How Pipe is creating revenue as an asset class
Unlocking a multi-trillion dollar opportunity
Harry Hurst is a serial entrepreneur who developed a passion for technology early in life, graduating high school age 12 studying Computer Science. Harry and Pipe co-founder Josh Mangel built their first company Skurt, a financial technology company in the mobility space. After four years, Skurt was successfully acquired by Fair in 2018. Pipe was founded in 2019, to unlock the largest untapped asset class in the world — revenue — to empower entrepreneurs and companies to grow their business on their terms without debt or dilution. Harry has raised over $150 million for his companies and is considered an industry expert on financial technology and emerging asset classes. He is also an angel investor and mentor to a number of companies. Prior to becoming a technology entrepreneur, Harry ran a professional recruitment consultancy, which influenced his approach to strategically and intentionally hiring the right talent, building strong teams, and developing enduring company culture.
Harry is a featured speaker at Wharton Fintech’s upcoming conference. In this guest post, Harry breaks down why he and his co-founders are building Pipe and the value Pipe is unlocking for founders.
The equity value of a business is a derivative of the revenue it generates.
From that simple observation, we are building Pipe to unlock revenue as an asset class, so that founders can fund their businesses without the need to raise dilutive equity capital or restrictive debt.
Before Pipe we saw too many of our friends pour their blood, sweat, and tears into their companies while successive rounds of equity financing diluted their ownership stakes down to the single digits.
We also saw companies negotiate against themselves — offering discounts of up to 40% to incentivize their customers to prepay them upfront for the year — reducing both the amount of cash they had to re-invest into their businesses and discounting their top-line revenue (and therefore enterprise value).
Pipe is addressing what we found were inefficiencies in the way that companies with a high degree of predictability around their revenues were being financed. A more aligned and efficient solution needed to exist connecting these companies directly with the capital markets.
If we were not building Pipe, we believe somebody else would have (eventually).
How does Pipe actually work?
The simplest way to think about Pipe is as a two-sided trading platform. Companies come to Pipe to trade their recurring revenue streams for as much cash as possible paid upfront, instantly. Investors come to Pipe to bid on these revenue streams and earn yield as an alternative to fixed income products, money market funds and other similar instruments.
Today, companies trade their customer contracts for cash equal to an average of 90–95% of annual contract value (ACV). We expect that terms will get even more favorable to companies — our goal is to move closer to 100% over time, as more institutional investors join the platform and bid on revenue streams.
Pipe is the conduit that sits between companies with recurring revenue and investors with yield seeking capital. We ingest the data and rate the assets, so investors can make their bids and execute their trades, while we work as the servicer and make sure that the money goes where it should.
How is Pipe different?
If equity and traditional debt products are derivatives of revenue, then the closest proxy to revenue are the contractual agreements that guarantee payments from customers. Pipe has unlocked those contracts, or subscriptions and made them fully liquid and tradeable as an asset in and of themselves.
We are not against other ways of financing companies, including venture capital. Far from it. We are VC-backed ourselves, with investments from some of the largest ecosystem players in the space like Shopify, Slack, Okta, HubSpot, Chamath Palihapitiya, Marc Benioff, Michael Dell, and more. I’m also an equity investor in a number of early and late stage companies. But we do find that growth capital can be costly and that founders pay too high of a price for other types of financing options. In particular, nearly all other forms of financing make you a victim of your own success — as your company becomes more successful, the effective cost of your financing increases.
For companies with reasonably predictable revenue, the reason you need financing at all is to close the gap between spending money (e.g., sales, marketing, product development, etc.) and your payback on that spend (i.e., cash in the door). Raising capital is not an end in itself.
We built Pipe to be the most efficient way to close that gap. In particular:
- Equity — There is a time and a place for venture capital-style equity financing. For example, I think it makes sense for companies that need to experiment and have not yet demonstrated product-market fit to raise equity. But the cost of dilution is high, especially over successive rounds and when an alternative like Pipe exists. In this respect, early stage VCs and founders are very much aligned.
