July 11, 2022
Pipe versus equity financing: What’s the difference?
Equity financing is a major source of capital for growing businesses, especially for founders based in the US. But it’s not the only way to capitalize your business if you want to avoid dilution. Some founders bootstrap their businesses, others opt for venture capital or business loans (including revenue-based financing and venture debt), and many are turning to alternative financing, like Pipe.
So how do equity and Pipe stack up, and how can they work together?
When equity financing makes sense—and when it doesn’t
For many founders, equity financing is key to getting a new business off the ground. Pre-seed and seed-round funding from a venture capital firm or other investor allow ideas to become real companies, and equity can help you realize a vision. Early on in the process of building a company that opportunity can make dilution a worthwhile trade-off.
But as your business grows and you’re looking to scale predictable spend, equity financing may no longer serve your goals. While it provides you with working capital, it’s also highly dilutive, which can come at a high cost. When you have a proven business model that’s generating recurring revenue, dilution can feel like selling an investment that you know is about to increase in value.
Introducing recurring revenue as an asset class
If you want to avoid dilutive financing (and dilution itself), Pipe gives you a new way to finance your growing business while retaining your ownership interests. You can use one of your most valuable assets—your recurring revenue—to generate capital without giving away your business.
Pipe’s two-sided platform lets you trade recurring revenue for up-front cash when you need it without sacrificing your equity. Investors bid on your anonymized recurring revenue streams, based on the health of your business. Bid prices on average are around 92–98 cents on the dollar (or 92–98 pence on the pound) and continue to increase as you trade on the platform. That means the more you trade, the more capital you can access up front.
With Pipe, you trade a future revenue stream, so your customer relationships are protected. Your customers continue to pay you directly—right on schedule—and you repay Pipe by ACH. It’s secure, simple, and seamless.
→ The takeaway? Pipe offers alternative financing with no impact to your ownership interest. Equity may cost marginally less today, but the dilution can come at a huge cost to founders, operators, and employees with stock options down the line.
Capital in hours, not months
In addition to protecting your ownership interest and decreasing your cost of capital, Pipe can put cash in your hands much faster than traditional equity financing.
Raising an equity round can be an operationally intensive undertaking that can take months of heavy lifting to plan and execute. Equity financing may be needed in the early stages of your business, but it can lead to missed opportunities when you’re ready to scale. Why? Because you need the flexibility and agility to strike while the iron is hot. Whether you’re expanding your operations, growing your customer base, moving into new markets, or developing a new product, time—and your bandwidth—are of the essence.
You can go from setup to funding in as little as 24 hours once connected with Pipe. Future access to capital can move even faster, as you’re already connected to the platform. Just select the revenue streams you want to trade and you’re on your way.
→ The takeaway? With Pipe, you can quickly access the capital you need, when you need it—without the heavy lifting it takes to raise a new round.
Flexibility for you and your customers
Maybe you’re kicking off a short-term project and need funds to get moving, or need to extend your runway to scale operations or take advantage of a time-sensitive opportunity. Equity financing, as we now know, isn’t typically an overnight deal—and shouldn’t be used for predictable spend like sales and marketing. So what’s a founder to do?
Some might be tempted to offer discounts for up-front payments and annual contracts to help get cash in hand sooner, but this can hurt your profitability. With Pipe, you can get the cash you need, when you need it while still giving customers flexible payment options. Once you're connected and approved on the platform, you can simply select a portion of your revenue streams to trade and get started.
→ The takeaway? With Pipe, you’re in control of when you access capital, so you can be agile and not use precious equity dollars for predictable spend like sales and marketing. Plus, you can still provide customers the convenience of flexible payment terms with less impact on your profits margins.
When Pipe and equity financing work together
Picking your capital stack is all about doing what's best for your business. Sometimes that means a round of equity or taking on a loan—or trading your revenue streams for up-front cash.
When you’re starting from scratch with no revenue in place, or if you’re investing in your business in a way that won’t cash flow in a predictable manner (like R&D, for example) equity financing can be a great option. But if you’ve established a steady stream of recurring revenue, you’ve created a powerful asset that you can trade for up-front capital on Pipe—without any dilution.
In the long run, it’s worth it to consider that equity is the most expensive of your financing options, because your company is inherently valuable. And it can become even more valuable as your company grows. Founders who want to avoid dilution may turn to loans as an alternative. But while business loans and even venture debt can seem cheaper than equity, they can come with warrant coverage and restrictive covenants that become more constraining and expensive as you scale.
Luckily, Pipe works seamlessly alongside other financing options. With the right mixture of financing, you can minimize the weighted average cost of capital (WACC), optimize your capital stack, and achieve your ideal balance of leverage, dilution, and liquidity.
→ The takeaway? Using Pipe can be a better option than equity while you’re scaling, it’s non-dilutive, and it’s less restrictive than a loan. Pipe can seamlessly layer into your current capital stack—or act as your main source of financing once you’ve got a steady stream of recurring revenue.
Why should you Pipe it?
Pipe allows you to diversify your capital stack with a very low cost of capital. Because your revenue streams are stable, the bid prices on Pipe get more advantageous as you trade on the platform. And if you’re considering debt as an alternative to equity to avoid dilution, keep in mind that Pipe has no restrictive covenants or warrants, and won’t impact your long-term debt-to-equity ratios, as trades can typically be booked as short-term liabilities. This can be another advantage if equity is part of your long-term plan, and can help drive up the value of your company.
Whatever decisions you make about your capital stack, Pipe can work to increase your business’s speed, agility, and flexibility as you scale—while helping you avoid unnecessary dilution. Ready to get started?
This post was originally published in October 2021 and was updated in July 2022.
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.