Note: Revenue and growth rates are estimated from publicly available information.

We estimate that Pipe made $15M in 2021, a growth of 600% over 2020, and will make $23M in 2022. The growth rate declines to 50% as multiple revenue-based financing fintechs crowd the market, and rising interest rates increase investors’ IRR expectations. Pipe makes money by charging up to 1% of the transaction value as a fee from sellers and buyers. However, in many cases, it waives the transaction fees for sellers to attract them to the platform. We estimate that 12,000+ companies have signed up on Pipe, and it mentioned its tradable annual revenue (GMV) to be $1B, estimated to cross $2B by the end of 2021. ~50% of its sellers are SaaS companies, while the rest comprises D2C, media and entertainment, and other companies. 

Note: Revenue, growth rate, and valuation based on publicly available information. Size of the bubble indicates valuation. Both axes on log scale for visual clarity.

Pipe has raised $371M from investors like Greenspring, Craft Ventures, KSD Capital, and Mindrock Capital. It was last valued at $2B at a valuation/revenue multiple of 133x. Pipe’s last funding round (Series A) was in August 2021, when fintechs with high growth and large TAM commanded rich valuations. Pipe mentions that the round was oversubscribed and it ended up raising $250M, against its target of $150M.  As the funding market has become tougher in the last six months, many fintechs have lost substantial value with publicly listed fintechs losing $500B in market cap in 2022. Even privately held fintechs raising new rounds are doing so at substantial discounts. Klarna raised a new round at an 85% discount to its earlier valuation of $45B, and Stripe recently reduced its valuation by 30%.

Pipe makes fundraising for a startup as easy as connecting your cards and checking accounts to a budgeting app like Mint or Truebill. It is a marketplace where a company with recurring revenue sells future revenue contracts to investors at a discount to get funds immediately. Pipe monetizes by taking up to 1% of the transaction as fees from buyers and sellers.

Software enabled marketplace

Pipe’s taking a software-enabled marketplace approach where once a company connects to its software, Pipe automatically matches them with buyers without any intermediaries, data rooms, or investor pitches. This enables Pipe to scale faster with a lesser headcount than traditional service-oriented debt/revenue-based financing companies. 

Marketplace liquidity

Pipe attracts sellers by offering a free and easy way for SaaS companies to find out how much their future revenues are worth in a few clicks without any obligation to take funds. It has expanded its customer base to D2C companies, media & entertainment, VCs, and crypto companies to build more liquidity in the marketplace.

Pipe presents an opportunity to invest in growing companies with high-margin, predictable revenue streams to the buyers, which are financial institutions and banks. Pipe reduces the friction in the investment process by rating the seller's business, facilitating matchmaking based on the buyer's risk appetite, and reducing the time required to invest compared to debt/equity investments.

Pipe vs. traditional startup funding

Unlike equity or debt financing, money from Pipe doesn’t dilute the founder’s stake or create a lien/warrant on the company. Thus, it can be executed quickly without complex steps such as board approvals. The funds sit in the balance sheet as cash on the asset side and a short-term liability on the liabilities side. Unlike annual discounting to existing clients, which often reaches 15% to 30% of the contract value, financing through Pipe doesn’t hit the revenue or gross margin, as companies continue to recognize client payments fully as MRR.

Comparison between Pipe and other forms of financing.

Pipe is one of the first fintechs to wrap revenue-based financing inside a modern dashboard with a neobank-style UX, which traditionally needs significant manual heavy lifting. Pipe is composed of three interconnected parts: An origination and servicing platform where sellers connect their software and that services the investors by remitting monthly payouts, a rating platform that signals how good the company is, and trading exchange for selling/buying the revenues streams.

Pipe works by asking companies making a minimum of $100K ARR to connect their bank account, payment processor, and accounting software to Pipe for free. It analyzes the cash flows, contracts, new logos, etc., and algorithmically assigns a rating to the quality of their revenue. This rating is similar to what a rating agency does to bonds, except that Pipe does it in minutes compared to weeks taken by rating agencies. Pipe also puts an upper cap on how much money a company can raise. The company can see all its contracts in its dashboard and pick the ones it wants to sell to investors, who usually pay $0.85 to $0.95 per dollar. The transaction is instant, and Pipe credits money into the company’s account within a day. When your customers pay you every month/quarter, Pipe automatically debits it from your account through ACH and pays the investors, settling the transaction.  If a company’s sold contract churns before 12 months, they replace it with another contract or rebate the capital they received on a prorated basis.

