How a New Asset Class Is Growing Out of Subscription Revenue

The pandemic was a light-bulb moment for founders of financing startups, which aim to turn subscription-based revenues into a new asset class.

Bigstock photo

Bigstock photo

Venture funds and bank loans are no longer the sole source of capital for emerging technology companies.

Revenue-based financing, which allows companies to borrow against recurring revenue and return a fixed percentage of ongoing profits to investors, has become a new source of funding for entrepreneurs that don’t want to dilute current investors. Backers of recurring revenues are hoping they will become a new asset class. For so-called SaaS companies — technology firms that charge customers periodically for their software services — and similar businesses, the new financing option has reshaped the landscape of early-stage fundraising.

Revenue-based financing “was invented a decade ago, but it really gained momentum in the last few years,” said Ed Goldstein, a partner at Pennington Alternative Income Management. The growth, he explained, is due in part to the rise of SaaS companies during the pandemic, as remote workers required reliable cloud infrastructures.

Pipe, a trading marketplace that allows companies to raise capital with reliable proof of recurring revenues, has signed up over 10,000 firms for the platform since it was established in June 2020. In May 2021, the startup reached a $2 billion valuation, with $250 million in equity from investors like Greenspring Associates, SBI Investment, and Counterpoint Global. Michal Cieplinski, Pipe’s chief business officer, said the founding members realized that “companies with recurring revenues, [especially] SaaS companies, should be funded differently,” since they showed that they could generate reliable income streams during the pandemic.

Cieplinski explained that compared to traditional financing schemes, such as equity or debt, raising money from recurring revenues has its own advantages. A founder who opts for equity financing gives up a certain level of control over their business and risks diluting current shareholders. While loans can provide non-dilutive and straightforward access to capital, they usually have “restrictive covenants and warrants that can act like a ball and chain” on the business. Companies can secure funding within 24 hours from Pipe, which has developed its an algorithm to assess the quality of the borrower’s subscription-based revenues.


Goldstein said revenue financing is democratizing the capital markets. While the goal for Pipe is to become a marketplace, the “Nasdaq for recurring revenues,” other financing startups in the market, such as Capchase, Bigfoot Capital, and Lighter Capital, are providing “balance sheet loans” directly to these businesses. Capchase and others, Goldstein said, give founders access to “a much more adaptive capital structure than traditional debt financing.”

Miguel Fernández, a co-founder and the CEO of Capchase, said his business targets entrepreneurs with urgent financing needs. Early-stage startups often have limited access to bank loans because most of them have negative earnings, he explained, and regulations prevent banks from lending to companies that are burning through their funds. In addition, Fernández stressed, the underwriting process for bank loans can be much more expensive than getting up-front cash backed by deferred revenues.

With a team of data scientists, Capchase, which was also founded in 2020, has developed a framework that the company uses to decide how much money it can lend to specific borrowers in the SaaS space. “We look at more than 200 metrics,” Fernández said, including how quickly the company is growing, how long their customers stay with them, and how efficiently the management teams use borrowed capital.

Fernández added that investors in Capchase view the lending as the third wave of innovation — after venture capital and venture debt — in the SaaS financing world. These investors, according to Przemek Gotfryd, a co-founder and the chief operating officer at Capchase, include both large and small asset managers who are backed by insurance money, sovereign wealth funds, credit funds with a low cost of capital, and investment banks. One of the biggest challenges for Capchase, Gotfryd said, is to convince these investors that smaller startups with reliable recurring revenues can also be “durable companies on the path of rapid growth.”

Cieplinski said the buy-side of the Pipe marketplace is made up of institutional investors such as family offices, pension plans, and sovereign funds that are seeking to diversify their portfolios as persistent inflation and a low-rate environment threaten the return profile of the traditional stock and bond portfolio. William Davis, the president and managing director of KSD Capital, a Pipe investor, said the rise of interest rates is a key theme that the firm is following in 2022. “The short average life of Pipe’s revenue receivables enables us to continue buying yield without exposing ourselves to duration risk,” Davis said.

“We like Pipe’s marketplace model [because] we can easily invest in the revenue streams of many different companies,” Davis added. “Revenue receivables have been hard to invest in historically, [but] we see them as a major opportunity going forward.”

The future of securitizing recurring revenues remains unclear, according to John Griffin, a professor of finance at the University of Texas at Austin. He explained that securitization is made for assets that are “informationally insensitive and [for which] the evaluation process can be standardized.” Securitization is riskier when there’s little transparency around the future value of the cash flows or ambiguity about the nature of the underlying assets.

Ed Goldstein agreed the financing option has a long way to go before it evolves into a securitized product. Securitization, for example, requires the asset to have some performance history, so that the markets can underwrite the credit performance. But the major market players, such as Pipe and Capchase, were only founded in the last few years. “For the market to efficiently price that asset, there [needs to be] enough time to see how losses might [jeopardize] a portfolio of revenue-based loans,” he said.