What Is Pipe?
Have you heard the pitch "We charge $12/mo but it's only $100/yr"? This is a common sales tactic…giving people a discount for paying for an annual plan. Although companies leave money on the table, annual plans allow for more stable cashflow. This is REALLY important for an early stage company.
For 10+ years, this has been the answer to solving cash flow woes for SaaS companies. Just make customers commit to an annual plan, so the revenue for the year comes in all at once, not monthly. But, startups are actually leaving money on the table when they do this. Specifically, two months of revenue.
What I mean is that the cost for getting that cash flow in the door was two months of revenue. But what if....it could be one month? Or three weeks? Or two? Is it possible to get the same cash flow benefit without sacrificing so much money to get it? It should be. Why?
That two month's lost revenue is a quite inefficient. For a venture scale startup, that's potentially millions of dollars being left on the table. And who gets the value of that money? No one. It just disappears. Do you think there are people in this world that want that lost revenue? Yes.
What happens in the void between what a startup is willing to give up to get their cash flow and an investor willing to take a risk to secure what could have been lost revenue, but also could just be extra revenue that doesn't disappear? Pipe is the answer to that question.
Pipe is a marketplace between companies with recurring revenue and investors who want a piece of the void. Instead of the startups burning two months revenue, Pipe allows startups to burn one month revenue and allow investors to "purchase" one month of the companies revenue.
The best way to explain this is with an example. I have a company called Growthmeter. It costs $20/mo. If I wanted to better capitalize myself without taking investment, I could say "$20/mo but it's $200 if you pay for the year."
Usually I would need to decide between $240 over 12 months or $200 today. Pipe allows me to get $220 today, and someone else that extra $20/mo that usually disappears into thin air. That someone else is an investor or a bank.
Someone on the other side of Pipe see's that $20/mo customer contract of mine, and thinks that I have a strong enough business to keep that customer for a whole year. So what do they do? They purchase the contract of that customer.
They fund me for a year's worth of revenue . So let's call her Sarah. Sarah purchases the contract of that customer. So Sarah pays me $220, through Pipe. Now, what happens to that customer? Nothing. But the revenue of that customer now goes to that investor, not my bank account.
Now does Pipe have access to all my contracts? No. I need to "Pipe" customers in order for them to be added to this marketplace. And Pipe puts a limit on how much $$$ I can Pipe. So even if i have 150 customers paying me $20,000 a year, I can only Pipe a % of them.
When I got access to the Pipe platform, I was given a limit on how much I could Pipe. That limit increases as my company does better and Pipe gets more data on me. The more data it has on me, the more data the investors on the other side have on me. This builds trust.
What happens if I lose the customer of the contract that the investor bought? Then Pipe automatically selects another one. No harm, no foul. This is the reason for the Pipe limit. So there are always more customers to Pipe if one churns.
Note, this doesn't affect the customer experience at all. Customers don't need to know that they are piped, nor does it matter. They pay the same amount. They get the same product. This doesn't impact their UX at all.
The genius isn't how it works. The genius is how much better it is than the other options. This company is a savior to founders who want to grow fast but don't want tp dilute to get there.
Venture Capital: This is a great source of capital to grow fast and take markets. But it can also break a company if taken on too early. The VC path is very dilutive and control becomes an issue down the line. Pipe allows for capital injections without diluting or taking debt.
Revenue Based Financing - Revenue based financing is great but it is debt, straight up. You owe money that isn't yours. With Pipe, you owe money that you just haven't made yet. There's no debt actually involved. The investors take a majority of the risk, not the startup.
Bootstrapping - Ok, let's be honest this is so hard to do full time when just getting started. I am mostly a bootstrapped and Piping my revenue really allows me to smooth out my cash flow while I get to profitability. And I don't need to dilute to get there.
Pipe isn't just an innovative product. It's create a whole new asset class. One where founders get the benefit of cash flow without needing to leave money on the table or taking on unnecessary dilution or debt. No one know how big this can be. The future is a canvas.
If anyone is interested in getting onto the Pipe platform, feel free to DM me and i'm happy to answer your questions. I don't work for them (but maybe I want to?). Learn more about Pipe on their website here.
This post was taken from a Twitter thread I wrote on January 14th 2021 which can be found here. Follow me on Twitter here.
in case the company gets bankrupt, what happens to investor?