The launch of Pipe coincides with three macro trends: growth of the subscription economy, low-interest rates, and improvement of fintech infrastructure. 

Growth of the subscription economy

The B2B subscription market, such as SaaS products, is estimated to be worth $600B, growing 15-20% annually, and the B2C subscription market, such as media and ecommerce subscriptions, is estimated to be worth $120B, growing 50% annually. 

Low interest rates

The US Fed kept the effective interest rate under 0.5% from 2020 to early 2022, touching almost 0% in 2020. Thus, investors were looking for higher-yield investments, and SaaS companies were looking for quick and non-dilutive funds to pay for CAC.

Emergence of fintech infrastructure

Fintech infrastructure companies such as Marqeta (card issuing), Plaid (banks API), and Stripe (payments) make it possible for SaaS companies to embed inside their customers’ payments and accounting workflows. Thus, companies like Square, Shopify, and Ramp can underwrite loans to their customers much faster and with less risk than a bank.

These fintech-in-a-box companies also make it easy to pull a company’s financial history through APIs, leading to a mushrooming of modern revenue-based financing startups, differentiating just by adding incremental services. For instance, Arc (raised $181M) adds banking services, Capchase ($950M) buys the future revenue in-house without the marketplace model, and Founderpath ($161M) offers a longer payback period of 24 months. Unlike Pipe, these companies are not marketplaces and purchase the future contract themselves. Pipe also competes with B2B BNPL solutions from Ramp and Balance that let businesses pay for purchases in 30 to 60 days for a fee. 

Unlike equity funding, where companies can raise money in large multiples of their ARR, through Pipe, companies can raise as much as their ARR. The non-equity funding market is still dominated by the likes of SVB and Trinity Capital, who have entrenched relationships in the startup ecosystem, and the fintech players represent a low single-digit percentage of the annual funding volume in the market.

Financial services

Pipe can layer more financial services its customers need to grow, such as checking/saving accounts, corporate cards, virtual cards, ACH/wire, expense management, and Forex support. Its competitor Arc is bundling banking services with cash advances. Mercury, a neobank targeting startups, started by offering checking accounts with modern UX and later added venture debt to its portfolio.

API

Pipe can spin off its core tech as an API to other companies, especially vertical SaaS, to assess customers' business quality and extend financing. For instance, Toast can use the API to determine how much funds it can lend to its restaurant customer to buy new machines, or Mindbody can use the API to lend money to a gym to buy new equipment. Pipe’s API is now in private beta for companies selling mining equipment to crypto miners. 

Geographic expansion

Pipe is currently open to companies in the US and the UK. It can expand internationally to other geographies with large startup ecosystems, such as Latin America, India, and Europe.

More categories

Pipe started with only SaaS companies and scaled up to add D2C, media and entertainment, and insurance segments. It can add more use categories to expand its serviceable market.

Changes in macro conditions

The US Fed has consistently increased interest rates in 2022 as it tapers off quantitative easing to control inflation. This means the buyers will expect a higher rate of return and higher discount rates per dollar of revenue bought, reducing sellers' interest in the platform. Furthermore, startup financing has become tougher compared to the peak of 2020-21. This change in the funding environment can make the contracts of Pipe’s customers riskier with higher than expected churn and expectation of higher discounting from buyers to account for higher risk. 

Commoditization of revenue-based financing

There's a rapid influx of startups providing revenue-based financing like Pipe. These startups are trying to differentiate through minor changes such as longer payback periods or an analytics suite bolted to the platform, with the underlying capital becoming a commodity. This could lead to a highly competitive and resource-sapping battle to acquire customers faster than competitors, increasing burn rates and the need to raise large sums of VC money. The problem is compounded by Pipe’s last funding round, done at the peak of the fintech valuation boom, making it richly valued and less attractive for future investors.

Risk management

It is unclear how well Pipe's algorithms assess sellers' quality and how it prevents businesses from defrauding investors. This is crucial as Pipe is not underwriting the risk for its buyers, and once the buyers purchase the revenue streams, the risk moves to their balance sheets. In a tough financing environment, if the customer contracts churn faster than Pipe estimated or Pipe’s customers shut down, the buyers will be forced to write off their investments and reduce their exposure to Pipe. 

Adverse selection

Many startups prefer to raise money through equity or debt financing as they want a much larger multiple of their revenue and are looking for value addition from them beyond just the funds. Hence, Pipe faces a risk that the startups coming to its platform are the ones that aren’t lucrative enough for VCs or banks to back.