April 14, 2020

Attention SaaS Companies: A New Non-Dilutive Financing Option Has Arrived

What if you could turn your MRR into ARR in just a few clicks? SaaS financing doesn’t have to mean dilutive equity or debt anymore.

Most SaaS leaders face the same dilemma at some point in their journey. The good news: you have product-market fit, you’re selling subscriptions fast, and your monthly recurring revenue is predictable. The bad news: closing new accounts takes time and money, and while your churn rate might be low, the majority of your customers prefer to pay monthly or quarterly, forcing you to offer deep discounts on annual contracts (our data shows that average conversion to annual pre-paid is only 7%). You have the subscriptions booked—but you don’t have cash-in-hand.

With this cash flow conundrum, how can a SaaS company fund growth? Historically, there have been two main options for raising capital—equity or debt financing. But today, SaaS companies have a better alternative, and that’s Pipe.

Traditional Financing: Short-term Gain, Long-term Losses

Since many SaaS startups can’t grow rapidly with the cash they have on-hand, they often exchange a portion of their company ownership in exchange for capital from tech investors. Especially at an early stage, this allows for faster growth. But founders dilute themselves—and their employees—as they exchange equity for more capital in order to fund growth. The reality is that founders who put their blood, sweat, and tears into building and growing their companies often end up with low single-digit percentages of their companies.

Aside from equity capital being very expensive in the long run, many companies don’t have access to the venture capital firms and tech investors Silicon Valley is known for. Bootstrapped, scrappy companies that have a solid business model and need to fund growth might not be in a position to go out fundraising. They might not have the bandwidth, connections, or desire to hand over equity for capital.

Debt is another alternative, but there are a number of reasons why debt financing isn’t ideal for SaaS startups. Typically, debt financing takes a long time to get in place—even up to six months in certain cases. Beyond that, taking on debt is often a long-term commitment, potentially up to 3–5 years. Some debt financing deals require personal guarantees, and often require warrant coverage which means free equity for the lender and further dilution for the shareholders. In general, most company founders and leaders agree that it’s best not to have debt on your balance sheet at the end of the day.

Don’t Even Think About Discounting Your ACV

With the overwhelming majority of subscribers preferring to pay monthly or quarterly, many SaaS pricing models discount the total value of a yearly subscription in order to get customers to pay upfront. These annual prepaid contracts are discounted anywhere from 20–40%.

While this is seen as a necessary evil in order to close deals and get up-front cash flow, it is problematic for a variety of reasons — the biggest is that by lowering your ACV, you are in effect lowering your enterprise value as investors/acquirers will look at what your customers are willing to pay. In the future, this can impact fundraising or acquisition efforts. Once again, a short term payout with long term consequences.

A New Solution to Fund Growth

Dilution, debt, lower enterprise value—you likely agree that these more traditional financing options aren’t the most efficient or appealing, nor are they worth it in the long run.

There’s a new solution for SaaS companies that have proven product-market fit and predictable customer retention. Pipe provides financing to SaaS companies in the form of an instant cash advance based on your MRR receivables. We can turn your MRR into ARR by advancing you a full year of cash flow based on your booked revenue. It’s as if all of your customers paid you upfront.

Working with Pipe is a win-win—you get the cash you need in a few clicks without debt or dilution, and you don’t have to lower your annual contract value.

Interested in finding out more?

Let’s connect on LinkedIn or reach out to me directly harry@pipe.com

Thanks for reading!

Harry Hurst
Co-Founder/Co-CEO
Pipe Technologies Inc.

Disclaimer: Pipe and its affiliates don't provide financial, tax, legal, or accounting advice. What you're reading has been prepared for knowledge-sharing and informational purposes only. Please consult your financial and legal advisors to determine what transactions and decisions are right for you and your business.