- Debt — If you can access it, venture debt carries interest rates up to the double digits, in addition to potentially onerous terms that limit the way you can invest in your business. Further, venture debt often comes with warrants that significantly increase the effective cost of financing. This is a clear case where the financing structure you choose can make you a victim of your own success.
- Revenue-Based Financing / Merchant Cash Advance (MCA) — Pipe is sometimes incorrectly lumped in with MCA, so it’s worth highlighting the differences. We believe our pricing is more efficient than MCA because multiple investors on our platform bid for individual companies’ revenue streams. We want you to get the best price possible so you come back and use our platform. You will get the best price you can because investors bid on your specific revenue streams based on your company metrics, instead of giving you a price based on a fixed cost of capital and an average that includes some potentially bad companies too. Your customers will also never know that you’ve traded their contract on Pipe — you maintain total control of the customer relationship.
We believe the financial benefits of trading your revenue on Pipe are compelling on their own. Having built technology platforms in the past, we also believe in the value created by the design of the product itself.
In particular, Pipe financing will save you and your leadership team time — instead of weeks or months on the road (or Zoom) pitching your company, you can have cash in the bank in 24 hours and spend that time building your company instead. Pipe connects to all of your existing systems to make the process as painless and self-serve as possible.
Who is using Pipe?
Pipe is built for any company with predictability around their revenues.
Today, bootstrapped companies with a hundred thousand dollars in annual recurring revenue (ARR) sit comfortably alongside public companies that actively trade with hundreds of millions of dollars in ARR on our platform.
Pipe can be a fit for companies of such wildly different sizes because it gets right to the heart of a company’s value. The underlying contracts (cashflows) that underpin the equity value of the company.
To take one example, a public company looking for $100m in financing would pay millions of dollars in legal fees, plus interest, plus dilutive warrant coverage to access a traditional credit facility.
With Pipe the same company can reduce its cost of capital by more than half (which doesn’t even take into account the order of magnitude reduction in cost from the elimination of warrants).
Trader Mentality
As a kid I sold £1.50 government assistance lunch coupons for £1.00 to my classmates, used the proceeds to buy sweets at wholesale prices, and sold them at a 3x markup to double the value of my original asset and get that value back in cash.
Now I want founders to know they have valuable assets that can be traded. I want to empower founders to shift from a borrower mentality to a trader mentality.
Here’s what I mean by trader mentality:
Let’s say you have $100k of ACV that gets paid monthly or quarterly, but you want cash to invest in your company now. You have a few options:
- Provide a 20–30% discount to your customers to get them to pay up front. This will reduce your ARR by the amount of the discount, which will also reduce your company’s enterprise value.
- Borrow against that revenue, entering a multi-month process with a bank, paying significant legal fees, taking on restrictive covenants, providing warrants to your lenders, and paying up to double digit interest rates.
- Trade the contracts on Pipe instantly for a discount of 5–10% to the full ACV.
If you choose to trade on Pipe, you can get $90–95k cash today for your $100k of ACV (using conservative pricing assumptions). You can use that money to invest in your business: sales, marketing, product, engineering — whatever you need to spend on today that will result in getting paid more later.
Let’s say you invest $90k to hire a salesperson. If that salesperson generates just $10k of net new ARR, you are already cash flow breakeven on your trade.
The profit on your trade is not just when that $10k incremental revenue recurs next year, but also the multiple on that net new revenue that is added to the value of your business. At 20x EV/Sales, your trade has generated $200k in enterprise value (20 x $10k net new ARR).
But even that is quite conservative. What company do you know that hires a salesperson, pays them $90k, and expects them to generate $10k in sales?
More realistically, let’s say the new salesperson generates $200k in net new ARR. At 20x EV/Sales your trade has added $4m to the value of your business, not to mention the revenue that will recur in year 2 and year 3 (and year 4 and…)
That’s the value we are unlocking at Pipe. We are empowering founders to adopt a trader mentality. We’re unlocking a multi-trillion dollar untapped asset class for investors. We sit in the middle and make sure it all works.
