The following interview is a conversation we had with Don Muir, CEO of Arc, on our podcast Category Visionaries. You can view the full episode here: Over $180M Raised to Empower Startups with a Better Cash Management Experience

Don Muir
Hey, Brett, thanks for having me on. 

Brett
Yeah, no problem. So, before we begin talking about what you’re building there at Arc, can we start with just a quick summary of who you are and a bit more about your back round?

Don Muir
Yeah, definitely. So, I’m Don, Founder and CEO of Arc. We’re a B2B fintech platform that’s reinventing how software startups grow. Prior to starting this company, I worked in late stage private equity in New York for a couple of large publicly traded private equity funds and did management consulting at the Boston Consulting Group on the East Coast. I went to Cornell for undergrad and most recently graduated from Stanford’s Graduate School Business, where I met my co-founders and started the company. 

Brett
Nice. And do you have any relation to the mountaineer John Muir? Have to ask that living here in San Francisco. 

Don Muir
Depends who’s asking, but technically, no. 

Brett
Appreciate the honesty. You could have just made something up there. Great great grandfather. No one would have known.

Don Muir
Exactly. Depends who’s asking. 

Brett
I love it. All right, now, two questions we like to ask just to better understand what makes you tick as a CEO and Founder. First one is, what CEO do you admire the most and what have you learned from them?

Don Muir
Sure. So I think the CEO that’s most top of mind for me is Satya Della. He’s in the news, obviously a lot for the OpenAI play and creating this existential risk to Google’s monopoly over search. But my interest or admiration for the Microsoft CEO came from dates back to 2019, I’d say when he came to Stanford Business School during my first year and spoke to a Pact auditorium of Stanford students sharing his approach to building and managing a tech company. And it was this three pronged approach. First is customer obsession, so just really building what your customers want and delivering a really great experience to your customers. The second is within the company itself, having this singular, this one company mindset where everyone’s on the same team buying for the same objective. And the third is prioritizing de and I Those pillars are the very pillars that I built Arc on and laid the foundation for the company today.

Don Muir
And then obviously more recently, his operational excellence has proven to be paying extraordinary dividends for shareholders and driving extraordinary financial innovation to the tech economy.

Brett
Yeah, it’s been really fun to watch and it’s been pretty wild. Obviously. I know Microsoft is a massive company, but I just don’t think about them very often as an innovator. And then all of a sudden, out of nowhere, it seems they’re challenging Google, which is just exactly.

Don Muir
Couldn’t agree more. Well said. 

Brett
Now let’s talk about books. Is there a specific book that’s had a major impact on you? And this can be just one of the standard classic business books or a personal book that really just influenced how you view the world? 

Don Muir
Yeah, I recently read Power Play by Tim Higgins, if you’re familiar with that one. Chronicles the rise of Tesla and Elon Musk’s willingness to risk it all every step of the way along the journey to make his own very unique dent in the universe. So controversial figure today. The book is very well written and it’s really that willingness to put it all on red and double down when you have conviction. 

Brett
Nice. I love that. That’s a book I haven’t read yet. I read his book that came out in 2017 by Ashley Vance, I think, or something like that. But I didn’t even know there was a new one. So thank you for that insight. I’ll be spending my weekend reading that now. 

Don Muir
Check it out. 

Brett
Nice. Well, let’s switch gears here and let’s talk about what you’re building at Arc. So can we just start with the origin story and what the early days look like for the company? 

Don Muir
Sure. So, as I mentioned in the intro, I come from a finance background on the East Coast, and that skill set yielded this unique insight I had when starting the company out of Stanford during my MBA program. Coming from a New York value based investing background, I had an appreciation for, one, raising debt and equity, understanding the nuances between nondilutive and dilutive capital, bringing that insights or that appreciation for cap markets and for fundamentally driven investing to the West Coast. I saw a gap in the early stage tech ecosystem whereby founders were selling too much ownership in their business too soon. A lot of the founders that I talked to during my time at Stanford, they thought that equity was the only type of capital to fund their business at the early stages, even once their revenue generating, and had really high quality recurring sources of revenue for a lot of these SaaS companies. 

Don Muir
So spending more and more time with these operators, what I realized is we could offer nondilutive growth capital by converting future revenue streams into upfront capital today by leveraging the modern finance stack, ingesting months of raw historical financial data to make faster, better, lower risk credit decisions. And so were solving this gap in the market where were helping founders avoid unnecessary dilution while avoiding the pain point, the relationship driven, offline nature of credit processes that were under serving these early stage software businesses. 

