In a recent press release, San Francisco-based Arc announced it has raised $150 million in debt financing and $11 million in seed funding. Founded in 2021, the organization will use funds from its stealth raise to build a fintech solution, especially for Software as a Service (SaaS) founders. While the end product will be a comprehensive banking solution, Arc’s introductory product allows SaaS firms to raise funding based on future earnings at the click of a button.
What Makes the Financial Needs of SaaS Firms Different?
Gartner predicts cloud services will generate $400 billion in revenue in 2022 and grow more than 20 percent year-over-year. Annuity revenue streams are the “holy grail” of business—predictable, regular income streams, ideally spread across many customers to avoid dependence on key accounts.
However, they take time to scale to significance. This often leaves early-stage founders hustling for capital due to the timing mismatch between monthly cash receipts from customer subscriptions and the upfront capital needed to acquire those customers.
Historically, SaaS founders have turned to venture capital and sometimes venture debt to scale their solutions. But these traditional options leave them shackled either with expensive debt or “giving” away equity, which impacts their control and operating flexibility.
Moreover, where a founder triples the value of an organization in a year, traditional equity financing comes at a 200 percent cost of capital. And in the world of fast-moving, innovative technology, the archaic, offline capital solutions can be doubly frustrating, ultimately limiting growth.
The Arc Solution
Arc has partnered with Stripe, one of the world’s largest and most valuable private fintechs, to build a full-service finance platform for SaaS. In a first-of-its-kind, SaaS founders will be able to borrow, save, and spend on a single digital platform. In addition, they can access growth funding without diluting their ownership. Paying for today’s operating expenses is just a matter of tapping into their future recurring revenue.
And, with Arc, they bypass the restrictive covenants, guarantees, and the insolvency risk that come with traditional debt. As a result, Arc is steadily winning over the tech startup industry by providing the kind of capital typically only available to more mature companies and combining it with consumerized technology experience.
“We’re on a mission to help startups grow,” says Don Muir, Arc co-founder & CEO. “Arc provides SaaS startups with the funding alternative they deserve, empowering founders to scale without selling an ownership stake in their business or risking insolvency with legacy credit products. Arc was purpose-built for software founders. Our fintech platform eliminates the friction inherent in traditional capital raising while broadening access to non-dilutive capital, helping founders preserve ownership in the business they’ve worked so hard to build. And this is only the beginning — in the coming months, we’ll be launching a full suite of financial tools to empower SaaS founders to scale their businesses efficiently and retain control. We want founders to know that when it comes to accessing and managing capital, Arc has your back.”
The Benefits of Real-Time Credit Risk Underwriting
Arc can deploy capital in minutes because it leverages technology to underwrite credit risk. By applying machine learning to data obtained from real-time integration to startups’ financial data (via APIs to companies such as Plaid accounting software), Arc’s decision-making is faster than—and superior to—exclusively manual assessment systems.
Better yet, technology-driven analysis removes the inherent biases in traditional “human-determined” financing. Finally, by leveling the playing field, founders from diverse backgrounds are given the opportunity to bring novel solutions to light, potentially addressing under-serviced audiences.
With Stripe’s banking-as-a-service technology, founders can keep (and spend) their funds on a digital platform designed for them. Able to access the capital they need effortlessly, and when they need it, they’re free to grow their organizations efficiently without diluting their ownership.
Who is Involved?
Don Muir (CEO), Nick Lombardo (president), and Raven Jiang (CTO) founded Arc in their last year at the Stanford Graduate School of Business when the campus was in lockdown due to the COVID-19 pandemic. Lombardo and Muir had previously worked in private equity and investment banking in New York.
There they experienced the “slow, offline, and transactional nature” of the deal process, which took no account of the opportunity cost of management’s time. And Raven, a software engineer from Silicon Valley, had observed the growing trend towards consumerized enterprise software.
In 2021, they partnered with Y Combinator and became an early member of YC’s Winter 2022 batch. After meeting hundreds of software founders in the Bay Area, they confirmed they all shared a common pain point—that startup funding is costly and distracting.
Since the launch of the Arc platform, over 100 startups have signed up. Jared Friedman, General Partner at Y Combinator, notes, “The Arc team’s top-notch execution and the strong market need for this product have caused the YC community to rally behind their success.”
Arc is funded by NFX, Bain Capital Ventures, Clocktower Technology Ventures, Torch Capital, and Y Combinator, among others.