Hi guys, welcome to the Fintech Coffee Break. I’m your host Isabelle Castro. This week I shared my coffee break with Don Muir CEO and founder of Arc.

This episode was a special one. It was the last one of a very busy year and I wanted to kind of take stock of what had happened and how it had affected the fintech ecosystem. Arc works closely with startups and fintechs and has had a great insight into what’s going on in the landscape. Since the march banking crisis, the company has been growing at breakneck speed, rolling out products in response to the evolving conditions.

We spoke about the last year what it has meant for fintech and his outlook for the year ahead.

Don Muir 0:49
All right.

Isabelle Castro 0:50
Hi, Don. How are you today?

Don Muir 0:53
About feeling great. Great to be here. Thanks for having me on.

Isabelle Castro 0:57
Good to have you here. Thank you so much for making the time I know you’ve been super busy like travelling around, going to Money 20/20

Don Muir 1:05
pleasures all mine. Money 20/20 was quite the scene, there’s a lot of challenges and fintech, but the general tone was fairly upbeat. So it’s great to reconnect with so many inspiring founders across the fintech ecosystem.

Isabelle Castro 1:18
Yeah, I wish I could have gone. So to begin with Don, what gets you up in the morning?

Don Muir 1:26
that’s a tough one. In my prior life, which is probably the place to start. I was working in in traditional finance working in late stage private equity, structuring large deals and got me up the morning was the was the work we’re doing fundamental analysis and, and solving large, complex problems. What I’m experiencing now is really night and day, I’ve really found my passion and my place in this role at Arc startup ecosystem. As we’ll likely discuss today, it’s been through a lot this year 2023 venture funding down 50% plus year over year, and equity dollars are now 50% more expensive. regional bank crisis and q1 Now we’re experiencing geopolitical crisis, inflation, uncertainty, monetary policy, it’s really challenging environment for cash burning, high growth. venture backed technology companies that rely in on third party capital rely on selling software to grow the problem, we’re solving it Arc, as the first software banking and growth capital platform built for scale built for protection, runway extension, that value proposition has ever been more clear to me. It’s our mission since day one to help startups grow. Now it’s to help them survive, weather the storm and emerge on the other side of this macro environment stronger and healthier. That’s why I get out of bed in the morning and surrounded by a really great team that’s working alongside me to really help the startup ecosystem prosper. And today on this call, have I’ve ever more passionate about that value and about our mission and about helping these founders, the CFOs the startups weather this storm, and emerge stronger on the other side?

Isabelle Castro 3:23
That’s a really great answer. And really, fintechs like yourself. contributing so much to that. I really feel that so well, you kind of already answered it. But what brought you to founding Arc?

Don Muir 3:39
Sure, yeah, I mentioned this before, but I started out in a traditional finance role. I was working as a late stage private equity investor structuring multibillion dollar financial transactions taking public companies private, buying private equity backed companies from other private equity funds. This required working alongside armies of commercial and investment bankers to structure these deals to finance billion dollar equity and debt transactions. That’s really where my passion for equity, debt, capital markets, first really started to evolve. When I moved west, to go to Stanford Business School, my intent was actually go back into late stage private equity. I always had this interest in entrepreneurship. Inspired from my my family, my grandparents, who immigrated to the US and were entrepreneurs in their own right. What it stands for that really came to life and meeting founders, entrepreneurs venture capitalists on campus in Palo Alto, I saw an opportunity to apply my competing passion for finance and top markets to the startup ecosystem, taking my knowledge of capital raising debt capital All in commercial banking and leveraging software to make it more accessible to these companies that were taking unnecessary dilution or didn’t appreciate that there were broader. There were tools in the financial markets in the capital markets that could support their growth that are less dilutive. While also maximising runway through high yield cash management platforms, in partnership with traditional banks.

Isabelle Castro 5:25
No, yeah, the Arc kind of business model has always been quite fascinating to me. And I mean, we saw the strength of it in recent one not so recent now, but kind of this year’s chaos, especially around March. So we’re coming to the end of the year. It’s been quite a good year for you guys. You’re growing quite a lot now, I think. But not so much for others. What have been the most pivotal moments to affect the fintech industry in your eyes?

