Michal Cieplinski of Pipe

Welcome to The Puck, Venture Capital and Beyond, a show that explores the evolving landscape in the venture capital world. We'll have candid conversations with today's VCs and entrepreneurs who are shaping those changes. I'm Jim Veer, the managing partner of Veer, Negron, and Troff and the president of CMEG Advisors. This podcast brings change makers to the table to discover the inner workings behind their decision making strategies and ultimately to how they got to where they are today. The size of this market is just ginormous, and PIPE is the creator of this as an asset class.

There isn't even a copycat. On this episode of the Puck, I'm sitting down with Michal Chaplinski, the chief business officer at PIPE, a groundbreaking financing platform. Michal shares his path from serving as general counsel for the Bank of New York Mellon and Fundbox, to managing LendingClub and eventually joining PIPE as part of a team introducing an entirely new asset class to the investment ecosystem. Nehal Chaplinski, welcome to the Puck, and we're thrilled to have you here. Can you take a minute and tell us a little bit about your background and what brought you to the pipe?

Thank you, Jim. Interestingly enough, my background is similar to you. I started as a lawyer. Well, before that, I started as a hedge fund trader. I wasn't that good of a trader.

I was advised I'm better in a of an analyst and operator, so became a lawyer at Schulteier, Offensable, which is not far from my hedge fund roots. It's a major law firm that handles pretty much majority of the work for hedge fund and private equity groups. And after way too many years for Sanity, the law firm, I moved to one of my clients, the Bank of New York Mellon, where I had a legal and operational role in private wealth management and asset management roles. At my height of my career there, nearly $800,000,000,000 of assets were under my supervision at the Bank of New York Mellon. But then a dear friend of mine from way back, Eyal Shinar, was starting Fundbox.

And few weeks after Fundbox was launched, I joined as one of the first hires in The US to basically bring his vision of providing b to b credit to really small mom and pop shops across The US, and that's what we built with Fundbox. I was involved in, most of the raises. We did Khosla. We did, General Catalyst, Spark, mister Bezos, very successful company. One of the winners of the pandemic, in light of what happened with CapEx and OnDeck.

Fundbox did very, very well, so it's fully algorithmic machine learning algorithm work. After Fundbox, I was asked by a dear friend of mine that's actually happens to be my neighbor, Tiva Loca, to join LendingClub, again, in this legal slash operational or operational slash legal role of helping him rebuild LendingClub with a sole focus on acquiring or becoming a bank. So I led the acquisition of a bank at LendingClub, which, as we can see from the stock price performance, was very successful and actually benefited, in light of the pandemic, benefited LendingClub a lot. And then LendingClub being probably what is the largest fintech lender in America, at the height of it, we were providing credit of over $1,000,000,000 per month, 40 to 80,000 applications a day. You can see the scale of it was massive.

I wish the folks there all the best. It's a fantastic company. But in September 2019 via one of the investors, Harry Hurst, the cofounder and co CEO, contacted me, and I joined Pipe. You know, the story of Pipe is we never really slipped on a banana as as they call it. It was more of Josh Mangel, also cofounder and co CEO, and Harry had a problem and identified a problem.

SaaS businesses should be founded differently. They should be financed differently. I didn't know much about SaaS businesses, but when I saw what they were presenting to me, I saw from my trading background, I saw a recurring asset, a fixed income. That moment where all of that flowed is me googling fixed income on Investopedia and showing it to the guys and all of us reading and realizing, do we have something here? Can we turn it into an asset class?

And from there, that was September, October two thousand nineteen, we embarked on the road of building recurring revenues because it's not only SaaS. It's every type of reoccurring asset can be traded and should be an asset class. So that is extremely interesting. And from the perspective of the evolution of providing financing for companies, one of the things that was exciting to me, Michal, about being able to get you on and discuss pipe was where's the world going, where's the puck going with respect to financing alternatives for companies. We know about traditional VC models.

We know about traditional bank models and traditionally AR and inventory financing. What you're doing strikes me as very revolutionary, if not evolutionary. And from your perspective, is it the creating of this new asset class that is the big differentiator here or are there other things that really differentiate you? This asset class has been staring at us for decades. Think of it.

It's not dissimilar to what Uber did or Airbnb. The thesis of Airbnb came out of Craigslist. You and I were renting apartments or houses. It just wasn't a thing. It wasn't a class.

You couldn't really operationalize it, and each and every time it was painful. The same thing with Travis. He got an idea traveling through Brooklyn and London when you had car service and mini cabs, but it was never a thing. It was painful. It's the same thing with recurring or reoccurring revenues.

