Two firms that have emerged in recent months are vying to cater to digital-first tech startups that are having trouble finding traditional financing.
Though a few institutions like Silicon Valley Bank have made inroads in early financing to tech entrepreneurs, such startups have limited options among traditional lenders.
Grasshopper Bank and Mercury are trying to change that, targeting small companies with unique business models that often scare away traditional institutions.
Startups are "seeking lines of credit,” said Gilles Ubaghs, a senior analyst for Aite Group’s wholesale banking and payments practice. “Ten years ago, most banks would’ve told those startups to get lost, and we can’t help you because of your unproven business model.”
“Those are the types of companies" that Grasshopper and Mercury are catering to, he said.
Immad Akhund, Mercury's CEO, has been on the other end of discontent with traditional banks. He’s been involved with startups for 18 years and has “always been frustrated by the banks we were using.”
“Everything else about running a business improved over that time except for banking services,” Akhund said.
Akhund launched Mercury in April with traditional banking features like federally insured checking and savings accounts through a partnership with $502 million asset Evolve Bank & Trust in Arkansas. The savings account earns either 1% or 1.5% APR depending on certain criteria.
But Mercury’s selling point for startups is a bundle of features like cash-flow tools, searchable transactions, the ability to send a payment in three clicks, and the pending integration of third-party services like Stripe and Gusto. Akhund said the tools are meant for startups that lack a dedicated finance team found at bigger companies.
“The idea for Mercury was to start a bank that is well situated to give you insights to figure out what is ‘normal’ for your company and understand your finances," he said. “We’ve done a little bit of that so far. We haven’t quite built out the product, but that’s definitely part of the vision.”
As Akhund and his team have built out Mercury, the San Francisco company has attracted investors including athletes, celebrities and Silicon Valley bigwigs. NBA players Kevin Durant and Andre Iguodala both contributed to Mercury’s recent $20 million Series A funding round. Other contributors included Andreessen Horowitz, Will Smith’s Dreamers Fund, Joe Montana’s Liquid2 Ventures and Uber’s Allison Barr.
Akhund downplayed the idea that celebrity investments give Mercury an edge in the market. The attention is more about the service it’s providing, he said.
“It’s not something I quite expected going into this,” Akhund added. “But I think those celebrities are attracted to us because they themselves are entrepreneurs and are running businesses and what we’re doing resonates with them.”
However, competition is quickly approaching for Mercury. Grasshopper, which is based in New York, expects to emerge from a beta period some time during the first quarter of next year. Earlier this year, Grasshopper became the
Judith Erwin, Grasshopper’s CEO, told
Erwin said at the time that Grasshopper was focusing on three main “pain points” with its services: quick account opening, the ability to send wire transfer from anywhere and in three minutes, and a cash-burn calculator tool that enables entrepreneurs to manage and project their business’ cash flow.
“We’re intensely focused on the client experience right now so that when we do the big launch, we’re ready for all comers,” Erwin said in a recent interview.
While Irvin declined to specifically comment on Mercury, she said she is aware this niche market is ripe for new entrants.
“I welcome new entrants because it makes the industry stronger and it's better choice for the entrepreneur,” she said.
As it stands, Grasshopper does have a couple of advantages over Mercury despite the latter having a head start. Grasshopper will offer lending services that are often crucial in helping a startup grow. (Mercury has said it plans to offer loans soon, but declined to give a time frame.) Grasshopper also has a banking charter.
Akhund said the company’s plan is to add more features to better align with startups’ grand plans.
“If we’re doing a good job with other services, the hope is that they’ll continue using us as they grow bigger,” he said. “It’s a core part of what we do: providing services that those companies need.”
