Arc is the Future of Startup Finance

Fragmentation in a large market undergoing technological disruption is inevitable—startup finance is no exception.

Over the past decade, we’ve seen a proliferation of fintech point solutions percolate to tackle discrete pain points across the finance stack. Digital banking. Expense management. Corporate charge cards. Forecasting. FP&A. There are multiple fintech startups whose entire business revolves around improving the experience within each of these product segments.

While these solutions are a step in the right direction, they leave much to be desired. And the broader addressable market remains wildly underpenetrated given deeply entrenched relationships between corporations and the legacy financial institutions who still dominate the market. Moreover, the fragmentation of fintech point solutions creates a disjointed product experience, which is distracting to founders of pre-IPO tech companies who do not have large internal finance infrastructure built out. Most importantly, given these fintechs operate in silos, point solutions further fragment an organization’s financial data, which means founders can’t always see clearly when it comes to making mission-critical financial and operational decisions - raising money, managing expenses, or improving unit economics.

Enter Arc. We’re changing the paradigm by reimagining and rebuilding the entire finance stack from the ground up.

In doing so, we’re putting software founders back in control of their financial future. Better yet, we are leveling the playing field for the tens of thousands of startups who can’t rely on their network or pedigree to raise money. We’re helping founders scale faster, on their terms, and without restriction.

We are the future of startup finance.

LEGACY FINANCIAL INSTITUTIONS

Traditional corporate banks have dominated lending, deposits, and cash management since the dawn of civilization, with financial services now representing >20% of U.S. GDP—Silicon Valley is no exception. A founder’s relationship with their bank is about more than just managing deposits. It’s also about finding a partner to fund their vision, make payroll each month, and ultimately finance their growth.

During my time in private equity, I witnessed firsthand just how antiquated the financial services industry really is. Mature cash flow generating companies would pay millions of dollars to hire an army of investment bankers to run offline, manual, and redundant analyses in excel, and to copy charts into a slidedeck, to raise debt or equity. There was virtually no automation, software, or tech used in these processes. Sadly, the name of a company’s lead investor often mattered more than its fundamentals.

Despite all of these analysts poring over company data to support financing, this process also consumed the company’s time, and pulled them away from actually growing the business.

Founders and finance teams had to spend months reviewing, negotiating, and re-negotiating term sheets. Many failed to raise.

The lucky few who managed to make it through this grueling process and secured financing, quickly found themselves underwater with paperwork. They now had to spend time compiling updated financial documents to stay compliant with their creditors’ requirements and restrictions.

Usage and liquidity requirements, minimum cash balance requirements, and restrictive performance covenants such as minimum growth rates, gross margins, and operating leverage were (and still are) commonplace.

Companies unable to meet these requirements were often subject to painful sweep triggers, which enabled lenders to debit their accounts and repay the facility even when a default had not occurred.

Bottom line: as a founder, you had to be extremely precise with your capital planning (and capital deployment) or you risked having your reserves depleted at a moment's notice.

And yet despite all of these challenges, the large legacy banks offered major benefits over non-bank lenders and other non-dilutive capital providers—once you broke through and successfully onboarded/converted all of your accounts to theirs, you now had coverage for most of the financial products you needed, in one place. The products were by no means revolutionary, but they got the job done, and companies generally stuck with their bank given how painful it was to switch.

This stickiness, along with their ties to the other capital providers (VC, angels, accelerators, etc.) formed over the previous decades, became their competitive advantage. For many, a proven ability to support private market financing became an essential moat, more important than building technology to better serve the tech-driven clients they served.

With no financial incentive to evolve, these traditional banks simply maintained their offline and redundant processes and product experiences—it went on like that for years. Then decades.

That is, until the new generation of startups entered the market.

These startups didn’t want to have the same experience that the previous generation had.

• They didn’t want to spend months in diligence or negotiating term sheets.
• They didn’t want to manually produce and upload statements to the bank constantly. 
• They didn’t want to be beholden to restrictive covenants.
• They didn’t want to live with uncertainty around the ability to upsize credit lines.
• They didn’t want to interface with a painfully outdated UI or speak with their relationship manager to facilitate a simple bank transaction.

They wanted a digitally native, interconnected, and consumer-grade product experience.

They wanted a partner that was on their side. A partner who won their business by delivering value, not locking them in.

A partner who was building instead of sustaining. Who was innovating instead of imitating. Who was challenging the status quo, not fighting to maintain it. They wanted to work with partners just like them.