Unknown Speaker 5:59
you hit the nail on the head, it was March of 2023. It feels like yesterday to me, but I realised now we’re coming up on six months since the regional banking crisis, since Silicon Valley Bank first released that 8k and their stock price plummeted in the after markets. And then FRB to follow Signature Bank prior, that period of time that that two week period of time was transformative, not only for Arc, but for the tech banking ecosystem. More broadly, these regional banks, they were the Bedrock of Silicon Valley for the last 40 years. These were large financial institutions. They weren’t us. G sibs, they weren’t global systemically important banks, but they were large banks. SVB was a top 20 bank in the United States at the time, and no one could have ever imagined in their wildest dreams, that it would fail. And so what we experienced that arc, in a matter of days was a 15x increase in average weekly deposit inflows. In just a few, a few short business days, the team was working around the clock pulling for months of product development, spinning up five plus million dollars at FDIC insured past week, per example, ensuring that we could onboard all of these companies in a matter of minutes protecting hundreds of millions of dollars of deposit. So our business grew meaningfully. But more importantly, we were in a position where we could actually support the ecosystem in a really big way. That was the tip of the iceberg. The business grew meaningfully following the regional bank crisis. But what’s perhaps more interesting is this shift in startup banking more broadly, the CFO, Founder CEO, the hacker community, they received a crash course in startup banking during that short period of time. And so while a lot of deposits moved to the world largest banks like JP Morgan Chase, like Jamie Dimon said, a couple of weeks there was $50 billion of inflows to JPMC, within a couple of weeks of the regional bank crisis, what we’re now seeing is those funds falling back, looking for a new home, flowing into the digital banking ecosystem or other bank partners that have a robust balance sheet but can deliver a customised verticalized experience purpose built for this very unique profile of cash burning hypergrowth venture backed technology companies, and that’s where Ark sits in the market. And that value prop is never wrong more clearly, for the startup ecosystem.

Isabelle Castro 8:37
Okay, so they’re still looking for that kind of customised experience that they’re not getting in the big banks. And they’re actually kind of, even though the landscape isn’t. I mean, it’s better on the banking front, but it isn’t stable to say the least they’re going they’re going away from the stability of the big banks and coming to Well, yeah.

Unknown Speaker 8:58
Well, here’s the interesting nuance. The regional banks dominated Silicon Valley for the last 40 years for a reason. They had dedicated relationship managers, they had high yielding cash management products to help startups preserve cash and extend runway. They haven’t they have venture debt products to help reduce dilution. But they didn’t necessarily have as we experienced in March was a secure balance sheet. They were subscale. They had asset liability mismatch driven by this unique profile of these companies. And so yeah, so started prioritise a safety of deposits above everything else. And what Arc has built is taking the best of both worlds. We have dedicated relationship managers who have come over from Silicon Valley Bank and its ACH bank peers to serve our customers in a very bespoke way. We have customised credit products, including venture debt, which we recently announced to provide that runway extension again for this very unique profile. I’ll have of company alongside raises or to help them extend runway ahead of their next raise. And then we’ve built our banking stack on the world’s largest banks. And so the CFOs no longer have to face this artificial trade off between safety and protection of deposits with the world’s largest balance sheets, and the customised dedicated support and relationship managers that comes with their community bank, the bespoke credit products that are purpose built for this segment of the market. And of course, most importantly, is usability. It’s UI UX. It’s a bleeding edge B2B SaaS platform where the CFO is in the driver’s seat or the founder, in some cases, earlier stage companies where they can manage diversify and optimise their cash at the click of a button, a process that takes weeks to months traditional big bank,

Isabelle Castro 10:52
I’m really glad you actually mentioned the credit products that you guys have released, because I mean, I covered this for an article I remember. And if I remember correctly, it was kind of a reaction to the decrease in kind of funding in the startup ecosystem. Is that correct?

