Startups Unpacked | “Just Pipe It!”, BYOS Marketplaces, & Rebranding

Product Market Misfits is now Startups Unpacked

Welcome,

Thank you for being here. For many of you, this may be your first interaction with my newsletter. I'm so grateful to have you aboard! Being a part of this newsletter should be fun, educational, & inspiring.

With that in mind, I'm excited to share something new. Moving forward, “Product Market Misfits” will be “Startups Unpacked”!

Why rebrand? Startups Unpacked describes what happens in this newsletter:

You’ll learn & be inspired by promising new tech startups as I go beyond the headlines to unpack the product & the big idea behind why they're the next big thing.

For entrepreneurs, Startups Unpacked inspires you to think differently & develop new startup ideas.

For angel investors, it keeps you informed of trends & investment theses.

For tech lovers, it makes you excited to help the next big startup get off the ground by trying it out.

Today, I'm excited to be talking about Pipe.com & its big idea: marketplaces that create supply out of thin air, aka “bring your own supply” (BYOS)!

You'll learn more about Pipe and Harry Hurst’s big idea below. Finally, if you'd like to keep receiving the Startups Unpacked, please subscribe below!


What’s Inside

  • Learn- “Just Pipe It!”

  • Get Inspired- BYOS Marketplaces

  • Recommended Reading- Recent long-form content from startup/VC land

  • Startup Pitch-in-a-Tweet - Knightley.co, an off the shelf data room with all the folders startups need to look like a super-founder in due diligence.


Learn- “Just Pipe It!”

“Should I raise capital?” - every founder in the world.

Raising money from friends/family, angel investors, or venture capital firms makes total sense at the idea/seed stages of a company, the most speculative time in a company’s life. Founders need money to bring the idea to life, but no bank will loan them money. That’s easy enough to understand.

But then one day, this question gets more confusing. Revenue appears out of nowhere (or so it seems to everyone else who wasn’t grinding alongside the founder)! Before long, the startup passes $10k MRR, then eventually $100k MRR.

Their investors/advisors say, “YOU FOUND PRODUCT MARKET FIT! GO RAISE A BIG ROUND OF CAPITAL!”

But then one day, while preparing to pitch her 342nd VC of the week, the founder comes across a tweet from Harry Hurst, Founder/Co-CEO of Pipe.com:

“I don’t need investors, I have @pipe,” catches her eye. Investors are expensive. Founders frequently end up giving investors 20%, 30%, or even MOST of the equity in their startup before they stop raising money. They also take up a lot of time that could be spent building.

So, she visits Pipe.com:

Okay but, what does ‘getting paid by the year’ have to do with not needing investors?

This is what a company looks like over time as they collect monthly recurring revenue, burn money, & ultimately need to raise more money twice from investors before running out of cash:

($ = The Startup’s Cash, % = Founder’s Ownership)

It’s a roller coaster cash balance (the big spikes in $ are capital raises as cash balance got low), and the startup gave investors more ownership in the company than they wanted to, twice.

But they have a hidden asset. Even though the cash flow is negative, these monthly revenues are getting pretty predictable:

Pipe studies the predictability of these monthly revenue bumps, using metrics like cohort retention on a logo and dollar basis. If they look good, Pipe says, “hey, cool startup, congrats! What if we just gave you the next 12 months of these revenues upfront? Cool. The money’s in your account already.”

Cashing in on 12 months of revenue up front makes the startup look a little different now (oversimplified+huge assumptions):

What changed? They don’t need an investor.

Every time they sign a new customer, Pipe pays 12 months of revenue upfront, minus a small %. That small % is much less than if they beg their customer to pay upfront with a 20-30% discount.

All the sudden, the startup is cash flow positive. So, they don’t need to raise money from investors anymore, and they get to keep their ownership!

The big implication is that Customer Success is almost more important than Customer Acquisition! Retention is vital. If startups don’t have a history of retaining their customers, Pipe won’t work for them, and it’s back to pitching VC’s (who also won’t love that you have rocky retention numbers). 

For companies who ace Customer Success, Pipe is essentially Cashflow-as-a-Service.

Tech’s newest verb: “Just Pipe It!”


Get Inspired- BYOS Marketplaces

Pipe isn’t the Fed- they can’t just print more money and hand it out to companies with subscription revenue! So where does it come from?

Institutional investors (hedge funds, banks, asset managers, pension funds) often invest in “Fixed Income Products”, and Pipe is aggregating a very stable/safe kind of products that are really similar to fixed income products, software subscriptions.

Software subscriptions are often one of the last bills that a company will stop paying in hard times because it’s often vital to a company’s product/operations. So these fixed income products are very stable for institutional investors. 

