Jake Aaron Villarreal: I'm your host Jake Aaron Villarreal, and here with us today we have Don Muir, the founder of Arc, a startup that's raised $200 million in funding and was perfectly positioned when the regional banks in Silicon Valley failed. It's a fascinating story. Don, welcome to the show.
Don Muir: Thanks for having me, Jake. Great to be here.
[About Don Muir]
Jake Aaron Villarreal: So a little bit about Don. Don is a Stanford GSB grad and a Cornell alum. Since launching Arc in 2021, Don has the community of several thousand startups and a team of nearly 50 strong across New York City and San Francisco. As we dive into this uh Don, give me a little background of you. How do you go from finance into technology?
Don Muir: Sure. So by way of background I come from the traditional finance world on the East Coast. After graduating from Cornell, where I studied finance, I took a job at the Boston Consulting Group, where I spent at least half time working on their private equity due diligence team doing commercial due diligence for the world's largest private equity funds. And then actually moved over to one of those private equity funds, a large publicly traded platform here in New York, where I experienced firsthand the inefficiencies of traditional capital markets, traditional commercial banking uh and capital processes. I saw that these are transactional, offline, uh and expensive for companies. And so when I moved to the West Coast to go to Stanford for business school, I saw an opportunity to apply my finance background to the startup and technology ecosystem in Silicon Valley, and that really is, was the inception of Arc.
[How to think about technology]
Jake Aaron Villarreal: Now when you got into that, um you're not a developer or coder. How do you start thinking about the technology component of a business that you're going to scale or build?
Don Muir: Sure. So with Arc and fintech more broadly, there's two type of product innovation. There's the software itself, which tends to unlock the opportunity or allow to scale the product across the the market and disrupt traditional FIs. And a financial product itself. And one of the key insights I had during the the customer discovery phase founding Arc was that these early stage high growth venture-backed businesses, where they didn't have a full appreciation of the breadth of the capital markets uh which is typically limited or restricted to, to later stage companies that are cash flowing. And uh what I saw was an opportunity for financial product innovation in addition uh to software.
And on the financial product side uh these companies were quite frankly just selling too much equity too early. Uh equity capital is not free; in fact, it's typically structured uh with liquidation preferences, making it more debt-like in nature. But for founders and even their early finance teams who don't come from the traditional uh finance world or capital markets uh they think it's the only option. The reality is it's not. There's venture debt, there's revenue-based financing. We came in with this revenue-based financing product out of the gate, allowing companies to preserve ownership in their businesses, selling less equity uh and taking on um less restrictive, covenant-lite uh unsecured growth capital alongside their equity round to bring down the overall cost of capital or the cost of growing their business.
[Revenue-based financing]
Jake Aaron Villarreal: That's amazing. So you're a software company as well as offering financial products or services that are different than a traditional bank or VC firm that's going to ask for a part of your business in re-, in return for funding. And you're doing it in a seems like a more creative way.
Don Muir: So that's, that's where it started. Um it started with this financial product innovation. What we quickly learned is that the offline traditional banks, they couldn't offer this product because they lack the technology. So we built the tech stack that allows companies to integrate their financials for us to make faster, better, lower risk credit underwriting decisions, and so we could strip out all of the cost and inefficiencies and operational intensity of raising uh debt or debt-like capital alongside equity, and scale that using software, using backend API integrations, to tackle this underserved segment of the market that typically is too small or too early stage for a traditional bank.
[Finding co-founders]
Jake Aaron Villarreal: Makes total sense. You know, as you start to build Arc um you know, it's really important to get the right founders, and finding those are hard. Um how did you go about finding your co-founders for, for building out Arc?
Don Muir: Sure. So I was in a fortunate position in that I was taking two years off from the, the working world. I, I spent four years, five years working in consulting and private equity. And then I got a, a two-year break, or two years to, to kind of step out of my comfort zone, and, and uh was inundated in this infectious entrepreneurial environment that is uh Palo Alto and, and uh in Stanford University. And during that time at Stanford uh I guess I drank too much of the Kool-Aid, Jake, and, and realized that I wanted to apply my passion for finance uh and for, for business banking and, and commercial banking uh to the, the tech world.
And it was during that period of time where uh similar minds come together, and I met my co-founders on campus, they're in my class at Stanford Business School. Uh my, my technical co-founder and CTO, he had spent years as a software engineer at Facebook and Tesla and was a founding engineer at a, a series B uh software company before going back to Stanford for an MBA. And my business co-founder, well he came from a similar uh background, investment banking and, and private equity, before going to Stanford. And uh him and I, we started tinkering all types of fintech ideas very early on, as early as our you know first year at, at Stanford.
