Pipe – Instant access to your annual cash flow

https://www.pipe.com/

by telotortium • 5 years ago

139 93 5 years ago

@Pipe folks: faq doesn’t mention what institutional investor requirements are. Is there information available without going through the Contact Us funnel?

ryan_j_naughton2• 5 years ago

Some of my friends and old colleagues are co-founders of Pipe. Let me ping them and ask them to jump on HN to answer questions.

danmur• 5 years ago

Sounds like a payday loan

mandelbrotwurst• 5 years ago

It's a B2B product.

indolering• 5 years ago

A B2B payday loan.

dillondoyle• 5 years ago

I wonder if that is actually a good idea for disruption that could also do a lot of good for underbanked and underprivileged.

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.

tptacek3• 5 years ago

It's (essentially) factoring.

https://en.wikipedia.org/wiki/Factoring_(finance)

pbourke• 5 years ago

So a payday loan with a fancy name?

andreareina• 5 years ago

Huh, I'd previously thought that transfer of risk was an integral component of factoring, but apparently not:

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).

postingawayonhn• 5 years ago

Australian company Greensill that is involved in this area of finance has just become insolvent. They had Softbank backing.

ryan_j_naughton2• 5 years ago

It's slightly different. It's securitization of a cash flow.

wdb• 5 years ago

This website isn't really user friendly I still don't know what the product is. Sounds like you can sell your customer subscriptions to someone else and get cash now.

throwaway_1237• 5 years ago

Call 877 cash now

nielsbot2• 5 years ago

Sounds similar to what Stripe and Square offer:

------

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"

------

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)

toomuchtodo3• 5 years ago

Slight differences. Square and Stripe extend the credit themselves, where Pipe is acting as a securitization platform for the committed revenue.

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.

nielsbot2• 5 years ago

Thanks. Re: the last part, sounds like Stripe and Square also don't charge interest or equity. (I don't have any stake in any of these companies, but I do run a small business)

tdeck• 5 years ago

This arrangement is called a merchant cash advance, neither Square nor Stripe invented it:

https://en.wikipedia.org/wiki/Merchant_cash_advance

Source: worked at Square when they first launched this product.

edoceo4• 5 years ago

Paypal too

todd3834• 5 years ago

I love seeing ideas like this that seem like a clear win-win. I’m a little nervous about what the fees might be for this service. I wish it was more transparent so you know what to expect. Assuming the fee is reasonable, this seems like it could be a great idea for both sides.

tom_mellior2• 5 years ago

This sounds like a useful service. But let's get our terms clear:

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.)

OJFord• 5 years ago

Yeah, the FAQ makes it sound like it's different because they 'buy your recurring revenue'.. but I'm sure if you lost that overnight you'd still owe back the... 'sale price', so it is just plain old debt.

'Supply' chain financing for hip small SaaS businesses.

tom_mellior2• 5 years ago

but I'm sure if you lost that overnight you'd still owe back the... 'sale price', so it is just plain old debt

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.

aparsons2• 5 years ago

That part is not clear. From the buyer perspective though, unless I intend to use it, or the seller gives me a pretty steep discount, this is equivalent to buying “cash”... so it’s generally a bad investment?

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.

rrrazdan• 5 years ago

Having talked to a competitor of Pipe they do take on the risk of the customer not renewing.

So it is indeed not debt. Probably.

kleinsch• 5 years ago

I'm not an accountant, but this may not be accounting debt. It may sound like debt to you, but selling accounts receivable is a one-time transaction that sells off assets. Your balance sheet no longer includes those assets (in this case subscription payments). Taking on debt means that debt is on your balance sheet. Investors hate debt (they don't want to give you money to pay someone else back), so if you're trying to raise money, it's better to have a smaller balance sheet than a balance sheet full of debt.

edoceo4• 5 years ago

ie: Liability

If your investor cannot see this as effectively "debt" they are unqualified.

jacurtis4• 5 years ago

I think what the parent is saying here is that while it might not "technically" be debt and might not "technically" qualify as a discount, both are still occuring from any practical perspective.

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.

dan-robertson• 5 years ago

This topic came up in Matt Levine’s column a day or two ago[1]. There are supply chain financing companies that let a big business pay suppliers after eg 90 days while the intermidiary pays those companies earlier (at a discount). The theory was that it makes the companies accounts look more appealing (having a lot of accounts payable supposedly implies you’re efficiently using cash by not paying suppliers until later).

[1] https://www.bloomberg.com/opinion/articles/2021-03-10/citi-i...

akrymski3• 5 years ago

This is most definitely debt.

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.

iamleppert• 5 years ago

What are the benefits of doing something like this vs. just getting a loan from a bank? If you already have ARR it’s easy to get a loan. A loan seems both more flexible and cheaper than this.

texasbigdata• 5 years ago

Assumes you can get a loan, and that the cost of capital of said long won't have an equity like instrument attached as a "kicker".

Think SVBs venture debt and the 0.25% warrant attached to sweeten the return.

Also covenant package, personal guarantee, etc.

andygcook• 5 years ago

Most standard bank loans won't give money to SaaS companies because they don't have physical assets to back up the loan and the founders won't make personal guarantees. SVBs venture debt is really only available to venture-funded businesses that are likely to raise another round.

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.

ericcholis• 5 years ago

This raises a wild thought exercise for me. Barring any similarities to a Pay Day loan. Would you use a service like this for your own annual salary? What could you do with the lump sum that you would otherwise have trouble accomplishing?

vineyardmike2• 5 years ago

I would consider this on an occasional basis (eg example 1 once a lifetime).

