Arc: Finance Solution for SaaS Startups

The Rise of Fintech for Early-Stage SaaS Companies

Financial technology, or fintech, is increasingly focused on diverse population segments and businesses at varying growth stages.

A recently launched company is specifically addressing the needs of a popular startup category: early-stage Software-as-a-Service (SaaS) businesses.

Arc: A New Platform for SaaS Financial Management

Emerging from a period of stealth development, Arc has secured $150 million in debt financing alongside $11 million in seed funding.

The company is establishing itself as “a community of premium software companies,” offering SaaS startups a unified platform for borrowing, saving, and managing expenses.

This initiative is being undertaken in collaboration with Stripe, a leading and highly valued private fintech organization.

Addressing the Cash-for-Growth Dilemma

Arc aims to facilitate growth for SaaS companies through alternative financing options.

This approach allows them to avoid relying solely on venture capital, which often comes at the cost of ownership dilution.

Furthermore, utilizing Arc can help founders circumvent the “restrictive covenants, guarantees, and insolvency risk associated with raising debt,” according to CEO and co-founder Don Muir.

The Challenges Faced by Early-Stage SaaS Startups

“Early-stage SaaS startups face the infamous cash-for-growth tradeoff — they are the most in need of funding yet are also in their most vulnerable state to raise capital in that they experience the highest dilution for each dollar raised,” Muir explained.

This challenge is compounded by the discrepancy between monthly revenue from subscription services and the upfront costs of acquiring new customers.

Arc’s Founding and Early Development

Arc was founded in January 2021 and officially incorporated in April by Don Muir, Nick Lombardo, and Raven Jiang.

The company’s origins trace back to Muir’s living room in Menlo Park during the final year of their studies at the Stanford Graduate School of Business, coinciding with the COVID-19 lockdown.

Prior to pursuing their MBAs, Lombardo and Muir gained experience in private equity and investment banking in New York, collectively securing billions of dollars in capital for established companies.

During this time, they observed the inefficiencies of traditional capital raising – its “slow, offline, and transactional nature,” as Muir described.

The Inefficiencies of Traditional Financing

“An army of investment bankers, credit analysts and lawyers will spend months toiling in data rooms and building static models in Excel to close a financing transaction that ultimately costs a company millions of dollars, before taking into account the opportunity cost of management’s time,” Muir stated.

Collaboration with Y Combinator and Market Validation

After connecting at Stanford, the founding team developed the concept for Arc and partnered with Y Combinator to gather feedback from numerous software founders in the San Francisco Bay Area.

Arc participated in the Winter 2022 batch of Y Combinator, which began earlier this week.

Identifying a Common Pain Point

“We quickly realized that they shared a common pain point — startup funding is costly and distracting.

Even in a zero interest rate environment, dilution is extraordinarily expensive for startup founders.

At the same time, offline and bureaucratic banks with outdated underwriting policies and limited bandwidth are structurally unable to serve earlier-stage opportunities,” Muir elaborated.

“Even premium recurring revenue software startups are neglected by traditional lenders.

We founded Arc to give founders an alternative to the status quo.

We’re on a mission to help startups grow — with technology and without dilution.”

Early Traction and Customer Acquisition

Since launching its initial product, Arc Advance, last summer, over 100 startups have joined the Arc platform.

Currently, the majority of its clientele consists of venture capital-backed B2B SaaS companies aiming to accelerate growth and extend their financial runway before seeking further equity funding.

Venture capitalists have proven to be a significant source of customer acquisition for Arc, with its largest partnership currently being with Y Combinator, which actively promotes Arc to its extensive portfolio of software companies.

Arc is also establishing partnerships with conventional capital providers, including VCs, banks, and venture debt lenders.

Benefits for Investors and Startups

A substantial portion of Arc’s customers are already backed by VCs and utilize Arc as a means to efficiently manage funding needs between traditional equity rounds, as noted by Lombardo.

For instance, a Series A SaaS company might secure $1 million quarterly from Arc in anticipation of a Series B round later in the year, accelerating spending on headcount and revenue generation, ultimately leading to a higher Series B valuation.

In this scenario, the Series A investor also benefits from the reduced dilution and increased valuation facilitated by Arc’s capital.