So stable, in fact, that institutional investors on Pipe’s marketplace buy a $1 subscription for maybe $0.95. Institutional investors net $0.05 when they buy the company’s $1 of revenue, and Pipe takes a small % as their revenue for facilitating the exchange between the company & the institutional investors.

This marketplace/exchange business model makes total sense to software companies and institutional investors because they’ve seen it before: 

Pipe, the NASDAQ for recurring revenue

For context, here’s a super brief NASDAQ history: 

  • "NASDAQ" was initially an acronym for the National Association of Securities Dealers Automated Quotations. It was founded in 1971 by the National Association of Securities Dealers (NASD).

  • A lot of security dealers were not huge fans of an electronic exchange as it reduced their profits on trades that, at the time, occurred over-the-counter (outside of a monitored exchange, literally over the phone). 

  • But as you can imagine, technology won because it was more efficient, and the fully electronic and somewhat automated NASDAQ eventually became known as “the stock market for the next 100 years!”

  • That story line caught the attention of the biggest tech companies in the world during the dot-com bubble, who listed with the tech-forward NASDAQ. And now, the NASDAQ-100 trades the largest 100 companies by market cap in the world!

Before going any further, I need to say that venture capital is a WONDERFUL financial instrument. Without it, a lot of your favorite companies simply wouldn’t exist. 

But VC is over-utilized by companies with predictable recurring revenue. And in those situations, it’s interesting to draw a comparison between the old security dealers & venture capital.

Today, VC’s trade startup equity over-the-counter (over zoom meetings, on term sheets, and SAFE notes) from one funding round to the next, with a higher valuation each time. Kinda like how security dealers used to buy a stock over-the-counter and sell it at a higher price to someone else.

It’s inefficient to have an over-the-counter process for capitalizing companies with predictable recurring revenue. Kinda like how it was inefficient to run a stock trading boiler room of finance bros:

For VC’s looking to invest in subscription-based companies with good retention rates, those might be harder to come by as Pipe becomes the preferred choice.

And as Pipe’s supply of revenue grows, it can attract more demand, aka larger investors. Then, at some point in the not so distant future, so much revenue will trade on Pipe that it will start to look like how stocks trade on the NASDAQ. 

That’s a big idea! How can you leverage it for inspiration?

Unlike an Airbnb or an Uber marketplace that aggregates pre-existing rental properties or cars, Pipe packages up a supply of revenue. In a way, inventing their marketplace’s supply out of thin air.

A16z dubbed this marketplace tactic: Bring Your Own Supply (“BYOS”).

BYOS is when you augment the supply side with your own “exclusive” supply. There’s a range of strategies here, from better marketing to differentiated testing that better identifies potential candidates to better training in order to create new supply. 

Where it works: This works in supply-constrained markets where the demand outweighs availability.  

Examples:

  • Lambda and Flockjay: Creating a new supply of developers and sales reps, respectively, through specific training programs.

  • Placement and Ladder: Creating a new supply of white collar workers and nurses, respectively, through features like relocation and ISA financing.

Lambda School, Flockjay, Placement, and Ladder are all creating supply from thin air.

And Pipe is a great example of a BYOS marketplace, a trend that we will definitely see more of as the Cambrian explosion of SaaS companies continues (New SaaS companies enable new kinds of SaaS companies to exist). More SaaS companies, more supply for Pipe!

Like Pipe’s fixed income products and Lambda School’s newly trained software engineers, what other emerging marketplaces are currently supply-constrained relative to demand? How can you package up new supply to really move the needle for the demand side?

I’d love to hear your ideas in the comments below.


Recommended Reading

  • No Meetings, No Deadlines, No Full-Time Employees - Sahil Lavingia

    Sahil’s company, Gumroad, grew to $11 million in annualized revenue, 85% year-over-year all without any meetings, and no deadlines - optimizing for “freedom at all costs” & 20-hour work weeks. Sahil wrote an awesome piece on how Gumroad got there.

  • Seven Questions - Phil Libin, co-founder and prior CEO of Evernote

    Phil answers some of today’s most pressing questions, like “what resource do you find yourself coming back to?” and, “how do you proceed when there’s no right answer?”.

  • Why I Believe In Growth Mindset- Pedro Franceschi, Founder of Brex

    Pedro shares an internal Brex company email that he wrote on Growth Mindset. “Failure didn’t mean ‘I failed’, but simply ‘this is something I haven’t learned yet’.”

  • My Homegrown, Personal CRM- Rick Klau

    Rick shares exactly how we duct-taped together a personal CRM that goes way beyond just a list of contacts to actually prompt you to reach out.


Startup Pitch-in-a-Tweet: Knightley


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Send interesting links to me on Twitter at @DanHightowerJr. Email me if you’re working on something cool, to share tips, or correct me when I’m terribly wrong (very likely) at Dan@StartupsUnpacked.com.


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