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.

doovd2• 5 years ago

You could invest that cash flow up front. 2020 was a very profitable year in the stock market

Yes, investing borrowed money is an excellent idea. /s

benjaminjosephw• 5 years ago

It's a scary time in tech when end-users are literally seen as an unrealized capital asset to be speculatively sold directly to investors. There's something dehumanizing about this that I can't quite put my finger on.

nc• 5 years ago

Wait till you see how financial markets work.

echopom• 5 years ago

scary time in tech when end-users are literally seen as an unrealized capital asset

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.

WJW• 5 years ago

Venture _capitalists_ and angel _investors_ are money focused? Who would've thought it. They want to buy a portion of your business because (they hope) it will make them richer, if they also think it's a good idea that is just a bonus.

garmaine• 5 years ago

When was that not the case?

rkachowski• 5 years ago

when was it different?

EveYoung• 5 years ago

What else are customers of a for-profit company supposed to be?

jacurtis4• 5 years ago

I'm sorry that the curtain has been pulled from your eyes this morning. But this has been the case for a very long time.

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.

jareklupinski2• 5 years ago

is this why it's so hard to switch away from a domain registrar?

1f60c• 5 years ago

What's the catch?

alborzb• 5 years ago

The catch is that their slogan is just falsehood.

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.

nojvek2• 5 years ago

Yeah. This is very sleezy marketing.

aparsons2• 5 years ago

It’s a payday loan for businesses from what I can tell.

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.

jacurtis4• 5 years ago

The "catch" is that they take a 6% rake off the annual amount.

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.

herodoturtle• 5 years ago

This sounds a bit like Factoring to me:

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.

eli• 5 years ago

I had the same thought. Actually a very old fashioned way of raising cash flow. Still commonly used in the fashion industry because the clothing maker normally doesn’t get paid until the item sells all the way through to the end customer.

boyband6666• 5 years ago

Isn't this extremely similar to Supply Me (SYME), except they use a lot more buzzwords; blockchain, AI, etc

te_chris2• 5 years ago

I work for an e-commerce company and we've used something similar with clearbanc to pay for marketing spend - they hook into your stripe and use 'AI' to work out eligibility, then take a percentage of the sales made to repay the loan. It's been great, allowing us to pay for much more marketing than our funding rounds would have allowed without having to sacrifce as much equity. Essentially you get to elastically scale your variable costs with demand.

akrymski3• 5 years ago

Would love to know the deal you got from them, any chance you can share the numbers?

te_chris2• 5 years ago

Not my side of the business, but don't think it was anything different to their normal offer. It scales based on sales, so good sales in a month unlocks greater credit in following months.

https://clearbanc.com/landing/uk/cold/ this covers it i guess.

moonbug• 5 years ago

This is offering invoice factoring, an idea as old as commerce.

blntechie• 5 years ago

This sounds very similar to lot of invoice based cash advance services in India. As invoices for recurring or one time services rendered to other companies are generally T+30 or even longer, small and mid size companies uses these invoices for getting cash in advance to keep their cash flow going. And the invoices are rated like loans based on how trusted the company who is being invoiced is. It is a very interesting business I learned about only few years back but must have been in some form or other since when invoice like instruments began to be used.

vishnugupta• 5 years ago

Yeah. Some of my friends lent through https://www.kredx.com/. They made good returns initially but it all quickly unraveled during NPA mess and of course the pandemic.

nt2h9uh238h• 5 years ago

How do they make Money?

DavidPeiffer• 5 years ago

Matt Levine wrote about this topic on his newsletter yesterday. He went into more detail and a funny situation that came up, but from what I can tell Greensill (company he focused on) and pipe are doing very much the same business model.

"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...

ectopod• 5 years ago

Unusally, I think Matt Levine's explanation is confusing.

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.

h1fra• 5 years ago

Is that a PaaS? Ponzi as a Service

AlexMoffat• 5 years ago

This sounds like bill discounting, as described in 1874 in https://en.wikipedia.org/wiki/Lombard_Street:_A_Description_...

srhyne• 5 years ago

https://founderpath.com by Nathan Latka also does this.

ryanmarsh• 5 years ago

The first thing I saw thought when I saw this is, liquidity for other industries should but just as simple. Unfortunately liquidity for most businesses is a complex zoo of companies that want to fuck you out of your cashflow.

kcolford• 5 years ago

What happens in this case if a customer cancels their subscription? Do you suddenly owe Pipe a bunch of money?

akrymski3• 5 years ago

Yes. In their words:

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.

kristjansson• 5 years ago

A thought: presumably the institutional investors are going to be both better equipped and more eager to extract money owed to them, whereas a SaaS business is more likely to cut losses, offer discounts, deferrals, free months to customers facing hardship.

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?

rmrfrmrf• 5 years ago

We wanted flying cars, instead we got 140,000 fintech companies

jareklupinski2• 5 years ago

it's a lot easier to move millions of dollars than a half cubic meter of water

ab_testing• 5 years ago

How did you get to acquire the pipe.com domain. That must have cost a fortune ?

nojvek2• 5 years ago

The issue with turning monthly contracts into annual contracts is that folks on monthly contracts usually are there because they want to de-risk and pay for a couple of months as a test drive before forking up an annual contract. They’re inherently more likely to churn than customers on annual contract. At-least that was my observation working at different startups.

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.

Pipe – Instant access to your annual cash flow

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