Brett
Now, let’s say I’m a Founder of a fast growing SaaS company and I come to you. Can you just walk me through what the platform looks like and what those benefits are that I receive? 

Don Muir
Definitely. So you’ll come to Arc for banking and funding needs, similar to how you’d go to JPMorgan Chase to open a bank account and request a line of credit or venture debt facility. With Arc, you can sign up on our website and integrate your banking, billing, accounting APIs in a matter of minutes. So the onboarding experience takes about three minutes, and within 24 hours, we’ll have a funding decision available to you in app. So we’ll push the funding decision to your Arc account. You can log in, you can request funds, and that cash will be available in your Arc bank account within 24 hours of signing up. And when you request, those funds are available instantly in your Arc account. So what we’ve done is leverage technology, machine learning, and other data enrichment layers to remove the friction and operational intensity of credit, underwriting and banking decisioning. 

Don Muir
So we do in days what takes a traditional bank weeks to months to do. 

Brett
And how do you do that? Is there a high level overview that you can provide? I’m sure it’s pretty complex when you really look under the hood, but how are you able to do something in days that would typically take someone else weeks? Yeah. 

Don Muir
So, at the highest level, we’ve trained our underwriting algorithm to ingest, process, synthesize raw historical financial data to make data driven credit decisions. So what does that mean in practice? We’ll ingest 24 months of bank transaction data through an integration with your legacy bank accounts, your accounting data, through an API integration with QuickBooks or Zero or another accounting SaaS product, and then subscription billing data, stick, stripe charge, B chargeify, et cetera. We’ll ingest all that raw historical data, we’ll run it through our underwriting model, we’ll back test it against other comparable companies at similar stage and their performance on the Arc platform, and then we’ll size and price a funding decision based on that underwriting model. So instantly, as soon as you onboard, we’ll have an algorithmically driven funding decision. So go no go, yes, we can fund you a million dollars, or no, we cannot, and what that should cost based on performance of similar companies on our platform historically. 

Don Muir
Now we have a manual process. We have a team that goes and sanity checks the algorithm’s findings. What we found is over time, over the last couple of years since building this business, the algorithm has become much more intelligent and we’re able to make faster decisions over time.

Brett
And to have that historical context, I think you mentioned 24 months. Is that the bare minimum that you need in order to have someone use the platform. Do they need to have been in business and have money coming in for 24 months? 

Don Muir
Yeah, most of our customers have been around for a lot longer than 24 months, but we’ll spend the most. Our model will ingest monthly data and daily transaction data for the past 24 months. That’s what most of the finance stack API unifiers that we work with. That’s the longest duration available across a number of these finance products. So when you think bank data and oftentimes accounting data, typically capped at a two year look back, so to the extent we want to go back further, we can do that as well. To the extent companies are on our platform for longer than two years, we’ll start to aggregate or collect data over a longer time period. 

Brett
And could you just paint a picture for us of what the average user looks like? Is this a venture backed startup that’s raised a little bit of funds, and they’re using this to bridge in between the rounds? Or is this a bootstrap business? What’s that average user look like? 

Don Muir
Sure. So there’s two products that we offer. There’s the funding product, which you’re inquiring about, and then there’s the banking product. The profiles are converging. On the funding side, it’s typically very high growth, cash flow positive businesses, or businesses that are on a path to becoming cash flow positive. So I think default alive businesses, they’re using our product as working capital or growth capital. These businesses are high growth such that they value a dollar today, dollar revenue today, more than that same dollar revenue in twelve to 18 months. So if we can pull forward that revenue and give that to them at time zero, they can invest it at a higher rate of return than the discount rate they’re paying Arc. So it’s a positive net present value transaction for that business, converting future revenue into upfront capital. That business has, on average, call it $5 million of arr. 

Don Muir
They’re growing 100% to 300% year over year. They have 70% plus gross profit margins. The banking side, our customers tend to be a little bit larger. We have. On average, it’s a series A to series B. They’ve raised ten to 30 million of equity, and they have idle cash. Arc works with those businesses to provide institutional grade corporate treasury services. We can invest that idle cash that’s sitting on a Series A company’s balance sheet at north of a four and a half percent APY, effectively providing them with months of additional runway just based on investing that cash in very low risk government securities. 

Brett
Wow. And can you talk to us about the competitive landscape? So I know there’s some companies out there like, I think Pipe has been in the news a lot. Mercury Founder path. That’s the startup side. But I’m guessing the competitors are really just the legacy banks. Do I have that correct? 

