Co-founders of $2B Recurring Revenue Funding Platform Step Down
November 27, 2022
It’s not a loan, it’s a trade. That’s the mantra of Pipe, an alternative finance platform that allows businesses to trade their future recurring revenues in exchange for upfront capital today. It sounds similar to a merchant cash advance but the company has rejected such comparisons in the past. It instead branded itself as the “Nasdaq for revenue” and grew itself into getting a $2 billion valuation just last year.
Last week, however, all three co-founders announced they were stepping down from their roles. In an exclusive with Techcrunch, Pipe co-CEO Harry Hurst said that they realized they needed an executive team that could really take the company to the next level, explaining that “we’re 0-1 builders, not at-scale operators.”
The following day, a story in Forbes suggested that there was more to the announcement, drawing attention to the possibility that Pipe had facilitated deals with bitcoin mining companies and that a source had said that some of them had gone bad. A since deleted tweet by a VC had said that there had been a significant loss on at least one of them.
The timing of Hurst’s resignation, announced before a new CEO could even be hired, allowed rumors to swirl. On Sunday night, Hurst finally addressed them.
4/ We haven’t “loaned $80M to a bitcoin mining company” and “lost it all”. We do have some customers in the space, but none of them have gone to zero.
— Harry Hurst (@harryhurst) November 28, 2022
6/ On the $70M personal loan rumor (perhaps the most bizarre): I haven't taken a loan from Pipe or any other loan against my holdings in Pipe.
— Harry Hurst (@harryhurst) November 28, 2022
11/ Now that’s all been addressed – back to building.
— Harry Hurst (@harryhurst) November 28, 2022
A tweet by a VC that had originally fueled some of the unflattering rumors has since been deleted.
Your Default Rate Is Too Low, And It’s Hurting You
November 22, 2022
There may be no word as terrifying to stakeholders in the merchant cash advance business than the term ‘defaults’.
In an industry where a significant portion of revenue is generated from daily or weekly automatic withdrawals from a merchant’s bank account, defaults can cause deep and lasting problems. Not only do they eat into profits, but they damage relationships with banks and processors- both of which are essential to the success of any merchant cash advance company. Defaults can also be contagious: if one merchant in a large portfolio decides to stop making payments, it can have a ripple effect that leads to other merchants doing the same thing.
All these are reasons why MCA companies go to great lengths to avoid defaults at all costs: they exhaustively screen merchants before approving them for funding and do all the due diligence needed to ensure they can follow realistic payment plans. They also attach a fee to every deal to cover the percentage of the deal they expect will not come back, and conventional thinking would be to aim to keep that number as low as possible.
That’s a lot of work to keep that default rate low, but what would you think if I were to contend your default rate is too low, and it’s hurting your bottom line?
Fear of defaults is paralyzing MCA funders and inevitably leading them to leave opportunities-and money- on the table.
Better Accounting Solutions has been the leading accounting firm in the MCA space for over a decade, and has seen this across the board:
Many MCA companies have adopted a risk-averse approach to avoid defaults, opting for sure-fire deals in higher positions, rather than taking calculated risks that could enhance their bottom line. In the name of capitalizing on low-risk deals with a lower chance of default, many companies choose to fund deals where they charge smaller fees than what they could be charging if they choose to fund deals others are wary of taking.
Let’s look at two deal examples for an example of my thesis:
Average Andrew is the perfect merchant for an MCA company. He is getting a $100,000 advance with a deal length of 7 months (140 days) and with his rock-solid history, his default rate is a meager 6%. The RTR on the deal is 44%, the UR fee is 7%, broker’s commission is 10%, meaning the profit on this deal will be $35,500- a net unit profit percentage of 35%, profiting $5000 a month. He is a great client, and a pleasure to work with.
Now let’s examine his buddy, Reformed Ricky. He’s made some mistakes in the past and now wants a business advance to grow the business he believes is The One. No one else wants to touch him, so you offer him a deal of $35,000. Because he is a riskier advance proposition, you can raise the RTR to 49%, and the UR fee to 12%. On a deal like this, the commission is around 14% and the default rate will be a whopping 18% on a merchant like this, but the profit to be made on this deal is $10,150- a 29% net unit profit, getting $3,383.33 monthly profit over the length of the deal.