There are a number of credit funds that were purchasing this type of asset for years, if not for decades. The problem was that it wasn't operationalized, the sourcing of it was very difficult and extremely time consuming. The market was in liquid, and hence, these were more of what, you know, in a trader talk, we would say OTC transactions, one offs transactions for yield. What we have realized is recurring revenues are actually the largest asset class in the world. They dwarf equities and fixed income because every single thing is, can be, or will be recurring revenues.

We started at Pipe, we started with SaaS B2B, but very soon we expanded into B2Cs. Right now, fourteen months since launching Pipe to the broader marketplace, 50% of the traded volume of the platform comes from non SaaS sources. We have direct to consumer, We have property management fees. We have athletes' transfer fees because they're also paid on a quarterly or monthly basis. We have movie and TV royalties.

We have music royalties traded on the platform. There is a massive amount of recurring revenues that can be traded on the platform. I just finished a call with one of our investors, one of the largest telecommunication companies from The Middle East. They would like to start trading their subscriptions. You're talking telecoms, you're talking rent.

Jim, you're talking your salary at this scale. So we're talking about when you think about when you add this, you now understand why I'm saying it equities and fixed income because the whole world operates on it. And what PIPE has capitalized on is the purest form of capital markets. We have a sell side. These are the companies with recurring revenues or reoccurring revenues.

And the difference is that not every single thing on our platform is $5.99 over month or every quarter. As long as over a period of twelve months or greater, it depends on the type of a company, But as long as for an x period of time we can calculate a predictable recurring revenue stream, these types of companies can join up on the platform and be of what we call on our sales. On the buy side, we have banks, pension plans, PWM units, sovereign wealth funds buying it. That has never been possible. These asset allocators in the past had to go via credit funds, via other banks in order to acquire that asset, and it was never liquid nor predictable.

We have opened the world on the sell side to access to the banks, the PWM units, sovereign wealth funds on the sell side. On the buy side, we've given them access to highly predictable recurring revenue streams. I like the best of the fixed income assets. So when you're looking at this from the perspective of the seller side, you know, somebody that's got a $100,000,000 of recurring music revenue because it's Michael Jackson's music library, that's one option. But what about some artist that's out there selling x number of CDs and is doing a $100,000 a year?

Can they both join Pipe? Yes. So that's the interesting part. The buy side seeks all types of businesses. We have businesses with as small as 50 to 100,000 ARR and as big as public company in hundreds of millions of ARR.

Pipe, actually, when the sell side connects their data sources onto the platform, we rate these assets. And as a result, we allow the buy side to buy in bulge brackets in each of every of their grade that we have created, which is associated with yields as well. And we are permitting the customers on the buy side also to trade in and trade out of their position, hence creating liquidity on the platform. So it's a fully institutionalized trading platform that we're building for large asset allocators. From a regulatory perspective, in terms of the sellers, I'm assuming anybody can presumably sell what they have.

On the buy side, is there any security law implications in terms of who can actually participate this or if any of these things are deemed to be securities? On the legal front, these are not securities. These are real asset purchases. We are in the process of obtaining a broker dealer license in the order to turn some of these assets into securities. Right.

The sum would be the large $10.50, $100,000,000 subscriptions that large company, let's say, GM pays to Salesforce. That singular subscription is in hundreds of millions of dollars. That needs to be divided. In order for that to happen, we need to turn it into a security, and we are in a process of doing this. But that's evolutionary step of pipe.

Right now, none of this is a security. None of this has to be. And these are real asset purchasers. No different than you buying your coffee or your things on eBay. You mentioned eBay.

I mean, essentially, you are creating, as far as I know, the first ever worldwide marketplace for buyers and sellers of these revenue streams. That is correct. We have only last week, we have announced opening our UK office. More to come, But the reality of it is that recurring revenues exist everywhere. They exist in America.

They exist in Canada, in The EU, in Asia. Latin America is a huge market for this as well. So these are the natural expansions of us. So for all companies from all of these places, please submit your interest, and we will be moving to each of these jurisdictions as we see the growing interest coming from each given country. But from the buy side, what it provides to the buy side, it provides diversification, which is together with liquidity, a crucial factor of establishing an asset class.