Unknown Speaker 11:15
The venture debt dislocation is the unspoken story of the regional bank crisis, the tech focused banks, they dominated venture debt in an even bigger way, a more meaningful way than they dominated the Depository business. And so what we saw is with the demise of these regional banks, founders and CFOs, no longer know where to go to for venture debt financing. And we’re seeing those in the numbers in the venture debt market, what was a $30 billion industry is now meaningfully smaller in 2023. It’s an it’s not a lack of demand, companies want this product, they just don’t know where to go to get it. And so we’re seeing tourists come into the venture that space we’re seeing banks like HSBC, and people and Citizens Bank spinning up venture focus groups launching venture debt products, but the they have a limited performance history. And they’re they’re bringing on talent from SBB and, and other traditional venture debt lenders to spin up these practices. But in the meantime, there’s a huge gap in the market. And Arc is sitting here with full appreciation having credit in its DNA as you know, from the earliest days to help these companies access non dilutive capital to extend their runway whether the storm and emerge on the other side of this macro environment and dislocation from a position of strength. They don’t may not have to take that that down round challenged equity financing environment.

Isabelle Castro 12:43
Okay. Really, really interesting. How would you expect these these kind of things to pan out going forward into 2024?

Unknown Speaker 12:54
I’m biassed Isabel. But it’s my view that the future of banking for Silicon Valley for venture backed technology companies won’t be delivered by a bank at all. It will be delivered by software by Arc by fintechs. In partnership with traditional banks and traditional lenders, providing easier and more frictionless access, and a more customised experience for these very unique venture backed hypergrowth cash burning companies with customised dedicated support better economics and protection, diversification of their deposits.

Isabelle Castro 13:29
Okay, okay. I like the answer. I like that kind of. I wouldn’t even say optimism because I kind of agree with you about where it’s going. But

Unknown Speaker 13:38
it’s in the numbers is acknowledged, look at the growth of Arc and other fintech peers. We’re outpacing the market and the one and that is market share growth. We’re growing exponentially faster than the traditional banks. And that speaks the secular market tailwind in favour of digitalization of the finance stack, specifically, Business Banking and venture debt.

Isabelle Castro 14:04
Yeah, no, you make a really great point. I’m going to move on now to another big feature of this year, which was the kind of I mean, it wasn’t just this year, it was the year before as well. But the high interest rate environment has been a big feature of this year. From your perspective and conversations with clients, how has this affected the ecosystem?

Don Muir 14:30
Sure, well, not to get overly technical on the finance side, but for those who come from a finance or fundamental background, listening in, we all know that equity is valued as the present value of future cash flows, and the investor market lost sight of that in 2021 and that resulted in a bubble fueled buys your interest rate environment and long dated Cash flows were valued highly, where the cost of capital was extraordinarily low. So that’s kind of finance 101. What that translates to in a rising rate environment based on traditionally, textbook finance is lower valuations when the when the discount rate is higher. You see, companies with long dated future earnings being the most severely impacted. And we’ve experienced that, in TAC, specifically in the private markets outside of seed funding, which continues to be robust. There’s still a drought, there’s a big drought of venture capital. And that’s permeating not only deal flow and the number of transactions that have occurred in the growth markets in 2020, in the back half of 2023. But really broadly across the the private and public tech markets in the pace of IPO. So do volumes on pay for the lowest year since 2017, based on the q3 data released by CB insights. And what we’re experiencing as a result of that is that founders are becoming much more conservative with how they actually deploy capital. They’re prioritising operational efficiency, over growth at all cost mantra, more companies are taking bridge loans or even down rounds to sustain their businesses and survive and weather the storm. We’re seeing inside around so existing investors participate in the equity to help these companies then runway and get through cycle. But ultimately, it’s putting a lot of pressure on founders and operators to become more efficient. My point of view is that some of this is healthy for the ecosystem. Companies are now prioritising unit economics and operational efficiency over growth, as I said before, that there’s been a reset and tack, and I think it’ll be healthy for the ecosystem overall, we emerge on the other side of the storm, stronger, more resilient, more robust as a startup community, focusing on efficiency, and performance and sales and unit economics, over just growth at all cost and vanity metrics.

Isabelle Castro 16:59
I’m interested because I know initially, you were kind of, well, correct me if I’m wrong. You were focused on kind of early stage and seed round companies. But now you’re kind of branching out and opening yourselves out to larger companies and later stage does that feed into the whole macro economic situation?