Now, looking at the structures of both deals, why would I advocate that someone advancing Reformed Ricky instead of Average Andy? What’s the advantage of working with the weaker merchant over the perfect one?
It’s simple:
Because of his history, you can set the duration of Reformed Ricky’s deal to 60 days (3 months). That means according to the terms of his deal, your profit is 9.67% a month. You’ll be stunned to learn that when you break down your monthly profit on Average Andy’s deal, it is a considerably smaller percentage of 5.00%!
This means every month you’re making more back on the smaller deal, and are getting it to work for you by placing it into new deals and generating more income for you, because of its shorter term. If you’re only taking deals with longer outstanding balances, it will take you a considerably longer amount of time just to make a smaller profit percentage.
On top of this, we also have to account for the compounding effect you will quickly be seeing when you take these ‘riskier deals: because you’re earning more money per month due to the shortened duration of supposedly weaker deals, you will be able to turn it around more times per year, supercharging your growth quicker than what you’d be seeing you stuck to only ‘traditionally-safe’ deals.
I’m not advocating for funders and brokers to be irresponsible and create a new and much less entertaining version of The Big Short, throwing money around to people that don’t stand a chance of paying it back.
I am saying that they should consider funding merchants and positions they were wary of till now, and responsibly assessing the opportunities and upside for them at those positions.
Of course, this doesn’t mean that you should mindlessly funnel money into every deal that comes your way. You still need to be responsible and vet your investment opportunities carefully, and of course, if it turns out you’re picking the wrong deals and your default rate explodes, you will have to reevaluate your approach.
However, working from a place of fear is not the way to grow and thrive, certainly in this business. Moreover, by avoiding risk altogether, MCA companies are likely to become less competitive over time. After all, it’s only through taking risks and innovating that businesses can thrive in today’s rapidly changing world, especially in the rapidly evolving and growing MCA industry, where more and more people are seeking to find their niche.
A great number of successful investors in MCA companies have complained to me that their partners are too conservative with the deals they are choosing to fund and leaving too much capital in the bank, costing the investors higher facor rates instead of working for them.
This approach is a way to break away, and ahead, of the pack, because only by taking the opportunities others keep passing by will MCA companies be able to grow and compete in the long run.
Don’t Forget About Utah’s Disclosure Law
November 14, 2022
While a new era of business moves forward in Virginia and the clock ticks down to compliance with the new complicated disclosure law in California on December 9th, it can be easy to miss state #3 in all of this, Utah.
Utah’s commercial financing disclosure law goes into effect on January 1, 2023. It’s more than just a form. Covered parties must apply for a commercial financing license. A checklist for that can be found here. Similar to other states, the commission paid to a broker must be disclosed but there is no APR requirement.
Think You’re Good at Closing Deals in the US? Apply Your Skills in the UK or Australia
November 10, 2022
Think you’re well-versed in the SMB finance business? You might want to take advantage of a fast pass being offered to replicate your success in the UK or Australia.
The opportunity stems from a proposal posted on LinkedIn by Capify CEO David Goldin. Goldin’s got two decades of experience in the business itself and 14 specifically in the UK/Australian markets. Now he’s looking to personally select a handful of brokers and/or small funding companies and guide them on expanding their business overseas.
But why?
Goldin believes that US operators could bring a certain dynamic lacking in the other markets, complete dedication to a single product where there is a lot of opportunity. “There’s very few MCA shops there,” he said. “Very few of them that are MCA-only companies.”
And so the dedicated MCA broker shop is something uniquely American and could prove to be a potent model if applied abroad. Brokers do play a major role in those markets but they’re a jack of all trades, Goldin explained, offering every product there is, resulting in limited throughput for a single core product. Markets like the UK and Australia offer some unique advantages in that they’re English speaking and the products themselves are already established. Goldin said that there’s an opportunity for US operators that “know how to sell risk-based capital” to come in and leverage the Capify infrastructure and intellectual capital.
