Podcast conversation: Growing startups through revenue-based funding, with Arc Co-founder Nick Lombardo
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In this conversation, we chat with Nick Lombardo, co-founder of Arc Technologies. Nick previously worked in private equity in New York where he experienced firsthand the limitations of traditional capital raising. In 2021, Nick and the other co-founders of Arc teamed up with Y Combinator and met with hundreds of software founders in the SF Bay Area and realized that they all shared a common pain point – startup funding is costly and distracting.
Arc was founded to give founders an alternative to the status quo that helps them grow – with technology and without dilution.
More specifically, we touch on investment banking vs. private equity, capital raising and the purpose of finance for early stage startups, invoice financing/invoice factoring vs revenue-based funding, embedded finance, and so so much more!
…and this model is really a collection of dozens of metrics that we think help us price the risk of the credit. I'd bucket them into two main categories. We're doing revenue-based financing and so having a really clear view of revenue is important. I mean, there's a bunch of metrics that are important for us to understand for each company. Some of it is just to name some of the high-level ones, it's revenue scale. So how big is revenue? What's the trend line? So, growth, what's the volatility month over month? That helps us understand kind of the receivable that we're purchasing.
And then the other set of metrics are financial position related. So, amount of cash runway, different cuts of runway. And then that's less about the receivable that we're purchasing, but more about the credit of the customer. We've built this model, we've automated it. And so, the calculations are automated on our back end. We also have more of an Excel-based model for comparison purposes and an underwriting team in house that can validate and make sure that the two are married up as we've scaled. The different metrics they're weighted based on importance and drive, an output which is in Arc score, which is a zero to 100 score, really a risk rating or a credit rating for one of our customers. And this score correlates to the terms of our offer.
So the amount of revenue we're willing to advance, the discount rate that we kind of charge when we pull forward the future revenue and the repayment term, there's a kind of a raw score, but then there's…
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