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Pipe, the newly launched California-based startup, has completely rethought startup financing.
Normally, startups sell equity to venture capitalists in exchange for money, which is used for team expansion, marketing, operations, and other uses. While this system works incredibly well and will likely not disappear, Pipe has created a new way for tech startups to fund their growth.
Pipe examines the revenue that startups generate from monthly subscribers and pays them the full annual value of that revenue upfront.
For example, let’s pretend Netflix has 10,000 subscribers, each paying $10 per month. That means Netflix is bringing in $100,000 in revenue per month. This is great, but Netflix wants more money to expand faster, conduct more marketing, and hire more employees. They are constrained by only having $100,000 of income per month, however, Pipe can give them the full annual value of their subscribers upfront. In our example, Pipe would offer Netflix $1,200,000 today, and then Netflix would eventually pay them back an annual percentage rate (APR).
This is a win-win. Netflix wins because they get money to expand faster and do not have to sell equity to raise capital. Pipe wins because they charge a high-interest rate, like 30%, because financing a startup is risky. 30% APR seems high for a regular company but is actually a good deal for a startup growing around 5% per month.
I think this model is extremely exciting because it allows companies to scale quickly, while founders retain equity. However, I would like to point out that this model only works for startups that are already doing well. This is not an ideal method for startups that have few customers, are growing slowly, or have little traction. Obviously, in those cases, this type of high APR loan would not make sense for both parties.
Another extremely exciting aspect of Pipe is its “investor” section. Instead of Pipe providing all of the funding and taking on all of the risks for these startups, they opened the financing up to investors. This is essentially turning startup financing into a new, easily accessible asset class.
The investors who want to win more contracts with startups must offer attractive terms, so again, this results in a win-win scenario. Investors get access to this asset class, startups get access to the best financing, and Pipe takes a small percentage of the contract.
Pipe not only makes this asset class investable and accessible but also simplifies the investing process, allowing users to easily track their investments and input their risk profiles.
The “Pipe” Of NFTs?
All of this begs the question, how can we adopt this model in the NFT ecosystem? I think this type of funding mechanism is perfect for the NFT ecosystem. Teams can earn income by selling NFTs to users on a regular or semi-regular basis, which operates like the subscription model that other traditional tech startups frequently use. While the funding rates for NFT startups will likely be much higher considering the increased risk, this model is a great way for NFT startups to raise money without dilution.
It would be incredible to tokenize these loan contracts and turn them into NFTs. This would create a market for startup financing that is accessible to anyone. For example, if the virtual world Cryptovoxels earned $10,000 per month in NFT land sales, then it could access the “Pipe of NFTs” marketplace, where users could offer attractive loan terms. These tokenized contracts could be traded amongst market participants and stream income to the holders.
Perhaps the loans could even be paid back in different cryptocurrencies. So, instead of using something like USDC, which is pegged to the dollar, certain loans could be paid back in ETH. This type of marketplace could be extremely popular and would allow NFT users to fund the growth of the ecosystem.
The company that I believe is best positioned to offer a product like this today is NFTfi. They are already functional and deal with NFT-collateralized loans, so adding these types of startup financing loans would not be far off from their main use case. If these loans are tokenized into NFTs on NFTfi, then they could be traded anywhere, even on platforms like OpenSea. They could even implement various features, like Sablier, to allow daily repayments to the NFT holders. We are in the perfect, high-risk, high-reward ecosystem for a startup like this to exist. If you or anyone you know is building something similar, please reach out!