The global software as a service (SaaS) market was valued at more than $134 billion in 2018, with expectations that the sector will grow to over $220 billion by 2022. The revolutionary model hinging on a subscription or pay-per-use basis has disrupted the industry, ostensibly stemming piracy and allowing access for those unable to afford licenses.
Subscriptions have also been pivotal in keeping many businesses afloat during the global pandemic, though one company suggests that this payment system could work better. With many experts advising that the SaaS sector is heading towards consolidation, LA-based startup Pipe has developed a plan to make smaller companies more competitive against the SaaS giants.
Founded in August 2019, Pipe launched its subscription financing platform in February this year. The company works by facilitating SaaS companies who have monthly or quarterly recurring payments as part of their subscription to obtain the full cash amount of those contracts. This is done in the hopes of preventing firms from raising dilutive equity capital or venture debt. Larger SaaS companies can also benefit from Pipe as the startup allows them to offer flexible quarterly or monthly payment terms to customers instead of requiring them to pay an annual amount upfront.
It's an attractive solution given the economic circumstances.
Depending on the SaaS company, the market-clearing price of assets is anywhere from 85 to 95 cents on the dollar.
"We've invested in building the technology to make the process seamless and instant so that SaaS companies can focus on pitching customers, not investors," said co-founder and co-CEO Harry Hurst in a statement.
Over three rounds, the company has raised over $66 million, with its most recent round in June, amounting to $60 million. This was led by Fin VC with participation from new investors Tribe Capital, Uncorrelated Ventures, Lachy Groom, and Anthemis, as well as existing investors Craft Ventures, Fika Ventures, and MaC Ventures.
It's clear that Pipe's financing platform hopes to change the way the global SaaS business model works fundamentally - and they're hoping it's for the better.
Investors believe that by "providing liquidity [Pipe] will generate a tidal wave of growth and innovation for SaaS companies and positioning subscription contracts as a new and highly valued asset class for global investors," said Peter Ackerson, investment partner at Fin VC.
Notably, Pipe investors will now have access to predictable, recurring revenue-generating assets.
"From an accounting and revenue recognition standpoint, you get the cashflow upfront, and you recognize the revenue each month as you service the customer," Hurst adds. "The benefit here is the top-line revenue is the same; you don't have to offer your customer a discount."