest FinTech firms providing revenue-based financing to e-commerce brands—have undergone significant layoffs. In Clearco’s case, the company has also changed CEOs and exited overseas markets, handing this portion of its business to London-based competitor Outfund.
The much smaller Paperstack faces the same conditions that forced bigger players to regroup, from mounting inflation and interest rates, which have made it difficult for many startups to raise capital, to slowing e-commerce growth.
“Securing financing is much more challenging across the board,” acknowledged Lidich, who noted that current economic conditions have led many FinTech firms to pull back and leave certain regions. “There’s just been too much change in a short period of time and that broke a lot of models and policies and portfolios.”
As the fundraising market has cooled and other lenders have tightened up their underwriting amid rising interest rates, defaults, and bankruptcies, Paperstack’s CTO claimed that there has been “a little bit of … a panic in the [e-commerce] industry.”
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“There’s definitely less supply of capital in the market, but there’s a ton of quality companies that are looking for [it],” said Lidich. “That working capital needs to come from somewhere, whether that’s just growing slower for a lot of merchants, or being able to access capital and growing faster.”
Paperstack sees an opportunity to capitalize on this need and expand its lending portfolio. With its latest funding, the company hopes to 10x its e-commerce portfolio before the end of 2023. The company did not share how many companies to which it currently provides loans.
The e-commerce lending startup has spent the past year building, testing, and adjusting its proprietary underwriting model during challenging conditions for e-commerce brands and lenders alike.
“When the markets are going up, it’s very easy to do it. When the markets are going down, that’s when you get squeezed.”
-Vadim Lidich, Paperstack
Paperstack’s underwriting model, which Lidich claims has been built “to be able to sustain high-interest rates,” measures metrics like profitability, free cash flow, inventory turnover, and margins. According to Lidich, the company only accepts about 10 percent of loan applications.
He expressed confidence that Paperstack can prove its model works in a “high-interest, high-inflation, high-default-prone environment.”
Lidich described companies like Clearco and Wayflyer as Paperstack’s closest competitors, noting that they compete for similar customers. But the CTO also highlighted that today, the vast majority of all loans by volume are still originated by legacy institutions like banks and credit unions. It’s sizeable competition that Paperstack itself faces as well.
Despite current industry trends, Lidich claims that Paperstack’s portfolio has been performing well, with revenue growth of about 30 percent year-over-year. As e-commerce market conditions have shifted in light of recent iOS changes, the return of physical retail, and broader economic headwinds, the CTO noted many of Paperstack’s clients are diversifying their sales channels.
As Lidich noted, and as Clearco and Wayflyer’s recent moves indicate, e-commerce lending remains a challenging space. “When the markets are going up, it’s very easy to do it,” he said. “When the markets are going down, that’s when you get squeezed because those expenses are not really going anywhere.”
Feature image courtesy Paperstack.