Pipe built a $2 billion business by turning companies' ARR into cash advances with the promise of repayment down the line from a growing stream of customer payments. But in a deal with AngelList, Pipe is targeting a new kind of business: venture firms.
While venture firms don't have the same notion of "revenue" that you'd see at a software startup, venture firms do get management fees, paid by their LPs over time, to cover the cost of the firm's operations. Now Pipe is giving general partners the chance to take more of those management fees upfront.
"For a GP that draws a management fee in cash over a number of years, Pipe provides a way for them to access that capital upfront for a number of use cases, for example, but not limited to, diversifying their personal investments into spaces outside of their fund's investment thesis, using the capital for a down payment on a house and investing into operating expenses like staffing to scale up for the next fund," Pipe co-CEO Harry Hurst wrote in an email to Protocol.
Venture funds typically operate under a "2 and 20" fee structure where firms receive 2% of the assets under management as an operations fee and 20% of the profits on exits. For larger funds or well-established firms with multiple funds, that 2% management fee can be plenty of money. But smaller funds and emerging managers have had to get creative on how to get more funding upfront to cover the cost of launching operations.
Some smaller funds, for example, charge 3% fees and front-load fees to offset initial costs. In a much more unconventional path, both Backstage Capital and Earnest Capital conducted crowdfunding campaigns to help raise money for operations in exchange for future profits.
The Pipe-AngelList deal will provide venture funds with another option: GPs can pay a small fee to Pipe and get up to four years of management fees in advance. It's not a loan and there's no interest, according to AngelList. (Revenue advances or merchant cash advances, as products like this are known, are generally viewed as the sale of future revenue and hence a commercial transaction versus a more heavily regulated loan.)
For Pipe, it's a push beyond its original market of SaaS companies. While Pipe focused on that market at first, Hurst said that more than 50% of its business now has evolved into other categories: direct-to-consumer companies, streaming services and even service-based businesses like pest control and gyms. While venture fees may not be a traditional "revenue" stream, for Pipe, it's another flow of cash it can tap in to.