Pipe – Instant access to your annual cash flow
pipe.com
pipe.com
> no debt
You get money now for money you are expected to give back later. That's debt. (It's not a loan as such.)
> no discounts
Their own screenshots show an example where you only get 94% of the expected annual dollar value of your contracts. That's a discount. (That you grant to your investors, not to your customers.)
'Supply' chain financing for hip small SaaS businesses.
I'm actually not sure about that. Maybe it's the buyer who carries the risk of the customer not paying for the contract. Maybe. It would be great if a company that provides financial services actually explained said services.
I think the numbers may work for the seller because the incremental cost of an additional SaaS subscriber is about $0. But a company needing funding doesn’t inspire a lot of confidence to buy a low upside asset from.
So it is indeed not debt. Probably.
If your investor cannot see this as effectively "debt" they are unqualified.
It smells like debt, it tastes like debt, it feels like debt, but its technically not debt by an accounting definition. But if it smells like it, feels like it, tastes like it, then isn't it really just debt?
Specifically in terms of the "discount", I actually think the discount is extremely fair here. Essentially "the bank" (pipe.com in this case) is taking a 6% discount on an annual contract based on extrapolated monthly or quarterly payments from a client. Yes 6% seems significant. But how often do most startups already offer 10-20% discounts for annual contracts already? How often have you seen $99 a month or $999 per year as an option when signing up for a service? That's a 20% discount. But in Pipe's case, they extrapolate $99 a month out to $1,188 and then take a 6% rake off of that, leaving the startup with $1,116.72. That's actually better than the $999 the company would get from collecting the annual contract directly. So in some way I could argue that there really is no discount here, just "fees".
I think that is what the parent comment is trying to get across and I think it is valid. With all that being said, I still think the service fills a vital role and is valuable for an early stage startup. If you are bootstrapping a SaaS for example, you could benefit from launching and your first 100 users essentially pay you annually. In the example above (a service that sells at $99 /mo), you would get $111,672 the first month to fund your project. For a solo founder that would be incredible. Now let's say they average 30 new users each month after that's $33,501.60 per month. You could easily build a solid business without taking on angel or seed investments (which usually come at costly equity exchanges). Even if the company still took on VC funds 18 months down the road in a series A, they would be doing it at a far better valuation which leaves more on the table for the founders and employees.
At some point you would want to transition off of this model. But you could wait until your monthly revenues fully cover your expenses. This is a critical threshold that companies often struggle to get to because it usually takes a minimum of a year to get to that level of growth, sometimes much longer. This is why VC exists. Even if you already had VC funding this model will extend your burn chart allowing you to take less VC money because all your VC funds are going towards accelerating growth instead of maintaining the business.
[1] https://www.bloomberg.com/opinion/articles/2021-03-10/citi-i...
If these would be ANNUAL contracts, and the factoring company took on the risk (as with Affirm or BNPL solutions) then it wouldn't be debt. But these are NOT guaranteed future cashflows.
What happens if a customer churns? "swap out churned contracts with active ones". Yikes.
What if there are no active contracts left? You've just defaulted on that loan.
The marketing seems to suggest that the investor is taking the risk - that is simply NOT true. It's a regular loan, which isn't a bad thing, and isn't easy to come by for many startups, but the tricky marketing is a major turn off.
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Stripe Capital (https://stripe.com/capital)
"Eligibility is determined based on a combination of factors, including overall processing volume and history on Stripe. ... Repayment is collected automatically through a percentage of Stripe sales"
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Square Capital (https://squareup.com/us/en/capital)
"Get a customized offer based on your card sales through Square... Repay it automatically with a percentage of your daily card sales through Square."
(edited formatting, added info)
It’s all credit card revenue factoring essentially, but the nuance is important depending on if you’re the business, the acquirer, or an investor, what your borrowing cost or yield expectations are, and if this type of financing product (if you’re the business) is a better deal than going to get a loan or diluting your equity.
To your point, all of these products preserve your equity arrangement.
There's no competition and the interest rate is plenty high.
If you have a running business there are loads of folks ready to get you capital to expand. Revenue redemption loans are all over the place.
https://en.wikipedia.org/wiki/Merchant_cash_advance
Source: worked at Square when they first launched this product.
That's my conclusion after trying to raise capital. VC and Angels seemed disconnected from the reality and behave as pure financial analyst.
No emotion or even interest on the idea just : "How much ARR ? Churn ?".
