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June 21, 2022

Comparing and contrasting Pipe and venture debt

A dial half surrounded by blue and green lights | Comparing Pipe and venture debt

It can be a tough balancing act to get your product built really well, all while doing the heavy lifting that ensures your company’s growth. It’s even more work to ensure you’re maintaining solid product-market fit while raising the capital you need to make it possible. And as founders and CFOs know all too well, that critical time spent fundraising is also time taken away from product development, customer acquisition, and retention. It’s a lot, to say the least!

One way to lighten the load is to strategically stretch the time between your equity funding rounds. Pipe and venture debt are two key options that can enable you to do just that, while still allowing you to grow your business and extend your runway.

So how does Pipe compare to venture debt, and how can you know which to use when? Let’s start with the basics.

What is venture debt?

Venture debt is essentially a loan with three typical terms of repayment—principal amount, interest, and equity warrants. It’s generally available to earlier stage, equity-backed startups, but it’s not inherently dilutive like equity-based financing. (Heads up: it can become dilutive in some scenarios—we’ll get into that in a bit.)

Venture debt comes with plenty of perks—not the least of which is access to additional capital between funding rounds without further dilution. (Many founders go for venture debt shortly after raising a round, as the amount of venture debt you can access is typically 25–50% of your last equity round.) But there also some important considerations to keep in mind:

  • Covenants. Like a conventional loan, venture debt often comes with with financial covenants, which can restrict your access to other debt financing and require you to maintain certain ratios and business metrics during repayment. For example, your lender might look at your net income growth, percentage increase in Monthly Recurring Revenue (MRR), or changes to Net Retention Rate (NRR) as indicators of your company’s growth and clauses for debt repayment. You may also need to maintain a certain debt-to-income ratio or other similar measures of solvency. If your company falls short of one of these indicators—even if you’re trending in a healthy direction—the lender could raise your interest rate, charge penalties, or even call the loan and demand immediate repayment. (Ouch.)

  • Warrants. Because venture debt can be seen as higher risk for investors, many of these loans come with warrants. Effectively, the warrants can be converted to common shares as an added value for investors. If your company grows and your share price goes up—which is probably what you hope will happen!—lenders can exercise the warrants and buy some of your equity at a lower price. And while this possible dilution is often significantly less than with an equity round, it still could equate to a significant amount.

How Pipe and venture debt compare

Pipe and venture debt both can provide access to capital between funding rounds without dilution. But while venture debt comes with an interest rate, and potential warrants and covenants, Pipe isn’t a loan and works quite differently. Pipe’s trading platform allows businesses with recurring revenue—think SaaS, D2C subscriptions, service businesses, real estate, insurance, media & entertainment, and more—to trade future revenue streams for up-front capital they can use today. This can close the same gaps as venture debt, but by leveraging your own assets rather than taking on a loan, and always preserving your equity.

Similarities between Pipe and venture debt

Like venture debt, Pipe can help you smooth out cash flow and give you a capital infusion to invest in growth when you need it. This can make raising a new round of equity funding less urgent, and allow you to strategically time that round for when it truly makes sense for your business.

On the practical day-to-day side of things, both Pipe and venture debt (except in cases where any warrants or covenants have kicked in with the latter) have a predictable repayment schedule.

Differences between Pipe and venture debt

Pipe and venture debt are also quite distinct from each other.

First off, the way you access the capital itself is different. With venture debt you take money from a lender, often using your assets as collateral. With Pipe, you trade your future revenue streams for up-front capital, so there’s no loan involved at all.

Second is the possibility of dilution. While venture debt isn’t inherently dilutive, if the conditions are right, warrants can put dilution back on the table. On the other hand, Pipe is never dilutive—there are no equity kickers, and you don’t give away any ownership in your business when you trade on Pipe.

Third, let’s talk restrictions. As noted earlier, venture debt can come with covenants—and those can have a pretty big impact on your business, from the ways you strategize to hit certain metrics to what your options are for accessing capital in the future. Pipe doesn’t put those sorts of restrictive clauses on your capital—no traditional warrants or covenants, no strings attached.

And fourth: how much capital you can access will vary. Venture debt limits are typically based on the dollar amount of your last equity raise and are a set loan amount. Conversely, your Pipe trading limit is determined by the health of your business and your recurring revenue streams, not your last funding round. With Pipe, that trading limit is renewed as you pay back the Piped capital.

The takeaway? Pipe and venture debt can both be useful additions to your capital stack that allow you to scale strategically and stay focused on high-impact work like product innovation and differentiation. Venture debt comes with more restrictions and the possibility of some dilution, while trading on Pipe is always flexible and non-dilutive.

The value of non-dilutive financing in your capital stack

Not all funding works for every scenario or business, and different types of financing incentivize different kinds of growth. For example, venture debt tends to focus on year-over-year (YoY) growth; VC funding tends to focus on potential return rates. With Pipe, the more recurring revenue you’ve got, the more capital you may be able to pull forward.

Finding the right balance of financing methods can help you stay nimble, grow at your own pace, and reduce the overall restrictions on you and your business. By layering non-dilutive financing into your capital stack, you can create a longer capital runway between VC funding rounds, while enabling and scaling up product development. With more runway, executives are freed up to strategize, product teams can go forth and innovate, and everyone can focus on what they’re best at: building the business.

Pipe and venture debt, side by side

If you’ve taken on equity and venture debt in the past, layering non-restrictive capital from Pipe into your capital stack can help alleviate VC concerns around debt repayment or cash flow, making your earlier choices all the better for you today. (If it makes sense for your business, capital accessed through Pipe can even be used to clear previous debt so you can grow, cleaning up the books for a stronger series A, B, or C round.)

No matter how you decide to grow, dilution-free capital from Pipe can work well alongside other funding types to position your startup for growth without giving away more equity than you’d like or limiting your flexibility. A thoughtfully combined capital stack, and your strategic thinking around it, can also be a strong look at the negotiating table.

Learn more about how recurring revenue financing through Pipe compares to equity financing, debt, and revenue-based financing.

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.

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