[Starting out]
Jake Aaron Villarreal: When you started the, the company, did you go through an accelerator? Did you go through YC? Did you start out of the gate and just take your thesis and go into market?
Don Muir: Yeah. So during our second year at the GSB, uh I was coming off of a summer intern, internship, where I worked for one of the world's largest publicly traded private equity funds uh investing cross cap structure, so investing in both debt and equity for this $25 plus billion uh private equity fund. And during that summer, uh Nick, who's now my co-founder, he was working at, at a, at a late stage Series D uh tech company on their finance team. And uh we spent a lot of time that summer just ideating. And that was the, the starting point of our, our founding relationship in the second year.
Um in the second year at Stanford, uh we realized that we wanted to work together, we wanted to build together. And we started taking customer discovery calls. And so we, we really treated uh the, the customer discovery phase uh for the 12 months during our second year at, at Stanford as an opportunity to get to know prospective customers, diligence the market. We treated it like a, like a, a private equity uh uh deal which you know him, him and I came from that world in our prior lives, and we talked to hundreds of founders in the Bay Area, both Stanford alumni and, and outside the Stanford ecosystem. And what we realized through multiple iterations and pivots early on is that there was this gap in the market for alternative sources of capital and for business banking more broadly.
Uh and so we started out uh outside-in, talking to customers, and then ultimately raised capital and built the MVP, the product, alongside our technical uh co-founder, with that, those customer data points in mind. We saw that companies lacked access to non-dilutive growth capital. We saw that they had a lot of friction across their banking stack. And we saw an opportunity to apply modern uh modern tech stack and modern finance stack to this ecosystem to remove the inefficiencies from that capital raising and business banking process. And so we started with the customer first. Uh we ended up raising our pre-seed round while we were still students at Stanford uh on campus, and then ultimately raised the seed round shortly after graduation, and then joined Y Combinator almost a year later after starting their company.
Jake Aaron Villarreal: Really cool. You know, almost every guest we've had on this podcast has gone through Y Combinator. They've gone through an accelerator like Techstars. And they all come away with real value points that they have applied to building their business and they stay in great relationships with their mentors and the people that were there to support them as they've gone. Um what's the one thing you walk away with coming out of Y Combinator that you look back on and say "I'm really glad we went through that and here's what you've really applied as you continue to build your company"?
Don Muir: I can't speak more highly of YC, their GPs and, and the alumni. Uh in fact we're, we're now working with, across business banking and capital products, with hundreds of YC companies, both in the existing batch and uh and alumni. And it's really created this powerful community and, and ecosystem where we're just helping one another grow. They're selling to us. We're introducing them to better banking and finance solutions, making introductions to investors. We've built this really powerful uh community and, and a big part of that is, is Y Combinator.
Um in terms of specific learnings and insights from the YC program: it's, it's "move fast and break things." It's "ship the product, get direct feedback from customers, uh and then iterate accordingly." The customer is always right. Uh the customer is the one that's helping us find the fast moving waters, identifying the gap in the market. That's why we launched business banking years before the, the regional bank crisis, because we identified this gap in the market through conversations with customers, and YC was a huge part of that. Their willingness to take customer discovery calls, share key pain points across the finance stack, and be an early adopter of new, innovative solutions to solving those pain points. That's the YC ecosystem. And if you're a B2B startup or founder, there's no better community to be part of to get your market, your product off the ground within that market.
[Pivot]
Jake Aaron Villarreal: Yeah, it sounds like a very familiar story. Many companies we've talked to started off with an idea, they get into Y Combinator, they leave with a different idea and focus, they do a major pivot halfway through. And some get into and out of Y Combinator and they build their companies and they still go through multiple little pivots or major pivots. What's one pivot for your company that you've gone through that's really changed the trajectory of your company today?
Don Muir: Sure. So we started off this conversation talking about the revenue financing business that we launched during our time at Stanford. Well, it was during Y Combinator, about a year later, that I realized the market opportunity was meaningfully larger than just alternative financing for early stage tech companies. What I saw through these again these customer discovery calls, through sales calls with hundreds and eventually thousands of startup founders and CFOs, was that the broader bank stack was broken, it was inefficient, they were underserving this early stage segment of the market. The same companies that were coming to Arc looking for financing, looking for venture debt and revenue based financing, where they were banking with these traditional, offline financial institutions. So as early as Q1 of 2022 we were selling a business banking product to all of our uh revenue based financing customers, and we were seeing tremendous levels of adoption uh of that banking product. And so during that time at YC, I don't know if I'd call it a pivot, but more of a platform expansion. I started investing heavily in business banking based on this gap that we were experiencing in the market on commercial banking for tech companies specifically.
