Last Week in Boston Tech Deals
The Future of SaaS Financing?
Securitizing SaaS Revenue
I’ve referenced Alex Danco’s Debt is Coming and John Luttig’s When the Tailwinds Vanish a few times already in this newsletter. But, I’m gonna do it again because Alex has a new followup post where he interviews Pipe’s CEO Harry Hurst. Pipe is one of the first-to-market to build a product around Alex’s philosophy. The company is turning recurring revenue streams into tradeable assets. It’s already raised over $65M from investors including Craft Ventures, Naval Ravikant, and Tribe Capital. If you’re unfamiliar with either of those original pieces, I recommend you check them out.
They discuss the impending securitization of recurring revenues for SaaS companies. Recurring revenue customers behave very similarly to fixed income instruments, something that makes them ripe for new disruptive lending models. They can securitize and sell a portion of their revenue, and the money from selling these assets could be used for financing more predictable expenses, like customer acquisition. Equity fundraising could be used for “things that don’t scale.” See: Startups spend almost 50% of investment on FB and Google ads and $1 in every $8 of VC goes to SF landlords.
Pipe is essentially working on a company that is one part securities exchange and one part ratings agency. They want to be the place where healthy companies go to securitize recurring revenue and sell it to investors.
“Analogous to what the NASDAQ did for technology stocks in 1971, though unlike a stock exchange, it’s not equity in the company that’s being traded, it’s the underlying asset that drives the value of that equity – the software subscription.” — Harry Hurst
Founders are waking up to the idea that they are “capital allocators” and are trying to more efficiently raise and spend money. Traditional VC makes so much sense because it’s “free” (you don’t pay it back) and it creates a strong investor-founder alignment from day one. However, selling off to much of your company to VCs and having a sub-par exit can be just as damaging as raising too much debt and going under.
If you have a strong cohort of paying customers, you could capitalize on their predictable revenue to fuel the growth of the next cohort without selling of more of your company. Hurst relates this idea to that of owning a home. Would you give your bank additional equity in your home if you needed financing for basic home improvements?
“Once you’ve got product-market fit with a rinse and repeatable growth strategy, spend is going to shift toward S&M away from R&D and raising equity to plug the CAC to payback gap in cash flow seems like an incredibly expensive way of achieving this” — Harry Hurst
Although this alternative financing strategy might be seen as a competitor to traditional debt or equity, it also might align well with the end goals of founders, VCs, and LPs. For example, if a SaaS-focused VC fund was able to get all of their portfolio companies to be just 5% more efficiently capitalized all the way to exit, what could that do for VC fund structure? Could they maybe squeeze out 1-2 more investments in new companies or reserves? This is aligned with what VCs want (more bets = higher chance of more wins), what LPs want (more bang for their buck), and what founders want (less money spent on other startups = more of the VCs reserves could go to them).
Innovative lending strategies are cool, but we’ll see how the company can do in the long term. At the end of the day, capital is still a commodity. More companies like Pipe are guaranteed to pop up (For example, Capchase is a Boston-based firm that’s working on a similar product), and differentiation will have to come from things like the exclusivity of the investors on the platform. Plus, how capital-savvy are founders really willing to get, especially at the earliest of stages?
There are a ton of other interesting points raised in the new interview and I’d recommend checking it out. Some other good articles on the topic:
Stuff I’m Reading:
Boston’s Q2 shows startup rebound isn’t ahead of us, it’s upon us — TechCrunch
Stanford Students are Short-Circuiting VCs by Investing in Peers — TechCrunch
Microsoft to Continue Discussions on Potential TikTok Purchase
VC Financing Deals:
ClimaCell 🌧️
Boston-based weather intelligence platform ClimaCell just raised a $23M Series C led by Pitango Growth and Square Peg Capital. The company helps businesses get more actionable insights about the weather and how it will impact their daily operations. It can generate customizable HD weather maps with its weather API and produce historical weather data for AI models. It also has a consumer-facing app called Weather Assistant. The four-year-old company has now raised over $105M since its founding.
Flooid Power Systems 🔌
According to a Form D filing, three-year-old Flooid Power Systems is in the process of raising $1.5M, with $145K closed. They Holyoke-based company is building a renewable energy source that harvests the power of Earth’s gravity — requiring only “solid ground and air” for location requirements. From what I could find, it uses an air compressor to move a special fluid through a closed, tower-like system that makes a turbine spin to generate energy. The heat from this compression process supposedly also generates energy.
Envel 💰
In late June, I wrote that Envel was raising $3M. A new Form D indicates that they’ve closed on a $2.73M convertible note. Founded by Steve Le Roux and Diederik Meeuwis, the fintech company uses AI to automatically allocate your money into “envelopes” used for specific spending purposes. It also includes features like bill splitting, a gamified Money Management Score system, and physical debit cards. The product is still in beta, but is set to launch at some point this summer.
GALY 🧬
GALY, a startup making cell-based cotton, just raised $2.68M. Based in both Boston and Brazil, the company wants to be a platform for creating various biomaterials by growing them in a lab instead of on a farm. In April, they raised $330K from winning the Global Change Award — a competition for sustainable products backed by H&M. According to Crunchbase, GALY has also raised from the accelerator group Brinc. They’re currently hiring various cell culturing and bioinformatics scientists.
GenesisAI 💻
Cambridge-based machine learning protocol GenesisAI is raising $2.5M, per a Form D filing. The two-year-old startup wants to build a marketplace that connects companies in need of AI services with companies looking to monetize their AI technology. According to NetCapital, the company is/was raising money through crowdfunding at a $12.4M valuation. Crunchbase also lists the company as having $910K in funding raised from Queen City Fintech and StartFast. Linkedin shows that they have six employees, led by CEO Archie Cheishvili, who developed the idea for GenesisAI while building his previous startup Palatine Analytics.
An in-depth breakdown of the company here.
6K ⚛️
Per a Form D, materials company 6Kis raising $2.2M in equity. The company is building an advanced materials production platform called “UnitMelt.” It centers around the use of microwave-based plasma technology for generating advanced materials. “6K’s platform technology is tailorable for synthesizing nano and micro-sized powders, spheroidizing and densifying metal and ceramic powders, and depositing these materials on targeted substrates through plasma spray deposition.”
SunDensity 🌞
SunDensity is currently raising $2.5M, with $2M of which already closed, per a Form D. I last wrote about them in December when they received $75K from the Buffalo-based CDFI LaunchNY. Their products utilize Photonic Smart Coating Technology to convert light wavelengths in order to maximize efficiency for solar panels, architectural glass, optoelectronic instruments, and more.
128 Technology 🌐
Six-year-old 128 Technology has raised $20M in equity funding, according to a Form D. With previous backers including G20 Ventures and the Perkins Fund, this puts their total funding at north of $100M. Their software makes it easy for businesses to customize the way that routers work within a network. From the company’s website, “Our professional-grade software teaches routers the language of applications and services, letting them understand the requirements of individual services and segments, and adapt the network dynamically to deliver what the business needs, when and where it needs it”
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