Don Muir
Yeah, that’s right. So across both products. The market is dominated by traditional, offline, publicly traded financial institutions. The thesis, which has since been validated since starting the company, is that the early stage, high growth, technology driven businesses are being underserved by these offline incumbents. These banks, these FIS, are relationship driven. They make underwriting decisions based on relationships with venture capital firms, more so than based on the fundamentals of the businesses that they’re underwriting. These venture debt shops are underwriting your next equity round, as opposed to the quality, consistency and margin profiles of your revenue. And so ORC on the funding side, is stripping out all of the noise and the hype and really leveling the playing field for founders across the country who may or may not be backed by the right VC. It’s almost irrelevant. It is irrelevant to our underwriting algorithm. We’re making decisions purely based on the fundamentals of the business. 

Don Muir
And so if a business has higher quality fundamentals, but isn’t backed by the tier One ABC that the VD fund wants to work with, they’ll qualify for a better rate than the same company that’s backed by the tier one VC, but might have a slightly lower margin profile or less consistent revenue growth. So that’s ultimately what we’re doing here at Arc. On the funding side and on the banking side, again, there’s a $20 trillion market opportunity. Less than 1% is owned by digital banking players today. 

Brett
And what’s the breakdown for you, just from a business perspective on those two products? Is it a 50 split or what does that split look like? 

Don Muir
Yeah, we haven’t disclosed those numbers, but you can think that breakdown is about right. Got it.

Brett
And do you think that’s going to change going forward, or is the business always going to have those two different product lines that are always somewhat equal? 

Don Muir
Well, they’re highly complementary and it’s somewhat market driven. So in certain market environments, cash storing cash in a high yield bank account becomes relatively more attractive when as debt and nondilutive capital becomes more expensive. Conversely, in a low interest rate environment, storing cash on balance sheet becomes relatively less attractive. You’d rather invest that cash in projects and raise nondilutive capital against those projects. And so the products are highly complementary. And it’s intentional that we built this vertically integrated solution that’s very unique in the market. We can serve clients in bull markets and in bear markets, and we can help them extend the runway and invest in growth in both market environments. And that’s really what’s unique about art.

Brett
Very smart. Take a note of sense. This show is brought to you by Front Lines Media podcast production studio that helps B2B founders launch, manage, and grow their own podcast. Now, if you’re a Founder, you may be thinking, I don’t have time to host a podcast. I’ve got a company to build. Well, that’s exactly what we built our service to do. You show up and host and we handle literally everything else. To set up a call to discuss launching your own podcast, visit frontlines.io podcast. Now back today’s episode, and let’s talk a little bit about today’s market, which is obviously just insane, for lack of a better word. What’s the impact that you’ve seen from Arc? Are you just seeing a massive uptick in customers, especially on the lending product side? 

Don Muir
Yeah, there’s a lot of interest, and capital is scarce in today’s market environment. Interest rates have gone up. That has made debt relatively more expensive, but it’s made equity twice as expensive as valuations come down. And what we’ve experienced over the last nine months in the public markets has really permeated down through the private markets. At the earliest stage, down through Series A, seed is a little bit less impacted. So what we’re seeing is an influx of companies, private companies, who are seeking nondilutive capital because they can’t raise at a higher valuation than their prior equity round. And they’re starting to run down on runway. Now, these companies are coming to the platform looking for capital, and it’s our objective to work with these companies and help see them through the cycle. Unfortunately, the 2021 Era growth at all cost era caused a lot of these companies to take on more Opex than they could handle. 

Don Muir
And at Arc, we like to work with very efficient businesses so we can’t work with everyone. But what we are doing is working with companies to help them improve operational efficiency, pairing nondilutive capital alongside dilutive capital to extend the runway and achieve default alive, which is the objective of a lot of the companies we’re working with today on platform. 

Brett
And if we just look at the algorithm so, historically, let’s go back 24 months worth of bank statements and financials for a Startup 2021 2022. They were pretty wild and crazy years. You mentioned there was growth at all cost, and I think it was easier to acquire customers and it was cheaper in a lot of cases. So is that ever going to be difficult, then, to make decisions about the future based on the past two years? Given the two years were very different, I think, than what they could have.

