There are fintech companies targeting all kinds of different segments of the population, as well as companies in different stages of growth.
Recently a new company has appeared that is targeting a popular startup field, and wants to help early stage SaaS (Software as a Service) companies exclusively with their financial needs.
Coming out of stealth today with $150 million in debt financing and $11 million in seed funding, Arc is building what it describes as a “community of premium software companies” that give SaaS startups a way to borrow, save and spend “all on a single technology platform.” And it’s doing so as part of a partnership with Stripe, one of the world’s largest and most valuable private fintech companies.
Simply put, Arc wants to help SaaS companies grow through alternative financing methods so they don’t have to turn to venture capitalists to fund growth at the expense of diluting their ownership. Those same founders could also avoid the “restrictive covenants, guarantees, and insolvency risks associated with raising debt” if they used Arc, CEO and co-founder Don Muir.
“Early-stage SaaS startups face the infamous cash-for-growth trade-off — they are most in need of funding, but they are also at their most vulnerable to raising capital in that they face the highest dilution for every dollar raised,” Muir said. . “This is exacerbated by the timing mismatch between the monthly cash receipts from subscription program revenues and the initial capital expenditures for acquiring new customers.”
MuirAnd Nick Lombardo (Chief) and Raven Jiang (CTO) He founded Arc in January of 2021 and merged the company in April. The trio founded Arc from the Muir living room in Menlo Park during their final year at Stanford Graduate School of Business when the campus was closed due to the COVID-19 pandemic. Prior to attending business school, Lombardo and Muir worked in private equity and investment banking in New York, where they together raised tens of billions of dollars in capital to fund mature and late-stage businesses. During that time, Muir says, the couple experienced first-hand the shortcomings of traditional capital raising — the “slow, offline, transactional nature” of the transaction process.
“An army of investment bankers, credit analysts and lawyers will spend months working in data rooms and building static models in Excel to close a financing transaction that will ultimately cost the company millions of dollars, before factoring in the opportunity cost of management time,” Muir said.
After meeting at Stanford, the trio came up with the concept behind Arc and then teamed up with Y Combinator to meet with hundreds of program founders in the San Francisco Bay Area. Arc was an early member of the YC Winter 2022 group, which launched earlier this week.
“We quickly realized that they share a common pain point – startup funding is expensive and distracting. Even in a zero interest rate environment, mitigation is very costly for startup founders. Meanwhile, bureaucratic and offline banks with legacy underwriting policies and limited bandwidth are unable to Structurally based on serving early stage opportunities,” Muir explained. “Even premium recurring revenue software startups are being neglected by traditional lenders. We founded Arc to give founders an alternative to the status quo. We are on a mission to help startups grow — with technology and without dilution.”
Since the company launched its introductory product – Arc Advance – last summer, more than 100 startups have signed up for the Arc platform. So far, the majority of its clients have been VC-backed B2B SaaS businesses and are seeking to accelerate their growth spending while lengthening their runway before raising additional capital. Lombardo pointed to the fact that Arc’s biggest partnership today is with Y Combinator, which promotes Arc across its portfolio of thousands of software companies, so far, VCs have been a strong customer attraction for Arc. Arc also partners with traditional capital providers, including VCs, banks and project debt lenders. In fact, a large portion of its clients are VC-backed and are seeking equity capital from Arc “as an efficient way to smooth funding needs between spin-offs VC rounds,” Lombardo told TechCrunch. “
For example, he said, “A Series A SaaS is raising $1 million each quarter from Arc Pre-Series B late this year in order to accelerate spending — leading to increased headcount and revenue growth resulting in a higher valuation in Class B.” In this example, the Class A investor also benefits financially from the lower dilution and higher valuation that Arc capital opens.”
Lombardo added that Arc’s clients also include companies that have operated outside of Silicon Valley.
In the coming months, the startup plans to Launching a “complete suite” of financial instruments designed “to enable SaaS founders to efficiently scale their businesses and retain control.”