Obviously we all know what happened over the, the rest of 2022 and early '23. But as uh as the market evolved, as the level of uh venture capital fundraising, funding declined uh exponentially throughout the back half of the year, the demand for credit expanded, but the banks weren't willing to provide it. And so these same companies uh that were coming to us looking for capital, well they wanted to bank with us as well. And so by the end of 2022, the lion's share of our business was now business banking, and now by the end of 2023, it's, it's the vast majority of, of our customer base today is this business banking product, which really evolved from that time uh during uh Y Combinator. We made that strategic repositioning of the company.
[Regional Bank Crisis]
Jake Aaron Villarreal: Tough to make calls like that, but good to see around the corners and you just never know. I mean, the regional bank collapsing, Silicon Valley, um some had huge downsides to that experience and others prospered. Sounds like that was really a windfall for your company.
Don Muir: We were just fortunate to be in the right place, the right time to help so many companies who are going through a lot of pain during the regional bank crisis. These founders, CFOs, they were frantically calling me and my team, looking to safeguard their cash, pull their cash out from the traditional banks which were on the verge of collapse. These founders didn't know if they were going to be able to make payroll the following week to pay, pay their teams, to keep the lights on at their company. And Arc was there with the ability to spin up FDIC eligible accounts in minutes at the click of a button. Whereas the offline competitors would take weeks, sometimes months to activate a new account and help them safeguard that cash. During that three-day period of time, our inflows increased 15x versus our historical average since launching the bank product in uh Q1 of 2022. And since then we've been on an upward climb, compounding our deposit volumes 2x, 3x quarter over quarter through the back half of 2023.
Jake Aaron Villarreal: Amazing. I love that story. You know, I saw an interview of you on Judy Shaw, New York...
[Arc Premium]
...Stock Exchange Floor Talk. And in that interview you talked about a new product you were coming out with at the time, Arc Premium. It sounded exciting, sounds really exciting. For those that don't know what that is, walk us through what that is. Maybe you've already explained it, but maybe just um define that a little bit more.
Don Muir: No, you asked about the, the Y Combinator uh pivot story. Well, the, the second uh largest repositioning or, or unique insight that uh we capitalized on as a company came following the, the... following the regional bank crisis of this year. And what we experienced uh changed the startup banking industry. What founders and CFOs learned was that not all banks are created equal. Uh balance sheet size, scale, it matters. And there's different regulatory requirements and hurdles that stipulate which banks uh are insulated from systemic bank failure and which, and which are not.
And uh the growth, the declines of, of venture capital dollars, so outflows, um combined with the profile of these cash burning, high growth startups that are capital intensive and are not cash flow positive, resulted in, in uh the issues that we all experienced in March of 2023. And what we learned is that all of these founders and CFOs were moving their cash out of the regional banking system into the world's largest banks. And so the unique insight we had was, well, these companies, they value their community bank. They value a startup focused bank. They value a digital banking platform with great UI/UX and customer service. But most of all, they value safety, protection of those deposits.
And so we got to work and over the following six months, we spun up bank partnerships with the world's largest banks. And today, with the uh introduction of Arc Platinum, Arc is the only digital banking platform that has not only of course bleeding edge user experience, experience and dedicated relationship managers for our startup banking customers, but we're built on the world's largest balance sheets. And so with Arc, you get access to the world's largest traditional, offline financial institutions to safeguard your cash, coupled with the highest yielding, institutional grade treasury management solution in the market. So our customers can earn north of 5.5% APY through direct investment in US Treasury bills. They can invest in insured cash sweep, earning over $5.5 million of FDIC. And at the same time, their cash is held with the world's largest financial institutions, ensuring that these founders and CFOs never have to experience what they experienced earlier this year.
Jake Aaron Villarreal: That's an amazing story and it's also just a perfect solution for the right time of the markets. Um as a company, you've gone...
[Raising Capital]
...out and you've raised a lot of money from some of the best VC firms in Silicon Valley. Um what's been your recipe for success in raising capital in today's market or just in general?
Don Muir: Sure. When I first started raising capital, it was a very different market in 2021 than it is today. I think some of this correction in tech, it's healthy. It's creating higher quality businesses that are prioritizing operational efficiency and unit economics over growth at all costs. Which was driving, which was creating all types of operational issues for founders and management teams at early stage companies, including bidding up the, the cost of tech employees, um and uh and that, that was due, overdue for, for somewhat of a correction.
