Where Credit’s Due Ep. 10: Getting capital without dilution or debt through recurring revenue financing, with Pipe and Anthemis

It's tough to raise capital these days – VC wallets are tightening as many investors are opting for a wait-and-see approach. This makes it harder to land a deal and get more cash through the door.

For entrepreneurs in need of financing for their companies, equity capital is still the most popular approach, but is harder to come by in an inflationary environment. However, dilution by selling ownership shares in your company for a part of future cash flows is not the only way to get capital.

There's also debt, which comes in the form of bond issues or loans, a means of financing operations without dilution, as long as – again – you have the cash flow to pay back the loan.

But today, we're talking about another way of accessing capital: recurring revenue financing. If there's cash flow coming in, this recurring revenue is made into a tradable asset that can be sold to investors.

It's a dilution-free and debt-free form of financing, which I'm exploring in more detail with Michal Cieplinski, Chief Business Officer at Pipe, and Farhan Lalji, Investor at Anthemis.

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The following excerpts have been edited for clarity.

Given the current state of play, what capital raising options are preferred by fintech founders, and how is the current down market affecting this?

Farhan Lalji: As investors, we really want our founders to have a multitude of capital perspectives. And what I mean is that equity financing is great, but it's not for everyone, and it shouldn't be the only thing that a founder has in their arsenal when it comes to how to capitalize their business. Whether it's debt funding, or equity funding, or revenue based funding, founders should think about the whole package, and think about how they select the right partner, and the right amounts of capital for their operational and capital requirements.

Working capital through equity, versus through debt versus through revenue based financing – they can all be collaborative, and they should kind of work together for the founders. And I think entrepreneurs, investors, other stakeholders in terms of employees and prospective investors down the line, want to see founders who have that almost holistic view of how to raise capital from different sources that will have different impacts on the cap table of any given startup at any given point in time.

Michal Cieplinski: You have to understand your capital stock and how to obtain capital. Equity typically provides your expansion amounts, but once you have product market fit, and rinse and repeat recurring revenue (hence where revenue based financing comes from). If you have that revenue, why are you using equity to fund that? You should use working capital solutions, and that's where Pipe comes from. Pipe is a solution for companies with recurring revenue streams. We started in February 2020, and we all know what happened the week after – this little thing called COVID started. But for us, it was the biggest push into the market that any company could imagine, because the whole entire world moved into SaaS and we started with SaaS B2B. Now two and a half years later, and hundreds of millions of dollars traded on the platform, over 50% of our volume is other types of recurring revenues. We have massive direct to consumer platforms. We have property management fees, hedge fund management fees, VC management fees, entertainment, where your streaming studios are trading their payments to independent producers on the platform. It's all based on the premise that a certain revenue stream is recurring.

What are the inner workings of recurring revenue financing?

Michal Cieplinski: There are many types of providers of such a solution. Pipe is unique because we are a trading platform, not dissimilar to NASDAQ or New York Stock Exchange. That's why the media dubbed us or coined us as NASDAQ for recurring revenues. We have a sell side, these are the companies with recurring revenues. And that can be companies as small as 100k annual recurring revenue, and as big as hundreds of millions of dollars in annual recurring revenue. And on the buy side, we have banks, credit funds, hedge funds that are purchasing it as a fixed income asset. When the sell side comes on the platform, we rate them and provide ratings to the buy side. The buy side purchases baskets of the companies, they typically hold 5200 names in their basket, and as a result, their exposure is spread, which also means they can bid exposure means risk. Risk means pricing, the moment my exposure lowers, I can bid prices and actually compete with banks and other sources of capital. On a daily basis, we compete with other investment banks and much larger institutions and win the deals because our buy side considers that if they're exposed into several 100 names, their risk is very low of losing the principal. As a result, they can bid prices that are unimaginable if you go straight to your local bank, or even investment bank.

What is the interest that you've seen in the US for such a platform?

Farhan Lalj: The interest from investors is obvious, right? We came in quite early and we've been really happy that we were in the early days of pipe, which has gone on to raise a significant amount of capital. The thing that's been really interesting to me is the types of organizations involved, as Michal was talking about. It is a marketplace, right? The people who are taking on the risk, but also the people who are looking for capital. The amount and the variety of different people seeking capital, and people seeking yield off the platform has been truly amazing. I mean, we're talking about publicly listed companies, we're talking about hotels and hospitality, software companies. And I think that's been surprising, at least to me, as an investor, that we're seeing those types of institutions coming in on both sides of that market so quickly. This ballgame has just barely begun. 

And what I've been really fascinated by is how some of these entrepreneurs haven't realized that actually, they can access this anywhere in any geography and industry. Demand is really off the charts. And I think they're just scratching the surface of the types of organizations and the types of capital that they can facilitate.

Michal Cieplinski: To be honest, there isn't a company that I can find a reason that shouldn't be using these. We have a lot of companies that don't have recurring revenues, realizing they can obtain this financing and they switch their model into recurring revenues. Think of your car loan, your mortgage, your rent, your phone payments, all of this is recurring revenues. So communication companies can use it. Large property managers use it and can use it as they expand. But the core as we started was SaaS, and it's going to be always a significant portion of our business, because that is very predictable. And then you expand in other areas and other grades within our systems that provide the same level of predictability. 

It's not the round of financing, but the best use case for Pipe is if you have product market fit. Because the moment you have product market fit, and anyone can tell you, you have predictable recurring revenue streams, you can project statistically, as to how you're going to grow that business. And that's where Pipe comes in.