Expanding Customer Base

Arc’s customer base also includes bootstrapped companies located outside of Silicon Valley, Lombardo added.

Future Plans and Product Development

In the coming months, the startup intends to introduce “a full suite” of financial tools designed “to empower SaaS founders to scale their businesses efficiently and retain control.”

Distinction and Similarity in Approach

Arc differentiates itself from conventional financial institutions, which often rely on extensive analyst teams for manual transaction underwriting, by employing technology to algorithmically assess the risk associated with startup funding, according to its founders. 

Muir explained that “APIs provide real-time financial access, machine learning enhances data utility, and cloud analytics enable scalable, automated processes.” This results in capital that is more adaptable, cost-effective, and readily available to customers on a programmatic basis. 

Specifically, the company utilizes backend API integrations, such as those from Plaid, to facilitate credit risk assessment through instantaneous access to a startup’s financial records. Machine learning is leveraged “to significantly enhance the interpretation of financial data received, surpassing the capabilities of manual analysis.” Furthermore, through the integration of Stripe’s banking-as-a-service technology, Arc’s clientele can manage and utilize their funding within a unified platform tailored for software companies. 

It’s important to note that Arc isn’t the first venture aiming to support SaaS company growth without equity dilution. Pipe, a prominent fintech, launched in September 2019 with the goal of enabling SaaS businesses to access their revenue upfront by connecting them with investors who offer a discounted rate for annual contract value. (Pipe characterizes its investors as “a carefully selected group of financial institutions and banks.”) The platform’s objective is to provide companies with recurring revenue streams access to capital without sacrificing ownership or incurring loan obligations. 

A commonality between Arc and Pipe is that both provide founders with the ability to leverage future revenue to fuel growth while preserving their equity. 

Arc, however, stresses that its approach differs from competitors, despite shared objectives. 

The company states, “We do not operate a marketplace where customer contracts are sold on a platform resembling a Bloomberg Terminal. Instead, we cultivate a comprehensive relationship with our customers to support their long-term growth.” This fosters a recurring, full-service relationship rather than isolated financial transactions, allowing Arc to offer more flexible terms and provide hands-on support. Arc is committed to backing SaaS founders for the long haul and is developing a fully integrated product suite to address their end-to-end financial needs. 

Muir believes its specialized focus on SaaS is a key differentiator. 

He stated to TechCrunch, “While competitors have pursued broad expansion, Arc has concentrated on SaaS.” This vertical focus enables Arc to cater to the specific working capital requirements and predictable, recurring revenue characteristics of this high-value customer segment. 

This industry specialization also creates a unique opportunity for a SaaS startup to generate network effects among other SaaS companies through offerings that “provide benefits to all participants,” including financial benchmarking insights and collective purchasing deals, Muir added. 

NFX spearheaded Arc’s equity funding 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 contributed the debt financing component of the investment. A significant number of prominent angel investors also participated, including over 100 founders from Y Combinator companies like Vouch, Observe.AI, Eden Workplace, Teleport, RevenueCat, QuickNode, Dover, Middesk, Instabug and Rainforest QA, as well as “founders from multiple decacorn fintechs.” The ex-Stripe angel syndicate also invested in the round. 

James Currier, founder of NFX, who led the fund’s investment in Arc, has joined the startup’s board of directors following the financing. 

Currier commented, “Arc is constructing the digitally native equivalent of Silicon Valley Bank for SaaS startups.” He further noted, “The market for non-dilutive capital for SaaS startups is substantial and remains in its early stages.” 

Jared Friedman, a General Partner at Y Combinator, compares Arc to established fintech companies like Stripe and Brex, stating that the company “has developed a fintech product with broad appeal for startups.” 

This appeal was another factor that attracted NFX. 

“Arc’s vertical focus on SaaS prioritizes the needs of SaaS founders over buy-side investors and allows them to integrate network effects into their software to benefit the community,” Currier explained. 

In the past six months, Arc has expanded its team from three co-founders to 15 employees, including senior software engineers from Google and LinkedIn, and finance and strategy professionals from Brex, Silicon Valley Bank and BCG. The company intends to double its workforce in the first quarter of 2022, concentrating on engineering, data science, underwriting and sales.