Claro is raising a Crowd SAFE at a valuation cap of $12.5 million with no discount. This valuation is moderately high, even for a tech company. Taking into account a revenue multiple of 32.2 times — meaning Claro is valuing itself at 32 times more than its most recent year’s revenue — Claro is significantly overvalued in this round. But basing the valuation on Claro’s projected 2021 annual recurring revenue results in a more moderate 6.9 revenue multiple. Overall, Claro’s price is rated just above average.

The US HR and payroll software market is worth roughly $9.9 billion this year and has seen a growth rate of 5.3% since 2016. A few factors driving this growth are cloud technology and the increasing automation of HR processes, such as recruitment. Companies are also increasingly looking to outsource core HR functions to cloud-based software vendors like Claro. Overall, the market is fairly small and has been growing at a slow rate. So Claro’s market rating is just below average.

Claro founder and CEO Michael Beygelman says his lifelong mission is to “remove friction” from hiring. Beygelman has a degree in computer engineering from Rochester Institute of Technology and is currently working towards an MBA at the University of Maryland. Though he got his start on the technical side of business, he pivoted to business management fairly early on. He served as regional manager for Tekmark Global, then served as vice president of sales for MyBizOffice (which would eventually become MBO Partners), a business operating system for independent contractors. He specialized in employment outsourcing services for a number of organizations before founding Claro in 2014. In all, Beygelman has plenty of staffing and HR experience to rely on.

COO and HR manager Phyllis Afendoulis has an MA in HR from the University of Minnesota. After an extended stint at CEB (now Gartner), an information technology company, she took over as head of HR for SHL, a Gartner spinoff. After that, she joined the Claro team late last year. Michail Rybakov appears to be Claro’s only engineering team member. Rather concerningly, he is employed full-time at Vilnius, another analytics company, so it is unclear how dedicated he is to Claro.

The rest of Claro’s team covers gaps in sales, product development, and marketing. Despite  the notable lack of technology specialists at the executive level, Claro’s team score is one of its highest.

Claro’s US competitors include Workday and BambooHR. But these companies merely provide HR management services — not the in-depth data that Claro does. 

Claro’s data is gathered through daily “spidering” of public web pages containing workforce-related data. Claro users can search that information either through the application or by allowing systems to connect to Claro using an API (application programming interface, a software intermediary that allows programs to talk to each other). This method means Claro doesn’t need to rely on unreliable and sometimes outdated information from governments and other public organizations. The company is going for a higher-quality offering over a lower price, with a current average selling price of $90,000 per year. The company has no patent protection, but its labor market intelligence is unlike any existing offerings, which provides some level of first-mover advantage. In addition, the company’s stated mission of closing race and gender gaps in hiring capitalizes on a powerful trend towards equality in the US right now. In all, Claro’s differentiation rating is on the high end.

Claro generated $388,067 in revenue last year, up from $152,514 in 2019. Cost of goods sold only increased moderately from $329,433 to $367,339. The business sustained a hefty loss of $1.25 million in 2020, so it has yet to become profitable. But outside of financials, Claro has performed well. Claro hasn’t declared any partnerships but has established 16 clients in the medical devices, logistics and transportation, ride sharing, and financial services industries, including XPO Logistics and Intuitive.

Since 2019, Claro’s software has seen a 445% increase in daily user searches. As a business-only offering, the software is distributed business-to-business through licensing, generating annual recurring revenue. To support its $100,000-plus burn rate, Claro has also raised more than $5 million from names like Falmouth Ventures and IAG Capital Partners. All this means Claro’s performance rating is its highest.

Claro’s impressive success thus far has come at an escalating cost, as a burn rate in excess of $100,000 per month is significant for a software startup. Claro built up $1.67 million in long-term debt at the end of 2020 and shows no signs of slowing. While it’s not uncommon for startups to take on significant debt in service of rapid growth, these numbers are high enough and are rising quickly enough to cause some concern.

Claro also has only one founder, a narrow foundation to rest upon, and the team’s only technology specialist works full-time for another company. Claro appears more interested in fleshing out sales and marketing than on filling the technical expertise gap. This presents some team risk. And because Claro is distributing through a business-to-business model, investors can expect scaling to be a slower process. These contracts tend to have long sales cycles and take long periods to scale up.

On a final note, larger businesses are less likely to outsource HR management to Claro. And smaller businesses that would like to outsource their management software might not be able to afford the Claro solution, which could limit the business’s potential clientele.

One potential pitfall worth noting is that Claro isn’t the majority owner of its own stock. The majority shareholder (51%) is Falmouth Ventures, one of its previous investors. In addition, given a six-year operating history, revenue of $388,000 isn’t particularly impressive. It’s also unclear how much demand companies will have for Claro’s specific and pricey software. Given that any number of competitors can assist with end-to-end hiring, it remains to be seen if Claro’s labor market data is a significant enough differentiator to give it an advantage. Investors must also question whether Claro can maintain its lead in data acquisition and user experience without a full-time technology team member.

Despite questions about its financial stability and market fit, Claro has come along at the right time to ride powerful trends of inclusivity culture. As companies rush to flex their diversity credentials to employees, Claro’s product could see accelerated adoption. In addition, while Claro’s 2020 revenue isn’t huge considering a six-year windup, it is significant compared to 2019 revenue (a 154% year-over-year increase). The business has also shown considerable capacity to raise funds, given more than $5 million in prior fundraising, which has undoubtedly taken some of the sting out of its high burn rate. The company is led by a strong team. Claro’s independently gathered data also gives it an advantage, as it’s more reliable than many third-party providers’ data. Investors could see Claro become a major player in the HR software space.

Claro uses data to help businesses improve their hiring practices. Its customers can use its software to identify top talent, competitor hiring practices, and compensation trends. The software also enables them to bypass potential biases and craft a more diverse workforce. Claro has secured 16 recurring contracts across multiple industries and has seen its revenue expand dramatically in the past year. It has also shown a capacity for significant fundraising potential, which has helped offset its significant burn rate. 

Despite these capacities and rising revenue, Claro has a considerable amount of long-term debt, and its financing has led it to sell off majority shares to Falmouth Ventures. The company is significantly overvalued, given its audited 2020 revenue. In addition, the team’s sole technology specialist is committed to another company. While the startup hopes to scale rapidly, its business-to-business model will likely take time to pay off. That said, Claro is well-positioned to capitalize on a trending focus on diverse hiring practices. Therefore, Claro is a Neutral Deal.

For questions regarding the KingsCrowd staff pick or ratings for this company, please reach out to support@kingscrowd.com.

Analysis written by Benjamin Potts.