How is it different and the same
Arc differs from traditional financial institutions that may deploy an army of analysts to manually guarantee transactions, its founders say, in that it uses technology to algorithmically pricing the risks inherent in funding startups.
“APIs provide real-time access to financial data, machine learning drives data value and cloud analytics unlocks automated and scalable processes,” Muir said. “The result is more flexible, efficient and affordable capital that is programmatically delivered to our clients.”
More specifically, the company operates API backend integration from companies like Plaid so they can guarantee credit risk with real-time access to startup financials. It uses machine learning to “dramatically improve the interpretation of the financial information you receive compared to manual analysis alone.” Finally, by leveraging Stripe’s banking-as-a-service technology, Arc customers can store and spend their Arc funding “on a single platform designed for software companies,” the startup says.
To be clear, Arc is not the first company that wants to help SaaS companies grow without dilution. fintech buzz pumps It was established in September 2019 with the goal of giving SaaS companies a way to increase their revenue by pairing them up with investors in a market that pays a discounted rate to the annual value of those contracts. (Pip describes buy-side participants as a “vetted group of financial institutions and banks.”) The goal of this platform is to provide companies with recurring revenue streams with access to capital so that they do not dilute their ownership by accepting outside capital or have to take out loans.
One thing Arc and Pipe have in common? Both allow founders to borrow against the future revenue of their company to grow without diluting their capital.
For its part, Arc asserts that its model differs from competitors even if the tasks are similar.
“We are not a market where we sell customer contracts on a platform like Bloomberg Terminal. Instead, we build a more comprehensive relationship with our customers to help them grow in the long term.” “This approach lends a frequent, full-service relationship with clients rather than casual financial transactions. It also enables Arc to be more flexible on terms and more hands-on with clients. Arc supports long-term SaaS founders and builds a vertically integrated product suite to meet their financial needs, From start to finish. “
Muir believes that her vertical focus on SaaS sets her apart, too.
“While competitors have prioritized horizontal expansion, Arc has doubled over SaaS,” he told TechCrunch. “Our vertical focus allows Arc to serve the unique working capital needs and recurring and predictable revenue attributes of this premium client profile.”
This vertical focus on the industry also presents a SaaS startup with a “unique opportunity to generate network effects” with other SaaS companies through offerings that “benefit all members,” Muir said, including financial comparison insights and community deals.
NFX led the Arc stock round with participation from Bain Capital, Clocktower Venture Partners, Will Smith’s Dreamers VC, Soma Capital, Alumni Ventures, Pioneer Fund, Torch Capital and Atalaya Capital Management. Atalaya also provided the credit portion of the investment. A large number of notable angel investors also contributed to the round, including over 100 founders of Y Combinator-backed companies such as Vouch, Observe.AI, Eden Workplace, Teleport, RevenueCat, QuickNode, Dover, Middesk, Instabug and Rainforest QA, as well as To the “Several Founders of Decacorn Financial Firms”. The former Stripe Owners’ Guild also put money into the round.
NFX founder James Currier, who led the fund’s investment in Arc, joined the startup’s board of directors along with the funding.
“Arc is building a Silicon Valley digital bank for SaaS startups,” Courier said. “The undiluted capital market for SaaS startups is huge and still very early stage.”
Jared Friedman, general partner at Y Combinator, likened Arc to more mature fintech companies like Stripe and Brex, saying the company has “created a fintech product that has mass appeal to startups.”
And that call was another draw for NFX.
“Arc’s vertical focus in SaaS prioritizes the SaaS founder rather than the buy-side investor and allows them to build network effects into their programs to benefit community members,” Currier said.
Over the past six months, Arc has grown its team from three co-founders to 15 employees, including senior software engineers coming from Google and LinkedIn, and finance and strategy people from Brex, Silicon Valley Bank and BCG. The company plans to double the size of the team in the first quarter of 2022, focusing on engineering, data science, underwriting and sales.