What buy side is interested in is buying assets of different verticals, so not only SaaS, but also direct to consumer, also property management fees, IP rights, etcetera, etcetera, but also across different geographies. They wanna be diversified across the Northern America, but also enter Europe and Asia and Latin America. So creating of a global asset class means liquidity and the diversification. So in the same way you have companies like OPSkins that are creating in skins, and you have all these different exchanges coming up for NFTs, and you have the Bitcoin world, and you have all the different platforms for cryptocurrencies. You're not a lender.

You're not a borrower, but you are a platform that really is allowing essentially the decentralization and creating an opportunity for buyers and sellers to come together. And in the same way Uber, as you were using that example, doesn't have to own cars and doesn't have to have drivers. It becomes that place for people to meet. From a revolution perspective, this is a new way of looking at the world that is very, very creative. It does seem like it is a normal evolution from prior technology, but it's fascinating.

You know, interestingly enough, when we were starting Pipe, I thought that we are reinventing debt. And we definitely are, but one of our investors told us, yes, you are, Michal, but actually what you're doing is reinventing capitalism. Because if you ask what is the core tenant of capitalism, it's a transfer of risk from x to y. What you have created is the purest, most global form of transferring risk from x to y, from the sell side to the buy side. Similarly to what equity exchanges have done, it's just the asset classes several times, if not tens of times, bigger than equities and fixed income because every single thing in the world can be or is recurring revenues.

At scale, you know, my daughters shouldn't go to a bank and obtain a loan. They should, via their app on their phones, obtain a loan. They should, via their app on their phones, be able to pull forward six months, a year of their revenue in order to buy a car or a home. A business owner shouldn't need to when they have a rinse and repeat type of organization. So post the initial vision when they have a growing business, they shouldn't be using equity or debt.

They should be using pipe because pipe is the easiest and the most cost effective solution at that point. You're also talking about access to capital globally. Companies based in Latin America, Europe, UK, America, our rhino via pipe will get access to the largest sovereign wealth funds directly to the banks globally. You know, we have on our platform, we have Japanese banks that are extremely interested in that asset class because there are jurisdictions where yields of 1% or 2% are extraordinary for that type of an asset. So there is a capital that needs to be allocated and that's what Pipe has allowed.

It's allowed of those two parts that could never come to enter. It's not dissimilar to Uber or Airbnb. You had a driver, you had tons of cars, these cars weren't used and a person needed an income. The same with rental properties, the person had a home but couldn't really make it. It's the same thing here.

There is a capital available on the buy side that is waiting to be allocated into recurring revenue companies. So, Michal, I understand when I wanna go stay in an Airbnb, so I'm the quote buyer, and the seller is got a condo. I can do my due diligence by looking online and looking at the reviews and looking at the pictures, and I can look at the neighborhood. So there's a risk, but I can do my own sophisticated due diligence. Who's doing the due diligence?

Is there a rating agency? Is pipe giving a rating to these things? How does the small business revenue stream get compared to somebody else's? Who does that analysis? So let me explain.

For the sell side companies, so for recurring revenue companies, in order to get on the pipe platform, they need to connect their bank account, their billing managers, the way they build their customers, and their accounting software. In some instances, it's all three of them. In some instances, it's two because one solution serves as both accounting and a billing solution. So they connect these three data sources, and out of this, we construct a financial picture of the company. We anonymize the data and turn it into a rating.

We follow a Fitch naming methodology, so triple a's, double a's, a's, B's, etcetera, and plus and minus. So it's in each and every category. And the buy side, via our buy side portal, invests in grades. For the lack of the better way of giving you an example, let's say the buy side wants to allocate $20,000,000. Via our portal, they indicate, I would like to buy 5,000,000 of double a's, 10,000,000 of triple b's.

And in each and every case, they provide their bid price for these assets. You know, that's why we've been named the Nasdaq for recurring revenues because it's no different than trading on any platform. When you buy Uber stock on Nasdaq, you enter, you say how much you wanna buy and what price you wanna pay. And if it matches the sell side orders, the stock gets allocated to you. No different here.

Is there anybody, Michal, now that's currently doing any kind of insurance for people that wanna get insurance on there? Like, in the same way you would get AR insurance? Is there anybody buying insurance for these recurring revenue streams yet? We've been approached by several providers, and it's let's put it that way. It is in the works, especially for a large institutional asset managers that are interested in an insurance wrapper on top of it.

