Problem: Financing options for startups are extremely limited: either equity or debt. Founders must give up ownership in their company or take money from banks at non-zero interest rates.
Solution: There’s been a lot of buzz online recently about alternative forms of financing for startups or SaaS companies with reliable, recurring revenues. The current model is something along the line of what Pipe has done by creating a “financing platform that provides non-dilutive financing to SaaS companies in the form of an instant cash advance.” As reported by Forbes,
The Los Angeles-based startup has raised $6 million in a seed round led by Craft Ventures, with Fika Ventures, MaC Ventures, Naval Ravikant, WorkLife Ventures, and The Weekend Fund participating.
“Until now, the main financing option for SaaS companies has been dilutive equity rounds,” said David Sacks, cofounder and General Partner at Craft Ventures. “Pipe is the tool every SaaS founder has been waiting for. It allows SaaS companies to grow without dilution by financing their SaaS receivables.”
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“SaaS companies have wonderfully predictable recurring revenues that, assuming negative churn, last forever. The problem is that their customers want to pay for their subscriptions monthly or quarterly,” says Hurst, cofounder and co-CEO of Pipe. “Founders of high growth startups find themselves discounting revenues by as much as 40% to entice customers to prepay annually, and at the same time, raise dilutive equity capital to bridge the gap between the cash flows.”
The concept is best described by Alex Danco in his blog post “Debt is Coming” (I recommend you read it for yourself) and was additionally expounded upon by Patrick McKenzie from Stripe in his Tweetstorm on SaaS-cash flow backed securities. Essentially the idea is to give companies money today for the reliable MRR cash flows that will eventually return in the future. The benefit of such agreements are that companies no longer have to discount annual memberships and can retain equity in their companies.
The business would compete directly with Pipe (right now the only major player in the market) and innovate on the recurring revenue securitization model. Perhaps, the business would allow anyone to invest in these securities.
Monetization: Minimal fees applied to the securitization process or repayment process.
Contributed by: Michael Bervell (Billion Dollar Startup Ideas)