To be clear, he’s not talking about sitting in an office in New York or Miami and calling business owners in Sydney and London, but about actually opening up a local office in those markets.
“You got to have a local presence,” Goldin said. “A remote company doesn’t work. You need to actually be there.”
All this would be set up and developed with the guidance of Capify, a benefit that would shorten the learning curve of doing business in a new market. “There’s a lot of stuff to navigate,” he said. “Different regulations, different rules, different clients.”
deBanked first began exploring the Australian market in 2015. At the time, there were about 20 alternative lenders operating in the country. Since then the market has flourished. The population of Australia is only 26 million people, about two-thirds that of Canada, but Goldin said that it’s not as competitive.
“The US is bigger but also 50x the competition,” he said.
For anyone interested in this opportunity, the best way to contact him is through LinkedIn. The original post can be found here.
How the Amazon / Parafin Merchant Cash Advance Deal Came to Be
November 2, 2022Back in December, Parafin, then a fintech startup with 20 employees, submitted a proposal to Amazon to roll out a potential Amazon merchant cash advance product. At the time, Parafin was little known to the general public and its surprise deal with DoorDash wouldn’t even become public until a month later.
The prospect of an MCA would not have been foreign to Amazon given that the company already offers direct business loans, lines of credit through Marcus by Goldman Sachs, and other loans thanks to a successful pilot with Lendistry. But the team behind Parafin were virtual unknowns in the merchant cash advance industry itself. The company’s 3 co-founders, including CEO Sahill Poddar, all hail from Robinhood, the investment app that became wildly popular especially with younger adults over the last several years.
Coincidentally, more than a dozen people employed by Parafin, including the co-founders, are former Robinhood employees, according to profiles reviewed on LinkedIn. It’s part of a trend, it appears, as other members of their team hail from well known Silicon Valley firms like Lending Club, Stripe, Funding Circle, Google, Amazon, Facebook, StreetShares, and more.
Ultimately, Parafin’s big bet paid off. On Tuesday, November 1st, Amazon announced that the Parafin team was the one it had chosen to debut its official merchant cash advance product.
“Amazon is committed to providing convenient and flexible access to capital for our sellers, regardless of their size,” said Tai Koottatep, director and general manager, Amazon WW B2B Payments & Lending, in the announcement. “Today’s launch is another milestone in strengthening Amazon’s commitment to sellers, and builds on the strong portfolio of financial solutions we already provide. This latest offering significantly expands sellers’ reach and capabilities, and broadens their access to capital in a flexible way—one that helps them control their cashflow, and by extension, their entire business.”
“We founded Parafin with the mission to grow small businesses, and we’re thrilled that we have the opportunity to do that by providing Amazon sellers with this merchant cash advance option,” said Vineet Goel, co-founder of Parafin. “It’s a privilege to count ourselves among Amazon’s suite of financial solutions, and we look forward to making a difference for Amazon.com sellers looking to expand their business.”
The product is already listed on Amazon’s website and was rolled out to some US businesses immediately. It will be available to hundreds of thousands of additional sellers by early 2023, the company claims.
Unique to an Amazon MCA is that funding amounts can start as low as $500 and go up to $10 million.
Amazon’s entrance into the merchant cash advance market coincides wih a unique moment in the product’s history as several states are in the midst of imposing strict regulations on their sale.
Broker Fair 2022 Photos
October 25, 2022The Broker Fair 2022 Photos can be FOUND HERE. Thank you so much to all the sponsors and attendees!
Ready for what’s next? deBanked returns to Miami Beach on January 19th! Registration is now open. For questions, email events@debanked.com.
Lavu Adds MCA Product Through Partnership With Parafin
October 7, 2022
It’s not just DoorDash that Parafin has partnered up with to provide MCA funding. Last week, the restaurant software company Lavu launched Lavu Capital to help restaurants owners access capital.
“We are a restaurant software company that focuses on small and medium restaurants,” said Saleem S. Khatri, CEO of Lavu. “Think of your favorite restaurants that have one or two locations that are really really popular, that are ingrained in the community. We do everything from point of sale to online ordering, payment processing, and anything a restaurant would need to start and grow their business.”
