The global equity and debt markets are to the tune of $170-200 trillion. The cost for these equity and debt are calculated by modeling future cash flows of a business. These cash flows are based on revenue of a company which are in turn based on Procurement Orders or contracts with the customers.
These contracts are guaranteed revenues (give or take) and hence worth their weight in gold. At a time when bond yields are negative to zero, corporates and institutions are competing to purchase these contracts. Pipe is a two-sided marketplace that connects companies that have predictable monthly or quarterly recurring revenues with institutional investors and recently raised $50 million (in equity or VC money btw) which shows the excitement around this business model.
For the companies, this means higher revenues and shorter sales cycles while investors are getting a higher return than they are used to from bonds.
How do they do it?
The machine lending algorithm plugs in to the accounting, payment processing and banking software and calculates two conditions:
- If the unit economics is positive; and
- If the ad spend is positive (LTV:CAC ratio).
If both the metrics are satisfied, the algorithm doles out the term sheet in minutes.
Why does it make sense?
Research suggests 40% of VC money goes straight in the hands of Facebook and Google as user acquisition spend. Businesses are funding their growth using the most expensive capital in the world as it comes with a heavy price of equity & dilution of ownership in. Bank loans require huge guarantees where founders have to put their personal assets in line.
This is a heavy price to pay for growth. Companies are understanding that Equity or debt might not be the right structure for these deals.
The recurring revenue asset class gives a chance to investors to invest in a fixed income-like product for recurring revenue streams.
And companies, can trade their monthly recurring revenue to get upfront capital (or the annual recurring revenues, so to speak). Without any dilution or debt.
With strong backers, companies like Pipe, Brex, Kabbage are offering direct access to capital markets to bootstrapped companies, early stage business and public listed companies.
The rise of subscription economy has paved the way for this business model where there is no dearth of capital if the SaaS or e-commerce business of a company is proven.