Unknown Speaker 17:24
Yeah, and the regional bank crisis, these late stage companies, they all banked with these. These tech banks, the series B through pre IPO companies were banking, predominantly overwhelmingly with with the regional banks that were focused on the tech sector. And like I said before, for good reason. Now, all of those funds, based on every call, I’ve had, you know, hundreds of founders and CFOs of late stage companies, they moved over to JPMC and its peers, prioritising, like I said, safety, over economics and over dedicated support over bespoke financial products. Now, as you may or may not be aware, just last month, we launched our Platinum. And our Platinum is differentiated in the market as the first software cash management and growth capital platform that’s built on the world’s largest banks. So like I said, to kick off this call, for the first time, these late stage, founders and CFOs no longer have to make the trade off between safety and protection of deposits, and an earning the highest possible to yield in the market, having the dedicated support in the UI UX to build, scale and grow their business. And so what we’re experiencing and how that translates to Arc’s, growth and arcs customer profile is yes, we’re still heavily invested in serve hundreds of these speed receding series A companies were getting lots and lots of exponentially growing demand from Series B through pre IPO companies, who are now switching JP Morgan Chase, to arc maximise their unit economics to extend their runway through high yield and cash management products without sacrificing the safety of $5 billion of balance sheet with the world’s largest financial institutions.

Isabelle Castro 19:21
Okay, okay. Yeah, that’s a really interesting kind of development. I remember when you launched the platinum product. So it’s interesting to hear a little bit more about the background behind that. So I’m gonna bring this up. I don’t know whether it relates to you, but I know that you work with a lot of banks. So this year, particularly these past couple of months have been very interesting from a regulatory perspective. We had the 1071 rule come into effect. We had a proposal for accelerating open banking with the 1033 and the CRA rule was finalised. What do you expect the impact of this to be on the fintech ecosystem?

Unknown Speaker 20:06
Absolutely. And just more broadly from from a higher level, Isabel, there’s been a lot of changes in discussion around the regulatory and compliance environment for fintech. And we’ve seen, we’ve seen some some issues with certain fin packs that haven’t prioritised compliance. Arc isn’t one of them. And we embrace these regulatory changes Arc, we make the it’s not a joke. It’s a mantra internally, Arc Arc is the most compliant software cash management platform in the market. And that’s reflected in our disclosures on our websites and our relationships with our our vendors and our bank partners. I think the biggest thing to flag here is, Arc isn’t the bank. We never touch our customers deposits our customers, deposits are always held with traditional banks, FDIC insured member financial institutions with the world’s largest balance sheets. And so they have our bank partners in particular, have various regulatory and compliance requirements and Arc are placed the book we have in house product compliance in house regulatory compliance, we built redundancies around KYC. Around KYB, we work with stripe, one of the world’s most reputable fintech institutions, who prioritises compliance as well and working hand in hand with their team to ensure that we’re playing by the rules, and that we’re a leader on the regulatory and compliance side. And I view that as a point of differentiation in this evolving market. And we embrace these changes that are being made on the regulatory side.

Isabelle Castro 21:46
I’m interested at state because you guys have grown quite quickly. I mean, I, you know, tech startups do grow quickly. But you guys have grown very quickly how that must be really difficult to still remain compliant. And kind of like, okay, with all these regulatory changes, like feeding into that, there must have been super difficult to do while you are growing at such a pace.

Unknown Speaker 22:12
Yeah, it’s a really interesting call out and you’re spot on. And if you chat with my marketing and revenue team, I’m sure they tell you that, you know, we played a little we’re a little bit too, too close to chest, we could have moved faster we could have, we could have pushed out product features and announcements faster, even faster than we did. And I’m proud of our pace of product velocity. With that context in mind, we’ll always wait the extra day, week month to get full compliance and regulatory sign off not only from our in house counsel and our outsourced Regulatory Council, but also from our bank partners who own the charter and from stripe, right, who oversees the compliance and KYC for a lot of our products. And so we play things by the book, it has, you know, at times, resulting in a delay in a product launch. But that’s always our priority. We want to ensure that we’re on the right side of history here. And we’re working alongside regulators, to ensuring that we’re building a robust and durable fintech ecosystem and platform here at RT for the long-term.

