Arc aims to be the ‘Uber Black’ of venture debt

Vasyl – stock.adobe.com

Don Muir, CEO of Arc Technologies, said his company’s latest service is designed to solve a recently-formed disconnect in venture-debt lending, a line of business that had been dominated by a few top entities for decades.

The market for venture debt, a popular funding source for startups, was thrown into limbo following the banking crisis last spring, when the biggest player in the market, Silicon Valley Bank, went bankrupt. Since then, other institutions have tried taking startup business by ramping up their venture-debt services. This week, Arc, which offers startup-focused banking products like cash management, announced its jump in the fray.

The San Francisco-based software company created Arc Capital Markets, a marketplace platform that Muir said solves for a break in the venture-debt market: Lenders new to the market, like private credit firms, tech-focused banks and funds, need help finding customers, while high-quality tech startups looking for non-dilutive, lower-cost capital need an easy way to source options. 

“Arc sits at the nexus of this pain point in the market,” Muir said. “We have a unique positioning to bring the most reliable lenders together with tech companies that are either banking with Arc today, or certainly will be once they transact through our capital market interface. That’s really the secret sauce of our capital markets.”

Silicon Valley Bank’s collapse last March was the catalyst for the platform, Muir said. In 2023, venture debt activity dropped to an estimated $12 billion after four years of more than $30 billion, per a Deloitte report. Many lenders, like HSBC, Stifel and JP Morgan Chase, along with startup-focused fintechs like Brex and Mercury, have entered or ramped up efforts in the venture-debt market since the spring. Even Silicon Valley Bank, after its acquisition by First Citizens Bank, has vied to win back its lost customers and venture-debt business.

Venture debt can be an attractive funding source for startups because it doesn’t typically require giving up equity, although lenders often require the companies to park a majority of their capital at the institution and the right to co-invest in the borrowers’ next equity round.

Arc’s differentiator is its speed and access to a variety of lenders, Muir said. The software company uses API integrations and artificial intelligence to analyze startups’ financial data quickly, onboarding companies in less than 10 minutes, he added. Then, if eligible, startups receive term sheets for up to $250 million in debt capital from a few best-match firms or banks out of a pre-vetted network of more than 100 lenders. 

Chalyse Robinson, a partner at WilmerHale who focuses on debt finance, said a tool like Arc Capital Markets could be beneficial for startups looking to compare debt deals from different lenders, or for lenders who might not be on the radar of early-stage companies. She added that she always advises clients to get term sheets from several lenders to find the best deal.

“With there being a mix of both the regulated banks that might have to keep tougher underwriting standards and funds that are able to take more risk…I’m excited to see if [Arc Capital Markets] ends up being a gamechanger and useful tool to help match,” Robinson said. “Within my own client base, there are companies that can get quite a few different lenders and then some that it’s hard to find even one.”

Muir said when startups attempt to find and compare private debt options on their own, the process is “disjointed, manual and offline,” and can take weeks or months.

Arc Capital Markets has facilitated more than 350 debt transactions in a private beta for some existing customers, many of which Muir said came over from Silicon Valley Bank. Since the platform’s public launch on Monday, Arc said it has received nearly 100 applications representing aggregate loan demand of more than $500 million

Robinson said there’s still a lot of appetite for venture debt, but she’s seeing more deals go to Silicon Valley Bank than other lenders. Deloitte estimates that venture debt for tech in the U.S. could rise back up to $14 billion to $16 billion. Marc Cadieux, president of First Citizens’ Silicon Valley Bank commercial banking business, said in an interview last fall that the bank was working to lure back business by adjusting the covenants of its loans.

“We were the market leader,” Cadieux said. “We dominated the space in terms of being able to see and get the right deals. …The competition is really nothing new. At the same time, we continue to believe that we have the best value proposition of, not just providing the debt, but then what happens next.”

But many banks have also raised their underwriting standards after a turbulent 2023. Muir said Arc’s platform is designed to maximize approvals, while not pushing venture debt on customers where it isn’t the best strategy.

Muir added that Arc Capital Markets is designed for startups, so the company also manages lenders to ensure that if they behave “adversely,” they’re removed from the platform.

“This is not the kayak.com of capital,” Muir said. “This is the Uber Black of venture debt. We have a premium product, we have a highly-managed lender network…Ultimately, Arc is serving its customers, meaning the startups that are using our software platform.”

Robinson said she’s curious to see how Arc will fit in the venture-debt market, which she thinks will pick up activity more in the coming year. She added her biggest concern is the amount of due diligence that can be done on a company in 10 minutes, but it’s not an automatic red flag.

“Something like this could be really useful for service providers like me that are trying to help my clients find resources,” Robinson said. “This would be an extremely valuable tool for me to reference, if it works.” 

Arc is also planning to launch another product in the first part of 2024, Muir said, but didn’t give more details about what it entails. He said that with banking and capital markets, though, the company is providing the services he imagined for startup customers.

“With this new product launch, this is the first time the platform vision is coming together,” Muir said. “Arc is the next generation commercial banking platform for Silicon Valley, for the innovation economy.”