Don Muir
Been, it’s a great question. On the funding side, we’re building an invaluable data set that has not been available for the past 15 years. So for the first time, we can actually stress test our underwriting model against real live data and see how this product, this disruptive financial product that we’ve innovated, performs through cycle. So, coming out on the other side of this market environment, our Arcs credit investors can rest assured that we’ve stress tested the Bear case scenario, and we feel really confident about deploying a meaningful amount of capital in a bull market when we’ve seen how these products perform in a market cycle. And so this window, this period of time, is a really great opportunity for Arc and for other capital providers to really understand their financial product and stress test the downside case, which will just create a larger growth opportunity on the other side of this market environment, makes.

Brett
A lot of sense. And are there any numbers or metrics that you can share that just highlight the growth, traction and adoption that you’re seeing? Like, is there a North Star metric that you’re okay with sharing or just any metrics so that our listeners can have an idea of the type of growth you’re seeing?

Don Muir
Right now, we’re not disclosing our revenue figures publicly, but we’ve grown over ten x year over year, so we’ve experienced really explosive growth in the business. And that’s just a testament to the product we’ve built into the team we’ve amassed and to the value we’re delivering to our hundreds of customers across the banking and funding products. 

Brett
And what else do you attribute to that success in breaking through the noise? Because it’s very hard to rise above all the noise. I think especially in this space, there’s noisy startups, there’s very well positioned legacy companies. So what are you getting right? How is Arc able to rise above all that noise outside of just building a great product? 

Don Muir
Yeah, it just kind of comes full circle to how we started this conversation. Focusing on the customer. Customer obsession is our number one value at the company that we live and breathe every day. I’m on the phone with dozen customers a week. Previously, it was 100 customers a week. I now have a sales team, but we do customer discovery calls. We talk to our customers in sales meetings. We chat with them and ask them what are we getting right, where are we wrong, and how can we improve? And we do that on a daily basis consistently throughout the life of the company. And so that is how we have defined our product roadmap. Every product, every feature we have built and shipped at this company has been informed by what our customers are asking for. And I think that’s how we cut through the noise and the Hype and Silicon Valley, the shift towards unit economics and viable business models.

Don Muir
That’s relatively new concept it seems today, but that’s been our number one objective since the get go. It’s like, how do we deliver value to our customers? How do we create a product that is truly valued in the market where we can still our mission to help startups grow? 

Brett
And do you have any tactical insights to share on how you do that? Because I think every customer today wants to be customer obsessed. I think every company says that, but oftentimes it’s just kind of like maybe a printout core value that’s on the wall of the office, but it’s not something that’s real. I don’t think there’s any company that says, like, they’re anti customer by any means. And everyone says we’re pro customer. Like all those types of things. So how do you make that real and ensure that it’s not some like just bullshit core value on a wall? 

Don Muir
Yeah, definitely. Great question. So, I mean, we track KPIs internally against the number of touch points we’re having with customers specifically focused on improving their product. And so the founders, the product team and the revenue team are required and track on a weekly basis to monitor all of those touch points and ensure that we’re receiving a sufficient amount of feedback to improve our product on a weekly basis. And so part of our OKR and planning exercise is how do we get in front of more customers, get feedback from them and ensure that we’re building the products that they want, that they need. Identifying the pain points that they’re facing across the finance stack today, and there’s a lot of them. Right? And then rigorously prioritize where we have a right to win and why we’re best positioned to solve that particular pain point. It’s our customers who are defining that product roadmap for us and we take that very seriously at our nice. 

Brett
I love that. Now, let’s talk a little bit about market categories and category creation. So how do you think about your market category? Is this part of the existing banking category and lending categories or is this something that’s totally different and totally new? 

Don Muir
Yeah, financial services is one of the last frontiers to truly be disrupted by technology. And why is that? Why is it that JPMorgan Chase, Wells Fargo, Citigroup, Silicon Valley Bank, first Republic Bank these are hundreds of billions of dollars of market capitalization. There is no pure play corporate banking challenger bank, there’s no publicly traded digital business bank. And this industry has been dominated by offline FIS for hundreds of years. Why is that the case? It’s largely regulatory capture. Washington and Wall Street have been inextricably intertwined since the founding of this country for the first time. That’s changing. And through the proliferation of banking as a service infrastructure and fintech point solutions and you get large B to C players like Chime who are now public comps and Sofa who are public comps and have more share of mind. In Washington. You’re seeing the financial services start to open up and open banking becoming this emerging concept on the B2B side where a company like Arc can come in and win clients away from the incumbents by purely offering a better product, by building the products that tech companies want, that the next generation of businesses in this country want. 