But, yes, it's possible. I just finished conversation with one of the largest investment banks that is interested in providing leverage on these assets. So there are all the features of a mature marketplace that are coming to play because everybody has been looking at this asset and pseudo trading it in the past or buying it, but they could never really make it into an asset class because there were two single one offs transactions versus creating the Nasdaq for recurring revenues, the trading platform for all global recurring revenues. So when you look at pricing, is there something that buyers and sellers can compare it to in terms of I mean, in other words, when you're talking about triple a, double a, is the pricing comparable to other asset classes? Well, we have a comparison tool for corporates, versus corporates.

Yes. It's a significantly better yielding assets, but the reason why we create that we followed a certain naming methodology is for the trading side to be able to compare it versus a certain risk levels associated with the something that they knew, which were corporates. So, yes, they can they can also see the evolution of the bid prices throughout the platform, what are the prices quoted, were quoted in the last three months, six months, a year, and then they can bid for these assets for the next month. If you're a seller on the platform, is the buyer buying a month revenue stream at a time, or is it a year revenue stream, or does it vary? It varies.

Majority, it's twelve months of, recurring revenue streams. Okay. But we have recently opened to shorter periods coming from as every great fintech, we listened to our customers. There were customers that expressed, well, I would like to sell only three months of my recurring revenue. So now you can sell three, six, nine, twelve, and eighteen, and twenty four months of your recurring revenues on the platform.

Because it tracks also the contract. Majority of volume is twelve months. When you've got these revenue streams that are being sold, as I understand it, then any of the complications that you would have for a traditional financing where you would have a default provisions and you would have security issues and guarantee issues, none of that applies here because all we're doing is we're selling the assets. You got it, Jim. Like, exactly.

It's as simple as that. Okay. I've been called by Harry, you know, Pipe's cofounder, I simplify very complicated things. It's actually really simple. When you acquire the asset, as long as you acquire that at market price, at arm's length transaction, which is the features of the pipe's trading platform Right.

Then whenever if there is a corporate disturbance, bankruptcy, any type of procedure Right. It's not affecting the asset that you already bought. You are the owner of that asset. You bought it at the marketplace prior to anything happening with the company in the future. Also, that being said, with the level of the data and our rating methodology, bankruptcies and all of this is is just very, very rare for twelve month period.

Bankruptcies come into a really light if you're providing debt, not our solution, and typically when you're doing three to five years. That's why we get a lot of these questions from our buy side participants, but the moment they understand the platform, they're saying, yeah. Look. The chances of this happening are are the black swan scenarios in principle. Well and also, as the president of a company that does restructuring and liquidates companies and deals with these issues on a daily basis, what's fascinating to me is that one of the things people choke over when they're selling assets when the company is struggling is whether as you related to is it some kind of fraudulent transfer or was fair value exchange.

You're creating a marketplace so that if there are any financial implications and anybody can try to claw back these assets, you've got the perfect defense, which is, of course, it was fair value. It was market. It was the Nasdaq of these instruments. So you've solved an anticipated issue, which is in a downturn when people are actually needing to sell assets. You're a marketplace for people not only to sell profitable assets that are doing very well with recurring revenue streams, but if a company hits a bump and is stumbling and they need liquidity, this is also amazing alternative for them to sell their assets in a way where it avoids being clawed back in an insolvency proceeding.

Yep. You know, interestingly enough, as an operator, I use my legal background extensively for exactly this. In fintech, especially, understanding the regulatory framework and predicting what can happen is is priceless. I mean, like, it's neither for Harry and Josh. And for me, this is our first company.

This is my reiteration number four or five in the fintech space. I tried doing this at many companies. Either the asset class was wrong or there were not enough data connections. Every single thing had to mature in order for Pipe to be where it is. The recurring revenues, the pandemic are very, you know, horrible event for the society at large.

We all moved. My daughters went into Zoom classes. I bought tons of subscriptions for software that they are right now using. We all accepted this new world. It only propelled the rise of the recurring revenues, and that helped us build the asset class and then expand it into other areas of recurring revenues as they're all growing.

I mean, like, I I have subscriptions for my coffee, my food, and several of other things, and many, many American households do. That's all recurring revenues. Your cell phone bill is a recurring revenue. Your loan, your student loans are recurring revenues to somebody. Oh, absolutely.

So you can turn a different product, which is a loan, into actual recurring revenue product to the buy side. The size of this market is just ginormous, and Pipe is the creator of this as an asset class. There isn't even a copycat. It's one of those. You may have many banks, many credit card companies, but when you look at the trading platforms, all that matters is liquidity and the diversification.

