—Saar Gur and Matt Heiman
One of the driving forces behind the last decade’s innovation wave is the creation of scaffolding and modern infrastructure for the startup: Gusto for payroll, WeWork for office space, Stripe for payments, AWS for storage and compute, Carta for shareholder management, and Atrium for legal, to name a few examples.
However, until very recently, one of the most fundamental pieces of the “company stack” had yet to be reimagined: banking. Enter Mercury, a software-defined bank for startups. Mercury is reinventing business banking for the twenty-first century, and today we’re excited to announce that CRV is leading Mercury’s Series A.
Why business banking?
Business banking is an enormous industry; even just the small business segment of this market represents an estimated revenue pool for banks of $90–100 billion annually.
Bank accounts sit at the nexus of company operations; payroll, accounts receivable and payable, credit cards, taxes, financial reporting, cash flow forecasting, and many other critical workflows all start and end with the bank account. They are the single source of truth for company financials. Bank accounts are also one of, if not, the furthest upstream thing that a company needs to set up after incorporation; companies cannot access critical products and services until they have a bank account in place.
Banks are critical partners to businesses throughout their entire lifecycle. Businesses tend to choose just one or two banking partners and stick with them for a long time: the average tenure of a US business banking relationship is over 15 years. And businesses tend to look to their primary bank for other financial products; for instance, two-thirds of small businesses with loans use their deposit-carrying bank. This means that the lifetime value (LTV) of a business banking relationship is very large.
Despite how critical — and valuable — banking is to businesses, the state of affairs in business banking technology leaves much to be desired. For instance, it has historically been difficult to open a business bank account online; most banks require visiting a branch in-person with business formation documents and licenses. That paradigm is outdated and presents a problem for companies that are trying to get up and running quickly.
In consumer fintech there has been a lot of ink spilled about the poor quality of digital interfaces of incumbent banks. But the truth is that the business banking side is far behind incumbent consumer banks. Even simple features that we’ve come to expect from our personal bank account, like viewing multiple months of transaction history, are far from the status quo in business banking portals.
And that’s despite the fact that business needs when it comes to banking and finances are more complicated and critical than consumer needs. For most consumers, finances do not require daily actions, but businesses need to care about finances as a critical competency and daily workflow.
Instead of innovating on product, incumbent business banks rely on relationship-led banking. They cultivate and maintain customers by visiting them in person and taking them out to dinners and sporting events.
But in 2019, the time has come for a product-led approach to business banking.
Why startups?
We believe that the product-led approach in banking will begin with startups. That’s because modern startups, more so than the average small business, are building product-defined as opposed to people-defined operations. Startups need a digital banking product to fit into their workflows without manual intervention. They also demand a banking product that matches the quality of the rest of their company stack.
As discussed above, business bank accounts have high switching costs, which is always both a challenge and an opportunity for B2B products. But unambiguously, the high switching costs make startups a strong initial go-to-market fit: new startups have no to low switching costs and their banking partner can grow with them as they scale to large companies.
Conventional wisdom holds that small businesses, such as startups, are not attractive customers to serve: low ACVs, high churn, hard to reach, etc. But startups differ from other small businesses in an important way: millions of dollars of cash in their bank accounts. From a banking perspective, that means that startups are much more valuable as customers than their revenue or employee scale would otherwise suggest. On top of that, they tend to have much higher growth, implying the potential to become large businesses.
Why now?
Despite startups being a strong go-to-market fit for software-defined banking, until the last five years or so the startup segment wasn’t sufficiently large. But the growth in the size of the venture-backed economy has now made that segment an attractive one for a financial services player to serve; US venture funding rose from $37 billion in 2008 (pre-crisis peak) to $130 billion in 2018, a 300% increase in the pie of venture-financed deposits over the course of a decade. Silicon Valley Bank, which largely serves this segment, is now a $12 billion market cap company, up 300% since 2014.
The rise in venture funding has been driven not only by a higher quantity of venture-backed company creation, but also by each of those companies raising greater amounts of money than previously. This trend is most pronounced at the growth stage, but it is also relevant as early as seed-stage: the median seed deal rose from $500,000 in 2008 to $2 million in 2018, meaning a 400% increase in the deposit size of a seed-stage company.
But there is another reason why a company like Mercury could only be successful in the last several years. Historically, financial infrastructure was incredibly siloed, but now, as we wrote about back in 2017, financial infrastructure has opened up, meaning that a product like Mercury can be built and brought to market without significant capital and years in regulatory approvals needed to stand up a new bank holding company.
Why Mercury?
At CRV, we are deeply thesis-driven investors. We’d been exploring the opportunity in B2B banking for many months but hadn’t found the perfect fit until we connected with Mercury.
Mercury has only been in the market for a few months, but already the customer response has been phenomenal. We rarely hear such strong praise from customer calls for such an early product.
But like many of our investments, the story goes further than our thesis in the market and initial traction. It’s about the founders. We first met Immad years ago during his time as founder of Heyzap, a mobile ad network. While CRV never invested that business, we watched Immad, Jason, and Max grind on Heyzap for six years, and after a ton of work and a number of pivots, ultimately exit successfully. Their grit and tenacity is something we deeply admire at CRV. So the opportunity to work with Immad and his team on a big idea like Mercury was too much to pass up.
We believe that Mercury can become the default banking solution for startups, just as similar best-in-class products have for other pieces of the startup scaffolding. We couldn’t be more excited to partner with Immad and team for the road ahead!
