Pipe: a new way for companies to raise capital
“No debt. No dilution. Just growth.”
I must admit that when I first heard Harry Hurst, founder and Co-CEO of Pipe, detail the market-altering operations which his financing startup was going to undertake, I felt somewhat jealous.
I’ll explain.
The idea behind Pipe is easy-to-understand yet both original and revolutionary — three elements which when combined are tantamount to the holy grail. In the most basic of terms, Pipe is developing a new asset class which allows companies who count on recurring revenues to trade said revenues for upfront capital. By trading monthly or quarterly cash-flows for upfront lump-sums, companies are able to finance their operations — from product expansion to marketing, and everything in between — independently, while circumventing the time-intensive and often-gruelling process of venture capital funding or venture debt raising.
Genius, I know.
In an interview given to Alex Danco, Tribe Capital’s Jonathan Hsu succinctly summarises the idea behind Pipe better than I ever could:
“When you acquire some customers and they start yielding revenue that behaviour sounds an awful lot like buying a fixed income instrument and there is a lot of sophistication around how to value those cash flows. In some sense, what we’ve seen over the last decade is that software enables a whole new business model — recurring revenue — which is both good for customers and is good for investors. It’s good for investors because it becomes more “predictable” in the sense that it starts to look more like a fixed income yielding asset and thus more amenable to traditional financial techniques and thus potentially “in scope” for a wider set of investors.”
Effectively, companies are able to sell future dollars to be earned through subscriptions for anywhere in between $0.85 to $0.95 cents on the (future) dollar, and this all happens remarkably quickly. By selling what Pipe calls “revenue contracts”, companies can raise their target sum instantly (!!!), and have the newfound capital in their bank accounts within 24 hours of discovering Pipe for the first time and signing up for their service. This rapid fulfilment time, coupled with the advantages of avoiding debt (which can stifle ingenuity and adaptability) and preventing the dilution of one’s stake in the company, make Pipe’s advantages clear-cut.
While beneficial for companies and their respective stakeholders, Pipe also offers an attractive opportunity for investments. In a world of markets characterised by immense volatility, low yields on traditional assets like government bonds, and close-to-zero interest rates, what investors can find in Pipe is a dependable, tradeable asset that also provides what analyst John Street Capital calls “a fixed income-esque rate of return on the underlying contracts”.
However, you might be asking yourself, “Sounds great Leo, but what happens in case a subscription contract is churned (terminated, goes unpaid or is otherwise cancelled)?” Simple. As the contract provider, you can simply replace the churned subscription with an active one — without even the semblance of penalties or fees.
Another counterpoint one could raise is if there is actually any need for an intermediary like Pipe. After all, you know first-hand that lots of the companies you interact with as a consumer on a daily basis allow you to pay for subscriptions either monthly/quarterly or annually, with the latter carrying important savings for you. Well, the short answer is: the discount rate.
As highlighted by Packy McCormick in his fantastic newsletter Not Boring (which acts both as a great weekly read and the inspiration for this article), SaaS (Software as a Service) companies like Zoom, Slack or DropBox who trade revenue for upfront payments in the form of annual subscriptions, do so at too steep a discount. As outlined in the table below, said companies forego anywhere from 16.62% to 30.95% (not a typo) of their revenues to obtain immediate financing. If one instead glances at the average price for which a SaaS subscription contract is sold on Pipe, the awarded discount oscillates between 5% to 10% of the total revenue associated with the contract in question:
Quite simply, that’s too much. For such steep discounts, companies could often obtain loans with lowers APRs. Moreover, the jury is still out on just how enticing the savings on annual subscriptions are for customers, as the desires to not be locked in or to avoid paying for a service you’re not enamoured with yet can easily beat mathematical savings. Flexibility and the lower barriers to entry associated with shorter subscriptions are also pivotal in securing new customers, but here’s the real shocker:
According to polls conducted by McKinsey and other research groups, while the growth in e-commerce related subscription-businesses is firmly entrenched in the high double digits, internal polling by Pipe reveals that a meager 7% of customers opt for annual subscriptions instead of shorter options. This means that, while the question of whether Pipe’s services are even needed in the first place is settled, it isn’t much of question to begin with.
To sum things up, Pipe offers numerous industry-breaking advantages both for firms — namely speed, low opportunity costs and lack of typical VC-imposed constraints — and investors — a new dependable, tradeable, income-generating asset — alike. While thousands upon thousands of words are required to fully unpack the magnitude of Pipe’s impact and its future trajectory within the financial industry, I thought that a brief introduction like the one you’ve just read would do just fine in getting you as excited about this company as I currently am. In fact, the more I learn about this company, the more I find myself exclaiming:
“I wish I had come up with this idea myself.” Oh well.