Don Muir
And that’s a digitally native solution. That’s a financial product that is consumer grade, that the CFOs of these companies have become accustomed to using in their personal lives. They expect that same frictionless, front end product experience, ease of use that they get across the tech stack. We don’t think that financial services should be any different. And for that reason we’re winning. Share handover fist from the offline FIS that dominate the corporate banking market today. 

Brett
I mean, it makes sense, right? Like, we use a major bank and it’s just awful. The experience is just horrible. And it just blows my mind that’s the case. My experience today as a business owner using our corporate bank account is the same as it was eight or nine years ago when I started the company. And that just blows my mind that there’s been absolutely zero improvement. And if anything, it almost feels like it’s gotten worse. So definitely makes sense that there’s a massive market there. 

Don Muir
Yeah, it’s hard to believe. And like I said, that’s changing. You look ten years down the road and fintech will dominate commercial banking. You’ll have players like Arc who are competing head to head with JPMorgan Chase on large transactions with large institutional clients, owning not just the banking relationship, but also the lending and spend management relationship as well. And to me, it’s that future of finance that is technology driven. That’s what’s exciting to me and what motivates me and keeps me getting out of bed every morning and chasing this enormous market opportunity. 

Brett
Nice. I love that. All right, let’s end with a question here, just to talk about the vision. So let’s paint a picture of three to five years from today. What does the company look like and what does your impact look like overall on banking? 

Don Muir
Definitely. And we got into this a little bit in the prior question, but in five years, the world will have fundamentally changed. We’re seeing it today, and the adoption curve is exponential. Technology is permeating every aspect of the business of the finance stack. Banking, funding, spend cards, it’s all going digital. And the incumbent banks who dominate, who comprise 98% of share today, they can’t keep up and they, unfortunately, cannot innovate organically. And so, five years from now, fintech will dominate corporate banking. We might not know what it’s going to look like exactly, but at Arc, we’re taking proactive steps to create a future that aligns with our mission. And we’re doing it in a way that is redefining the status quo, reducing barriers to entry for companies, to access Founder friendly capital, to open, create a bank account, and to generate insights, data driven insights, to grow their business. 

Don Muir
That technology driven financial operating system is the future of this company. And in my mind, it’s the future of banking for the next generation of technology driven businesses. At Arc, we’re building the future software bank for the next gen business in the United States. That’s all technology driven. 

Brett
Nice. I love that. And do you envision this in the future, that there’s going to be independent brands like Arc? Or are they eventually just going to be bought up by the chases and the Wells Fargoes of the world? I think that’s something that we saw in the consumer packaged goods market, where Kellogg and Frito A or whoever those big giants are. They just buy anyone up who ends up being a competitor and anyone who’s doing anything that’s innovative and disruptive. So do you think that’s going to happen here? Do you think a lot of these companies are just going to get bought up by these massive banks because they have so many resources, or do you think they’re going to be able to remain independent? 

Don Muir
That’s an excellent question. Intuitively, in looking at other industries, as you point out, you would assume that the banks can’t innovate themselves and they can’t build these digital solutions organically, that they will turn to inorganic growth and acquire digital banking brands and other niche fintech point solutions to fill these gaps. I think that’s definitely probable. I think that is highly probable. What we’ve seen, though, is through a lot of these acquisitions, it stimmies innovation and growth. These large banks do not have the organizational infrastructure to support technological innovation and growth. The PNL model that is prevalent across these banks where you have MDS managing a book, a loan book, or relationship managers owning accounts and have their personal economics tied to those accounts, that approach is not conducive to distributing modern financial products through technology. And so even in a world of inorganic growth for these banks, my guess is it’s going to be really hard for those bureaucratic organizations to compete with pure play tech competitors.

Don Muir
So what I would like to see, and my goal, my aspiration for this company, is to grow and scale this business such that we can compete head to head as a publicly traded business against these behemoth offline financial institutions that are burdened by their legacy processes and their relationship driven approach to doing business.

Brett
Don, that makes my heart happy to hear about someone competing with these big banks. So gets me really excited. Unfortunately, we are up on time here, so we’re going to need to wrap before we do. If people want to follow along with your journey, where’s the best place for them to go?

Don Muir
So check out our website, Arc Tech. You can sign up for a high yield corporate treasury product bank account in a matter of minutes. Or follow us on Twitter at join Arc. We’d love to get in touch. Thanks for your time. 

Brett
Don, thanks so much for sharing your story and talking about your vision. This is all super exciting and look forward to seeing you execute on the vision.

Don Muir
Thanks, Brett. Appreciate it. Great talking to you as well. 

 

Brett
Keep in touch.