Was really shocked how people behaved , but it's better to have a cold shower now than in ten years i guess.
I feel like software industry is now tightly integrated with capital market , it's saddening to see that.
I used to work in the home alarm industry. Nearly every company operates this way. They have big banks behind them (the one I had worked with used Blackstone Capital and Goldman Sachs) who would pay out a 5 year contract up front. So when they sold you a new alarm in your home for $30-$50 a month, they would take your contract to the bank and get a 5 year payout on that instantly.
This is why it is so hard to get an alarm company to go away. If you cancel, they have to give back several years of your money that you haven't even paid them yet. Essentially the alarm company has already spent the money that you aren't even going to pay them for another 3-4 years. So when you cancel, they need to go sell another contract in order to pay the bank back for your cancellation. Now imagine if the guy who's contract they sold to cover your cancellation also cancels... yeah, its pretty darn close to a Ponzi scheme.
I know a guy who operates a commercial water delivery company. It works the same way. He gets 24-36 month payouts on water delivery contracts. He gets paid upfront by a bank before the customer has even made their first payment.
Car dealerships are selling credit notes and trading inventory that they don't even own. Home mortgage companies take your mortgage, bundle it up with a bunch of other people, some who have worse credit than you, and some who have more credit than you, and they sell it off to a bigger bank as a nice beautiful collage of mortgages called a mortgage bundle.
Sometimes you don't want to know how the sausage is made. And in today's economy, banks are making sausages with some pretty nasty shit.
https://en.m.wikipedia.org/wiki/Factoring_(finance)
Factoring service providers have been in business for a very long time. It's a good business model with win-win implications if it's done right.
Think SVBs venture debt and the 0.25% warrant attached to sweeten the return.
Also covenant package, personal guarantee, etc.
There are specialized lenders now though that know how to properly vet and value recurring revenue:
Lighter Capital Clearbanc Capchase Flywheel by HustleFund
And many, many, others.
You could (for example) buy a house by using the money as a down payment. Useful if the timing of lease ending/buy opportunities don’t line up with savings schedule. Smaller opportunities for house renovations or remodels etc.
You could invest that cash flow up front. 2020 was a very profitable year in the stock market... especially if you invested after Feb 20th. You’d make more money than if you invested in 24 chunks bimonthly. So if you had this service you could make some money when you see an opportunity (also risky). “Time value of money”.
On the smaller scale, you could use a similar advance service to semi-monthly buy bulk food purchases if you typically don’t make enough to afford big shopping trips. Not everyone is wealthy, and being poor is expensive. Being able to buy food you know you use in bulk will be cheaper per meal, you just need enough in your checking account to afford that one big expense.
Yes, investing borrowed money is an excellent idea. /s
I would argue every mortgage, real estate loan and small business loan is borrowing money to invest.
But if i (for example) invested 20% of my salary normally, and then one day the market totally crashed, i might consider it if i had the opportunity too borrow all20% of my upcoming yearly salary to invest in a dip instead of trickling that 20% over the year while the recovering market eats my gains.
But yeah trying to game the market typically isn't advised. But also, if you know what you're doing and you can afford the losses, then let people make their own financial decisions.
https://clearbanc.com/landing/uk/cold/ this covers it i guess.
The pricing strategy of annual with 1-2 months free attracts a lot of long term retained customers.
Also monthly payments had other headache with credit cards getting declined. We spent a lot of energy chasing failed monthly payments.
Pipe is a great idea, just sleezy marketing.
Does Pipe control and allow for those sort of factors? Is the client business on the hook for the revenue every month? Or does a customer of a business that sells its receivables through Pipe suddenly find themselves counterparty to (w.l. o. g.) BlackRock?
Debt = risk.
Looks like Pipe offers a trading platform to bid and buy something kind of like a collateralized 'bond' (future monthly income).
I would assume you could bring the 'spread' down and thus the pay day borrower gets a lower interest rate (is spread the right word?)
Given the huge profit of predatory lenders there is room to lower rates.
Definitely big challenge that might not work is how to assign a risk rating to a single human with no banking/credit history. Maybe another idea could use ML & more consumer data to create fairer & more predictive credit ratings.
> If the factoring transfers the receivable "without recourse", the factor (purchaser of the receivable) must bear the loss if the account debtor does not pay the invoice amount.[1] If the factoring transfers the receivable "with recourse", the factor has the right to collect the unpaid invoice amount from the transferor (seller).