Enter the point solutions.

THE EMERGENCE OF POINT SOLUTIONS

The first point solutions in the finance stack appeared out of the 2008 mortgage crisis, fueled by the boom in demand for a modern approach to finance from technology startups.

Founders wanted a digitally native, interconnected, and consumer-grade experience across their entire tech B2B stack. Finance was no exception.

The first solutions to appear were in the spend management category, followed by FP&A, and corporate charge cards. More recently, regulatory changes unlocked improvements in bank accounts as well. Rather than building comprehensive platforms to address all of the pain points, entire businesses were created to address singular pain points in the stack.

As a result, startups had to adopt 2-3 of these solutions to meet their finance needs. Because they were meaningfully better (and more user friendly) than the offline alternative, startups started to adopt them in droves.

Shortly following the rise of point solutions, we saw the emergence of fintech infrastructure, which focused on creating the “blocks” for other businesses to build on. Think payment rails, blockchain, banking-as-a-service and open source software.

These solutions came with standardized API frameworks and guardrails. More importantly, they helped fintechs save time and money on development. A small but mighty team of 5-10 could build in weeks something that would have once taken months or years.

This explosion in demand helped early entrants mature and scale within their fintech verticals. Meanwhile, lower barriers to entry meant a whole new generation of providers (often venture backed and flush with cash) appeared on the scene. Artificially low prices, subsidized by institutional capital, drove further product adoption within each product category. Competition sought to capture new segments of the market through niche innovation. Fragmentation followed.

Founders and finance teams that historically had all of their needs met with two to three providers (primary bank, spend management, FP&A), now adopted five or six.

As a result of the disjointed product experiences, finance teams had to spend weeks learning new systems, only to have those very systems replaced a few months later when the promotional pricing ended, and they were forced to make the switch again.

While disjointed product experiences and frequent systems changes are definitely drawbacks, the largest drawback that came with the point solutions was the fragmentation of the organization’s financial data (and subsequently the insights). Disjointed data meant that founders couldn’t always see clearly when it came to making fiscal decisions - raising money, managing expenses, or improving unit economics.

Enter Arc.

ARC - THE FUTURE OF STARTUP FINANCE

Over the last year, we’ve met with thousands of startup founders to dissect their finance needs. We built and then rebuilt our own finance stack from scratch – experimenting with seemingly every permutation of products. What we learned is that the whole is greater than the sum of its parts.

At Arc, we’re reimagining the B2B finance stack from the ground up and in the process, we’re putting software founders back in control of their financial future.

We’ve combined the flexibility and benefits of an API-driven solution with the native functionality of a consumer app, delivering all the financial services (funding, cash management, spend management, FP&A, forecasting, etc.) startups need without the drawbacks of legacy financial institutions (offline, relationship-driven, and time consuming).

Arc is the first, and only, digitally native and vertically integrated finance platform. Because of that, and the fact that we have truly unified the finance stack, we have access to data that no one else does, which means that we can help startups in ways that no one else can.

We can help them understand:

• When to raise capital, and when they don’t need to
• When to take equity dollars vs. debt vs. alternative financing
• Whether they’re growing at the same rate or or faster or slower than their peers
• Whether or not they’re too heavy on operating expenses, ad spend, R&D...etc.
• What their valuation should be priced at based on ARR and relative to peers
• What their cash burn and runway is, what levers they can pull, and how those levers may affect these metrics and ultimately valuation and dilution

At the same time, we can also help them:

• Tap into their future revenue streams to access non-dilutive capital
• Deposit these funds into an FDIC insurance eligible account
• Leverage financial insights to more efficiently drive growth

Arc is so much more than a platform, or a network, it’s a movement. A movement of founders helping founders grow. Today we have a community of over one thousand founders, and next year we expect to have multiples of that.

By bringing together thousands of founders, empowering them to benchmark their financial metrics, and providing hundreds of millions of dollars in non-dilutive growth capital, we’re leveling the playing field for those who don’t reside in Silicon Valley.

Arc is the future of startup finance, and we are just getting started.

From our early beginnings in my off campus residence at Stanford, to a distributed team of nearly 30 Arc-itects with a central hub in San Francisco, it’s incredible to see just how far we’ve come in one year. While I can’t wait to see what our team will accomplish next, I also want to thank all of those who have helped us get here. A huge thank you to our partners, investors, and customers for continuing to believe in and support our mission of helping startups grow.

Yours in the journey, 
Don