Liquidity means the largest wins. There cannot be many large ones. There will be one because the buy side will flock to the trading platform that provides with the right liquidity and the diversification. That is the reason for our expansion into other sectors and verticals and also the global expansion because we wanna provide the buy side as much of a diversification in terms of an assets so that it could on the risk adjusted yield, then could calculate it and get to the yield that they are seeking. So when you talk about expanding in a different verticals, one question I have for you is when you look at commercial real estate and you look at the rent moratoriums, for instance, you're gonna have a lot of landlords that are gonna have a year period of rents that weren't collected that are now all of a sudden due that is technically a recurring revenue stream that was on hold for a while.

Could a landlord that has a lot of buildings sell their rent, so to speak, the back rent on pipe? Because to me, when these moratoriums start to expire, there could be a huge new demand for that. Yes. We have commercial real estate, but we are fairly big with several large property management companies where the trading on the platform, the property management fees in order actually to acquire more companies or expand. We have recently announced a partnership with MicroAcquire where pipe can be used for acquisition of small and midsize companies.

As you know, as a lawyer that assisted many companies in this, you know that there isn't really a financing for companies sub $1,015,000,000 ARR. And as a result, these acquisitions are actually 10 times more difficult than the larger ones where the IBankers come and they help you with pricing for it and getting the acquisition funds for it. So pipe being able to be used by both the target company and the acquirer company as a source of funding. Think of leverage buyout two point o without being leveraged, but just utilizing your assets that you never thought that you had, which are your recurring revenue stream, in order to acquire other companies. That makes sense.

So we haven't really talked about yield, and we haven't really talked about where this fits into the capital structure. If I'm approaching this from the perspective of I'm a company and I need to raise a certain amount of money, whether or not, let's say it's $3,000,000, and I go to an investment banker, I go to my financial advisor and they start talking about, well, you could sell 30% of your company, You could get an AR line or inventory financing line. You could raise junk debt. I mean, there's different ways you can do this. It's gonna range from giving away 30% of your company to somebody wanting a 20% IRR to somebody that's willing to lend you money at 8% for sake of argument or two over LIBOR.

How should somebody be looking at your trading platform from the perspective of capital and and where they fit into the capital stream? I think there's a place for equity fundraising and debt. Pipe is a supplementary. Pipe is a third choice of, funding your company. There is a fantastic space, especially for early stage companies, for equity.

When there is a vision, that is the space where venture is the best suited at providing the capital because they understand how venture capitalists especially understand how to build the companies from scratch and how to help founders with a great idea. The same with venture debt. Majority of it actually comes at the seed round or round a and then it dries out. Pipe is a perfect solution when you have rinse and repeat product, when you have a go to market product and all that you need is a working capital for an expansion of your company, and you do not wanna dilute yourself via equity or have a venture debt that comes with significant financial covenants restricting you from using other solutions or warrants, which at the end are very costly because that's portions of your company. No.

That makes total sense. And if I understand this right, as you said, it's complimentary to other financing mechanisms. It doesn't restrict your ability to do that. The only thing I would say for those people that want clarity, I would assume that if you're doing this, then traditional AR financing that's gonna take a security interest in your revenue stream, maybe off the table, or this would need to be carved out from that. It's in most of the situations, it's carved out and we're getting this carved out, and we cooperate with major banks that are senior lenders.

They understand that the companies want to grow. We're providing capital to companies at a cheaper cost than these companies offering the same products on an annual prepaid basis. And as a result, it's beneficial to the companies, what we're doing, and we don't have issues with cooperating with other lenders. It's natural. Pipe is not an exchange of.

Pipe is an addition. There's a beautiful space when you have rinse and repeat organization, when you have product market fit, and you need money to grow your business. That's where Pipe comes in as the, you know, most cost effective, the easiest to use, and most company friendly solution. And it grows with you. As your ARR increases, your size increases.

It's also your size of the trading limits increases. It also is on need based basis. It's when you take a loan, it's a million, half 1,000,000, 5,000,000 upfront. Majority of companies don't need that money upfront. They want working capital.

Pipe is available when you need it, and you only pay for the capital that you are using. This has been wonderful. And, again, we look forward to seeing where PIPE goes because as we're following the puck, this is absolutely a new trend, and it seems like you are the place to go right now for this. So we will follow you with great anticipation. And, Mohal, thank you so much for your time today.

Thank you, Jim. Thank you for having me. And, yes, the whole world is we're gonna be piping it all. It's exciting to be seeing, and it's exciting to have a Francine at such a great company. And the world of recurring revenues and the new asset class has been born, so we're all gonna be watching it right now.

There you go. You heard that here first.