Now, that said, the equity markets remain pretty challenging and there's a lot of pain in the startup ecosystem, and Arc's here to help with business banking and high yield business banking services, and also growth capital to help these companies weather the storm in 2023. Um and in 2022, what I've been looking for in terms of new equity investors on our own cap table is really strategic partners. When you're bringing on a new equity investor, it's less about the actual capital in the door and on the balance sheet, but more importantly, it's who's going to be in the boardroom, who's going to be helping you define and set the strategic priorities and agenda of the business, and ensuring that they're there with you every step of the way through the good times.
Jake Aaron Villarreal: Yeah, that's well said. Really good. Great to hear that. Good to know there's options out there in the market too you can look at as you're...
[Culture]
...growing your company as a software company, and specifically in SaaS, or even outside of SaaS. Just being able to look at alternatives. Um as a company, you're at 50 strong employees, maybe more, maybe less. Since um I've done research on um what makes it great to work at Arc and more importantly, what makes it great to work for you?
Don Muir: That's a, that's a tough question. Uh I'll do my best. So working at Arc, that's an easy one. Uh I'll, I'll pass the, the second one for, for, for a moment. Um at Arc we have a really unique culture. We bring together the best and brightest minds not only from Silicon Valley, with engineers from both blue chip and, and startup backgrounds. Many of our senior engineers have founded their own companies and are now uh product-minded engineers leading entire product strategies and features uh internally. Um but also from the finance world, in the traditional uh world of financial services. Our business banking and relationship manager team, they've come over from the likes of Silicon Valley Bank and uh First Republic and PacWest. They've come to work with Arc and serve our customers in a similar way that they served their customers at their community banks. Um providing high NPS, white glove, dedicated support when that's needed or, or asked for by our customers. And so the culture we're building at Arc is bringing together a team of A players from different backgrounds and encouraging them to work cross-functionally to deliver the most value to the customer itself, and solve their pain points, which again is inefficiency across the banking and growth capital stack.
Jake Aaron Villarreal: It's interesting you said A players from a, a lot of...
[Employees]
...different companies. Employees can make or break a company. Um what do you specifically look for when you hire people?
Don Muir: The zero to one skill set. Uh the ability to hustle, work really hard, work autonomously to solve problems. Come to me with solutions, right, not, not issues. Uh that is a very unique characteristic that I look for in, in every uh, in every employee, every "Architect" we call them here at Arc. And uh it's more rare than, than you might think. So I'm interviewing to this day every single uh, every single new hire before they start, as a, as a final round interview. And I'm probing for that, that quality. Um it's the ability to thrive in a undefined uh, nebulous uh problem or opportunity. And so, can I drop you in with uh, drop you into the problem that we're looking to, to solve or, or to tackle, and can you figure it out and come to us with uh, with a proposal. That's not just for the management team, but that's for the junior engineers. Uh that's for the, the sales development representatives. They don't necessarily need to have fintech or finance background, but what we do look for is that hustle, that work ethic, that intellectual curiosity, and the ability to break down walls and solve problems with autonomy.
[Entrepreneurs]
Jake Aaron Villarreal: Sounds like entrepreneurs hiring entrepreneurs, which I think is a really good way to look at it. I read something uh online which was, "Hire the attitude, not the resume." And I think that really makes a lot of sense. You try and understand what someone can bring to the table, also how they think and how they can solve problems, because as entrepreneurs, we're all trying to solve problems and identify opportunities in the market. And the more like-minded people is good, and also diversified minds is great too.
Don Muir: I'll give you, I'll give you one, one example uh Jake, because you, you hit on some, an important theme here at Arc. It's that entrepreneurial trait. Uh you don't need to be a former entrepreneur, but there's something about the DNA, the composition of the individuals that work at this company that they could all start their own businesses whenever they like. And some of our alumni, some of our earliest Arc alumni, have left to start their own businesses. And we're highly supportive uh and we help them uh with that journey. Uh I think about our founding engineer here at Arc. He came over from LinkedIn uh. After four years at LinkedIn... he sold his business and rose through the ranks to senior staff engineer. Then ultimately joined Arc as our founding eng. Well, a year later, he then brought over his co-founder uh that he exited to, to LinkedIn alongside. He was an engineering manager at Notion, and now he came over and is the Head of Engineering at Arc. And the harmony between uh these two individuals and the level of product, pace of product velocity that that drives internally, having that culture... that entrepreneurial, move fast and, and break things culture... that is really what sets apart our engineering, product design function is really the driver behind our uh, our product velocity.
Jake Aaron Villarreal: I love that combination. Great minds think alike and you're getting...