Isabelle Castro 23:19
Well, yeah, it’s a very important feature of yours. So that’s good. It’s good that you do this. So we’re coming to the end of the interview? What’s your outlook on the year ahead? What will you be looking out for?

Unknown Speaker 23:35
Like I said, software is the future of banking, for the tech ecosystem. It won’t be built on balance sheet, it’ll be built with a software layer in partnership with these traditional lenders and with these traditional bank partners, it’s my view. an ark is a first mover here, but it’s my view that the big banks, the global systemically important banks will play a more meaningful role in serving this ecosystem, where founders and CFOs are prioritising protection over anything else. So the big banks are picking up the scent. And my guess is they’ll be spinning up more partnerships with brands like Arc and its peers over the coming year. And that’s going to serve this gap in the market where founders and CFOs no longer need to make this trade off between protection unit economics and customised credit products. dedicated support.

Isabelle Castro 24:29
Okay, nice. What’s the piece of advice you’ve been given that you would give to someone else?

Unknown Speaker 24:36
So much, great advice that I’ve received over the last three years and I’ve learned a lot. So pinpointing one, it is challenging maybe back in the, in the preachy days. I met James courier while I was a student at Stanford, he actually got the first check into Arc. He’s the founder of Event FX and He’s based in Palo Alto I met him on a At an event on campus, and when he wrote when he ended up leading the seed round is now the largest investor in Arc outside investor in Arc. And he gave me some really great advice early on. And it’s like anyone can have a great idea. Anyone? Yeah, great ideas are really just worth the paper that they’re written on, everything comes down to execution. So it’s taking that vision, and building an A plus team, and putting together a strategy to execute on that vision and just never relenting until you realise that vision. So I’d say execution first. Above all else is number one, especially at the most vulnerable stages at the precede through Series B, everything just comes down to delivering on that vision and executing across that vision and surrounding yourself with the right team to bring that vision to life.

Isabelle Castro 25:57
Okay, I really, really like that. And as is a good piece of advice, especially in the circles that you operate your curveball question. Don’t be scared.

Don Muir 26:11
These are all curveballs Isabelle

Isabelle Castro 26:13
they were all curveballs? I’m sorry, I’m sorry. This is the actual curveball. So if you had one, it might actually be a nice one. If you had one year without any kind of responsibilities, or financial constraints, what would you do with it?

Unknown Speaker 26:34
Sure, that is a curveball, because there’s nothing in the world I would rather do than build this company. So let’s, let’s remove let’s remove Arc from the equation for a minute. My path prior to founding Arc was investing, I remain incredibly passionate about finance, investing in fundamental analysis. And it was my aspiration prior to defining entrepreneurship through technology, my aspiration to start my own growth capital and structured credit fund. And that was, that was what attracted me to Apollo Global in the first place. It was their expertise and investing across cap structure in both debt, and equity, to provide really, really unique and complex financial products, just to provide liquidity to the market. That’s what I aspired to do is was getting trained at Apollo Global and then start my own fund. So if I weren’t building Arc, I’d be building my own investment vehicle raising capital from LPs and then deploying that capital to provide liquidity to the market.

Isabelle Castro 27:40
Okay, I like that answer. It shows kind of how dedicated you are to this thing that you’re doing and how interested you are in the space. And I like it. So how can people get a hold of you?

Unknown Speaker 27:58
I live on LinkedIn, as you probably know. So LinkedIn is your best bet to get in touch. Otherwise, drop me a line. My personal emails don.muir@ARC.tech. I’m always interested in connecting with with founders or other thought leaders in the space to trade notes and see how we can build together.

Isabelle Castro 28:17
Nice nice, thank you so much for coming on the show. I’ve really enjoyed having you on as a guest. pleasure was

Don Muir 28:23
all mine. Thanks for having me.

Isabelle Castro 28:25
Thank you. As always, you can reach out and chat with me or my personal LinkedIn or Twitter @IZYcastrowrites. But for access to great daily content, check out Fintech Nexus on LinkedIn, Twitter, Facebook or Instagram. You can also sign up for our daily newsletter bringing new straight to your inbox. For more fintech podcast fun, check out the website, where you can find more fascinating conversations hosted by Peter Renton. And that’s it from me. Until next time, enjoy your downtime.

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