Khatri said that one thing they noticed is that these restaurants have a fundamentally hard time getting loans and that led them to connect with Parafin. Parafin’s product is an advance on future sales, not a loan, and their offerings have been simply integrated into Lavu’s technology. Parafin automatically generates an offer for restaurant owners that they can see in their Lavu dashboard.
“…it’s just really beautifully designed,” said Khatri. “It basically says, ‘Hey, you have an offer to borrow up to $5,000. Do you want it yes or no?’ And you just click ‘yes’ and you’re good to go, the money deposits straight into your bank account, and then you have a repayment schedule. And it just pulls it directly from your bank account according to that repayment schedule.”
Khatri says they haven’t really begun to market the product yet and they’ve just started off with a limited base of customers but that the plan is to roll it out to all their customers around the US. They’d even do it with their customers outside of the US if they could, but the tech is not set up to do that just yet.
“This is going to be a feature and an offering that really really benefits our customers because it gets to the heart of what they need, which is they’re in constant need of liquidity, they’re in constant need of kind of tools to run their business better,” Khatri said. “And it just really fits our portfolio of products that we offer to these customers. So the reception has been awesome.”
Think The New California Disclosure Law is Just About a Disclosure Form? Think Again
September 13, 2022
“We’re one of the good guys so of course we’ll comply and include the form with our contracts.”
Variations of the above phrase have been oft-repeated in the last few months by participants in the commercial finance industry when queried by deBanked about California’s new disclosure law. Several companies have shared that they are prepared for what’s to come, but are they? The regulations go into effect on December 9th and begin a new chapter of compliance for the industry.
Though one might be aware that California will require specific disclosures on commercial finance contracts (including purchases of future sales), Katherine C. Fisher, Partner at Hudson Cook, LLP, explained that the breadth of the state’s law will likely require changes to a funding company’s operational processes as well. Fisher told deBanked that there’s not just the matter of disclosing but also the matter of what triggers a disclosure having to be made. What might otherwise be considered the normal discourse between a funding provider and a customer prior to a deal being consummated is now an area requiring close examination.
“If a broker sends a text to a merchant with the offers, could it trigger this?” is one scenario she posed about the threshold for disclosure.
The funding provider needs to know the answer because once the disclosure requirement is triggered, the broker needs to relay back the details of the offers made, the specific disclosures provided, and the timestamp of when this took place. All of this data then needs be stored by the funding provider to maintain compliance.
And funding providers will need to be vigilant.
“The funder is responsible for broker compliance,” Fisher said.
The entire process of who-said-what, when, and how will suddenly become a realm requiring tight control it seems. And that all comes back to the form itself, which is not all that simple either.
California will require funding providers to estimate an APR on a purchase transaction using one of two methods: the Historical Method or the Underwriting Method. While the methodology selected is probably best left to qualified counsel to assist with, the likely deviation of a future estimated APR from a backwards-looking APR was a reality considered by state regulators. To bridge this gap, California requires that funding providers disclose reasonably anticipated true-up scenarios. A true-up in this instance refers to the already well-established option for a merchant to perform a monthly reconciliation of payments if the amount collected is above or below the purchased percentage specified in the contract.
Though the very nature of the reconciliation is a consequence of not being able to predict the future exactly, California’s law requires that funding providers disclose the dates and amounts of the true-ups that they reasonably anticipate. Such concepts and mathematics, once perhaps the subjective domain of a funding provider’s in-house underwriters will soon be subject to regulatory scrutiny for total accuracy. And this just scratches the surface.
The scope of this law is so unique and technical that the Hudson Cook law firm spent a considerable amount of time preparing a guide on this very subject. deBanked saw some of the pages of this guide during a call.
Fisher, meanwhile, insisted that compliance in California is different than compliance with the law recently enacted in Virginia and that if funding providers wait until December to begin preparing, it will probably be too late to be ready in time.
“This is more than just a form,” Fisher said. “You need to spread the word about it.”