[Arc's CTO]
...people from great companies to help build, you know, the company that is the future of your organization. And, and, and maybe your life. Who knows? Maybe this might be the last company. It sounds like it's a great company. Who knows where it goes. Um you know, I read something about your CTO, Raven. Yeah, he, he shared online, "My main motivation in life is the eureka moment when seemingly disjoint knowledge about the world fit together perfectly to create an opportunity for enlightenment and progress. I believe that organizations should be truth seeking and intro-, introspective if they wish to enable those moments." What are your thoughts on that? It sounds really deep and also very honest.
Don Muir: Raven is one of the sharpest minds I have ever encountered in my professional and academic career. Uh on campus at Stanford uh, Raven was legendary. We had fairly few uh engineers in our class at, at Stanford Business School. Uh Raven was the technical advisor for probably 20 uh of the startups in my 400 person class. Uh he was the go-to uh thought leader on all things tech and engineering, and anyone that was starting a company wanted Raven in their corner. Um I got to know Raven through uh through Stanford Business School and through, quite frankly, his reputation and credibility on campus.
And when I sat down with him for the first time to discuss the vision for Arc, um it showed me that he was much more than, than a, a software engineer, but he is a brilliant strategic thinker and mind. Mind. And uh that day we grabbed lunch and we went back to my off-campus uh house in Menlo Park and the two of us just we whiteboarded together for hours, and we ideated and thought about this problem set, that these companies were being underserved by traditional financial institutions. And how could we actually leverage software and technology and backend API integrations to make this process of capital raising more efficient?
And it was really through Raven's thought leadership around the banking, billing, accounting API integrations, uh the ability to ingest all that data and leverage uh machine learning and other data enrichment layers to make these faster, better credit decisioning processes. So Raven and I, we catch up uh daily. Uh we continue to whiteboard and, and map out business strategy and, and infrastructure on the, on the eng side. Um and uh those same attributes that led me to him in the first place, they persist through present day and he's really a, a role model for the rest of the engineering team.
Jake Aaron Villarreal: Wow, it sounds like you've met the right co-founders, which is incredibly important and...
[Next for Arc]
...congratulations on that. Um as we wrap up here, what's next on the horizon for Arc on the roadmap as you grow?
Don Muir: Sure, so we have a couple of exciting uh new product launches slated for uh this quarter, Q4 of, of 2023, and, and Q1 of '24. Um so, more to come there depending on, on when this podcast is, is being aired. Uh what I'll say is we've learned a lot over the last two and a half years around traditional business banking, traditional venture debt. And uh that's all been on the backs and learnings of our customers, through discussions with CFOs and founders of hypergrowth, typically venture-backed software companies. This is the tip of the iceberg. Traditional financial services for the last 40 years has been dominated by offline, traditional banks. It's my point of view that the future of business banking for Silicon Valley and the future of commercial banking more broadly won't actually be delivered by a bank at all. It's my view it will be delivered by software, by fintech specifically, in partnership with traditional banks.
So more to come on the product launch. What I'll say is that there remains an enormous amount of inefficiency in how companies are raising debt and equity and also storing and spending that cash. And Arc's roadmap reflects innovation to tackle that efficiency and drive it out of the market, ensure that companies aren't distracted by these traditional, offline business banking and capital raising processes. And that Arc will be there helping them with modern finance tools to make better, faster and more efficient finance decisions and manage their capital more effectively.
Jake Aaron Villarreal: Amazing. Don, if startup founders want to find you or find Arc, where do they go?
Don Muir: Sure, you should follow us on Twitter, join_arc, uh and on LinkedIn. We're posting all of our major events for the founder ecosystem in New York, San Francisco, Austin and Boston. Would love for founders and CFOs to join us, our events, and join our network um and uh and follow the journey. So thanks for having me on and uh excited to uh to build by your side and meet the founders in your network.
Jake Aaron Villarreal: Sounds beautiful, Don. Thanks so much for joining here today. I really appreciate your time. And also appreciate the time of our listeners for taking their time to listen. My name is Jake Aaron Villarreal and signing off for now, but can't wait to connect with you all on the next episode. Until then, enjoy the week. Thanks.
Jake, before we wrap up, I want to give a, a big shout out to all the entrepreneurs that have joined to make this podcast possible, and for all the listeners for listening. It means the world to me that you chose to spend your time with us today. I'm your host Jake Aaron Villarreal signing off for now. We can't wait to connect with you all soon on the next episode. Take care.
This show is sponsored by Match Relevant, a company that helps venture-backed startups find the best people in the market. And they do it in three simple steps. First, they sit down with founders to understand their story. Second, they tell their story into multiple candidate channels. And third, they schedule interviews within 48 hours. Find us at matchrelevant.com to learn more about how we do it.
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