The idea is to lend $200 million this year and up to $1 billion next year to startups that have already raised $2 million from at least one institutional investor. The product is intended for early-stage startups only, with Mercury offering between 25% and 50% of a startup’s seed round in debt.
The move puts the 250-person San Francisco-based company – which says it already has 60,000 businesses on its platform – on a collision course with Silicon Valley Bank (SVB). Mercury co-founder and CEO Immad Akhund says that’s the idea, too.
Like many fintech startups, Mercury – which is not a bank itself but a banking platform that offers FDIC-insured products through an Arkansas-based bank called Evolving Banking and Trust — says big rivals like SVB are cumbersome and don’t understand changing customer expectations.
“These banks have simply never had to create a product, so the idea of you going to a website, filling out a form and logging into QuickBooks is not something a bank would normally think of,” says Akhund. “It seems obvious as a product entrepreneur, but it’s just now that these experiences are building in the banks. It’s all still happening through email and PDF. There’s a ton of back and forth calls, lots of excel spreadsheets.
While a growing number of startups have begun to secure their debt while raising a cycle or soon after to expand their runway – SVB says that 63% of US companies that went public in the first half of the year last were customers – Mercury’s advantage over SVB is that it’s a “product-driven” startup, says Akhund.
Akhund says he knows the pain points of startups well, having co-founded two earlier companies, including Heyzap, a mobile ad network that was acquired in 2016. Indeed, it was through that first-hand experience, as well as his work with some of the hundreds of other startups he says he wrote angel investor checks to over the years, that Mercury was founded.
Its modus operandi has always been to blast through traditional banking hurdles for founders, starting with services such as checking and savings accounts, debit cards, ACH payments, check payments and domestic wire transfers. and international. Venture capital debt is just the newest product offering – one that the Mercury team says will become a major part of its business.
It could also prove to be more lucrative than the products Mercury currently earns revenue from. Its biggest source of revenue right now is debit card swapping, which means that every time a Mercury customer swipes their debit card, Mercury gets a small portion of the transaction. Akhund says Mercury also makes “a little money” on float, which is the time lag between when a customer deposits a check into their Mercury account and when those funds become available.
The question is whether the ease of use is enough to eat away at the market share of a brand like SVB, with its $30 billion market capitalization. This is the only front on which Mercury currently competes, in that Mercury’s loan terms are not necessarily more advantageous or lenient than those of its rivals.
“We have comparative interest rates,” says Jason Garcia, head of capital and relationship management at Mercury. He says Mercury also takes a “small mandate” when extending venture capital debt and charging origination fees, much like banks like SVB. (Notably, Garcia previously spent time with SVB as senior vice-president.)
Apparently, he is already gaining some converts. Mercury – which is backed by Coatue and a16z, among other companies – has extended venture capital debt to several Series A startups to date, including AirGarage and PreAct Technologies. The company also talks about good gaming, and in a world where few people feel much allegiance to established banking brands, that could go a long way.
“There have been a lot of people who have tried [offering venture debt]“says Garcia. “Wells Fargo. JP Morgan. People know it’s a good product.
The challenge, he insists, “is that bankers have a hard time connecting with founders, and that’s something Mercury does really, really well. We are built by founders, they are technologists themselves, and we built it ourselves with them in mind.