Even in a scenario where the transfer specified "with recourse" there is no guarantee that the seller will still be solvent so there is a risk to the purchaser.
"A basic dumb rule of thumb for big companies is that investors (1) do not like debt (ooh, scary debt), but (2) love accounts payable (ooh, you’re so powerful and so efficient with your cash, you can get your suppliers to wait a long time for payment so you can hang on to your cash). So transforming “debt” into “accounts payable” is a good accounting trick; it makes a company look more valuable, without actually changing anything of substance. Good accounting tricks are worth money, to big companies, and Greensill could profitably sell this trick."
I understand the time value of money and all that, but at a certain point it really feels like a waste to do all this financial voo-doo. Like, if a company wants to change from 30 to 45 day payment terms, I have to take my standard price if someone pays immediately, then adjust for 45 days, and possibly factor in that they won't pay on time anyways because they're a megacorp and have no reservations about stretching accounts payable on a small business. I can always sue them, but it'll be small-time lawyers versus big corporation lawyers, and I'll be burning the bridge if I do so. How much effort is spent trying to collect payment for no-BS "we performed to the letter of the contract, you agree, so pay us as the contract stipulates" situations?
It'd be nice if companies would pay at time of service, across the board, but any one company trying to do this would get the short end of the stick. While their suppliers would be enthusiastic, their customers wouldn't want to switch.
https://www.bloomberg.com/opinion/articles/2021-03-10/citi-i...
> Big companies buy stuff from smaller companies, and have to pay for the stuff within, say, 90 days after delivery. Greensill pays the suppliers, say, 30 days after delivery, but at a discount; the big company now owes the payment to Greensill. It pays the full amount, to Greensill, 90 days after delivery. Greensill has effectively loaned money to the big company; the difference between the discounted price that Greensill pays and the full price it receives is effectively interest on that loan.
This seems backwards; the big company isn't borrowing anything. In conventional factoring small companies make these deals to get their cash early, and they give up a percentage as payment. It makes no difference to the big company, which pays the same amount after 90 days either way.
Unless... the big company is working with the finance company to actively sell these deals to their suppliers. In which case the big company will be getting a slice of the percentage fee paid by the small company.
Levine concludes:
> The thing about Greensill’s business is that it doesn’t sound that … hard? Like, once you have introduced a customer to the idea of supply chain finance, I am not sure why the customer should be particularly loyal to you. Anyone who offers a better rate, or the same rate but a better promise not to blow up, should be fine.
This emphasises the point that this is normally nothing to do with the big company. The small suppliers can go elsewhere. There's something I'm missing here, and I think Levine is too.
If a customer churns before the 12 month period that you traded, you have two options. You can rebate the capital you received upfront on a prorated basis for the churned period with no penalty or fees. Or, Pipe can auto-swap another contract to cover the rebate of the churned customer.
> No discounts, no debt, no dilution.
It is debt, because it is a loan. Just financed in a different way.
and the no discounts part is just untrue, their own screenshots and examples show a fee. That fee is the discount.
I see about 10 ads a day from these guys, so some more things I observed:
- They’re trying to build a capital market aspect on payday loans - essentially, turn “SaaS subscription stock” into “SaaS subscription future” and let people trade it... except, that is a terrible investment with little to no upside. The company can go under, reduce prices, and in general a subscription worth $k is equivalent, at best, to holding $k in cash with no interest.
- So to make investors “buy”, you give them a discount. Which means, for all intents and purposes, there is interest. There is debt (where does accounts payable go on a balance sheet?) contrary to their marketing material.
Debt + interest, with your future earnings as collateral = payday loan. Plus some lipstick to distract you from this fact.
This means you get 94% of the annual contract value. So for a $1,000 agreement, you would keep $940. Still a pretty good deal if you ask me.
Its also pretty nice because they calculate it off of the extrapolated monthly term, which is already priced higher (usually) than the annual term. What i mean by this is how often have you seen a SaaS service that sells a product for $99 per month, OR $999 per year? Pretty common, right? Well in this case the SaaS is already offering the customer a 20% discount for paying annually upfront.
But in the case of Pipe, they take the $99/mo customer, extrapolate the total they will pay for the year out to $1,188. That is what they pay you out on, so they take a 6% rake from that, which means the company gets $1,116.72. That's higher than the $999 they ask for annual agreements with customer's directly. So it's a pretty good deal for the company.