Pipe was one of those names that kept popping up on my Twitter feed and I only got a round to digging into it over the holidays. Man, was I impressed! Software continues to eat the world and is not stopping at Finance. Let's dig in!
Pipe is a two-sided marketplace that solves a critical issue for SaaS companies who have found product market fit and investors looking for exposure to a new asset class for their alternatives book.
🧗♀️ For Founders
After a SaaS company has found product-market fit, the founders double down on growth and increase their marketing spend. Typically, companies go out and raise a round of equity financing from VCs to get the capital they need for growth. This happens many times over, each time diluting the founders. At the point of a liquidity event, it's common for the founders to be left with a small ownership fraction in the business.
Building a venture backed company is a most grueling undertaking, and Pipe believes in a better way to acquire capital without diluting the founders.
🪄 The Magic
With Pipe, founders connect their existing bank accounts and payment processor with Pipe's infrastructure and receive up to the full annual value of the their monthly software subscription revenue less a fee. For example:
SpaceY is generating $20k in net new MRR via monthly B2B subscriptions for their satellite monitoring software. They are using Stripe for payment processing so it's easy for Pipe to get a look behind the hood of SpaceY's business. They "pipe" these contracts over and get 240k instantly (20k MRR * 12 months is the annual).
This has a range of benefits:
- companies get cash to invest in growth without giving up equity
- founders can focus on building instead of fundraising
- founders can eliminate annual subscriptions where customers get discounts up to 30% in some cases
💰 For Investors
Once contracts are loaded into Pipe, a new asset class is unlocked for investors: a fixed income-like product for asset-backed, stable, recurring revenue streams of SaaS companies.
Investors can filter contracts by a variety of SaaS metrics (ARR, CAC to LTV) and invest in a pool of recurring revenue assets that fits their risk/return profile. 🤯
👀 So how could Pipe continue to innovate?
Private markets are notorious for outdated and "hard to piece together" data on private companies. Pipe is privy to some of the most valuable, fresh data, which sets it apart. It's an Investor's dream to access real-time data on software companies.
To that end, Pipe needs to double down on its data science team to be prepared to seize new opportunities as it expands.
Opportunities could include:
- Speeding up the underwriting process to become fully automated.
- Building algos to predict company success (Pipe Score). With more data and a sufficient time frame, Pipe can discover which companies have been successful, failed, or stayed flat. Pipe may surface this "health" score in the app UI to show Investors how a software contract compares with peer companies. But this only scratches the surface. With Pipe’s wealth of data, it can inform its own equity investments (for companies that don't yet have product-market fit / don't qualify for Pipe), create a research product for VCs to help them in their own investment decisions, or offer non-dilutive capital plus dilutive capital (if founders need more than a year's worth of annual revenues to grow their business).
- Including value-added services for companies listed in Pipe. Like traditional early-stage VCs who provide intros, recommendations, and hiring help, Pipe can include these value-added services to Pipe-listed companies as an additional incentive to join.
- Community for Pipe companies. Building a high growth company is challenging. Pipe can establish a strong peer to peer network to connect founders as they build their companies and roll with the punches. This creates a positive feedback loop— founders can help each other overcome challenges, share what's working, refer their friends, and use one another’s software. The bigger a company gets, the more SaaS tools are added to the stack, and what better place to look then the Pipe community itself. (Could there be a circular economy within Pipe?)
- Non-software recurring revenue streams. Pipe can expand horizontally not only to support software companies, but other companies with recurring revenue such as newsletters, podcasts, and membership communities.
The Pipe team has developed an incredible innovation in the space and I'm excited to see the company grow. Pipe builds on the idea that automation continues to steamroll into Finance and creates opportunities for increased efficiency. Between central bank-issued digital currencies, MMT, fintech companies, and crypto (did somebody say yield farming?), we are just at the beginning of this journey.