It’s been an eventful year for fintech Brex.
The year began with confirmation that the startup had raised $300 million at a $12.3 billion valuation. In April, the company announced a shift in strategy — a new emphasis on software and the enterprise. By June, it sent shock waves in the startup world when it announced it would no longer serve small businesses funded outside the venture capital structure. More recently, it laid off 11% of its staff.
One of the buzziest fintechs out there, Brex is known for more than its product offerings. Its charismatic co-founders and teen hackers Henrique Dubugras and Pedro Franceschi dropped out of Stanford to start the company as part of Y Combinator in their early 20s. Years later, newer startups in YC cohorts still tout themselves as the “Brex for X.”
At TechCrunch Disrupt 2022, I sat down with a refreshingly candid Dubugras and Anu Hariharan, YC’s managing director for continuity and an early Brex investor, to expose the context around this whirlwind of a year. The interview has been edited for clarity and brevity.
Azevedo: Tell us about when you first started Brex. I believe you were in your early 20s?
Dubugras: I was born and raised in Brazil, and out of high school, I started a payments business in Brazil that did payment processing, so kind of like a Stripe of Brazil. After selling that company, I moved to the U.S. to go to college and then dropped out to start Brex.
The first idea that we got into YC wasn’t actually in fintech. It was a VR company. When we sold the last company, we were tired of fintech. We’re like, “All these banks and regulators are so complicated. You know, we’re now in Silicon Valley. We want to do something on the bleeding edge of technology.” So VR seemed like it. But a few weeks into YC, we realized that we had no clue what we were doing and decided to pivot into Brex.
Brex is acting more and more like a venture capitalist over time
In Brex, the first value proposition was when we realized that there were all these startups that had raised millions of dollars and couldn’t get a corporate card. We were like, “That makes absolutely no sense. How can you have raised 3, 4 or 5 million dollars and still not be able to get a corporate card? So you know, that’s what we decided to do early on.”
So the last time you were at Disrupt was three years ago when you were launching Brex Cash. Around that time, you had billboards all over the city — you couldn’t pass a bus stop without seeing Brex on a billboard. You were aggressively marketing to startups in kind of an old-school way. But then earlier this year, you had a shift in strategy: You announced that Brex was making a push into software and that you were going to be focusing on the enterprise. And then this summer, you talked about no longer working with SMBs and non-professionally-funded startups. Now this surprised — and upset — a lot of people. What led to this decision of such a change in your strategy?
Dubugras: To explain that takes a little bit of history. So we started Brex as a corporate card for startups and honestly, that is still a lot of our core business. And if you look at our revenue, the majority of revenue comes from startup [customers] that we acquired five years ago that became larger companies and startup [customers] that we acquired today. And then, just like every company, we needed to expand, right? We were doing this corporate card for startup thing. We launched Brex Cash, our business account for startups. Where do we go from here? We had a couple of options. We could do Brex for e-commerce — another vertical. Then since startups are small businesses, so why not get traditional small businesses? And then a third idea was like, “Hey, let’s go into the midmarket and large companies because we had companies that started with us and scaled all the way. So let’s serve them.” We had raised a good amount of capital. So we were like, why not do all of these?
And I think what we realized in our journey is that it’s really hard to do all of these at the same time. You kind of have to pick and choose — no matter how much money you raise, because it’s not about the money; it’s about the focus of the organization. It’s about, “What are your leaders spending time on?”
And what happened is when we started serving more traditional SMBs — we realized there is a hard delineation between what’s an SMB and what’s a startup. Inside Brex, it is very clear, but externally, it’s a little bit more complicated. We realized that we went from onboarding a few hundred startups every month to onboarding 5,000 or 10,000 SMEs every month. And everything started breaking — like everything that you would expect if you just multiply all your volumes by 10. Then we started not serving our core customer, startups, as well as we wanted to because we had so many small businesses. And the ones that were growing, which is a lot of our best customers that started with us, were starting to say, “Hey, in order for me to stay with you all the way through, I need some new features and functionality.”
So then as a founder, we came to this super hard moment and decision to say, “OK, what do we do? Where do we focus?” We decided to focus on our core customer, which are the startups. We made a super hard decision to offboard a lot of the more traditional SMBs in order to keep serving our core market, because we realized that our value proposition for startups was number one so they could stay with us from the beginning until IPO and beyond. A lot of times our customers, when we talked to them, they were like, “Look, I don’t want to use a tool that I’m going to have to switch out to something more mature later. I want to go with something that I can start today and stay with until I go IPO and beyond.” So we needed to solve that. And so that’s what led us to the strategy of focusing on the startups that were growing in our base and focusing on the midmarket and enterprise as well.
Anu — you’re an early investor in the company. When Brex started contemplating the move, did they discuss it with you, and what were your first thoughts? I mean, did you think “OK, this is a good idea,” or did you have your doubts?
Hariharan: First of all, to give you all some perspective, 2020 and 2021 were very different years for pretty much every startup. We were in a pandemic. We were in a remote world and what did that mean for startups that Brex was servicing? Everything had changed. So if you look at when Brex started in 2017, pretty much all YC startups were in-person. They all had less than 10 employees. And in 2020 and 2021, startups had to be remote. So now the Brex card could no longer just work for a U.S. employee. It had to work for employees globally. … So Brex had to really adapt its startup product in 2020 and 2021. So the discussion became, “Let’s figure out one thing to do really well rather than try and do two to three things really well, because that’s just hard.” Because startups are resource constrained more than capital constrained, right? So when you think about where to put all your resources, it was a very honest discussion at the board level in terms of “OK, who’s our core segment?” And the way that we want to continue to service that segment looks different now. Their needs are different. So let’s double down on that.
This summer, when you made the announcement, there were a lot of upset people and I think a lot of startups felt abandoned — in particular, the smaller ones that you were no longer serving. You were one of the fastest-growing fintechs — very buzzy; you made such a name for yourself in the startup world. So there were some shock waves, and I suspect that you may not have expected the fallout, or I guess the backlash, that you got. So tell us: What did you learn from that? Were you surprised by what happened? What would you do differently if you could go back in time?
Dubugras: I think that probably the first mistake is that, as I said, in Brex, when we said SMB or startup, in our heads, those were different things. So I think the first problem was that it was very confusing who we were and who we weren’t solving for. A few days later, we released the eligibility criteria … and I think we should have made that more clear. Like, what are the eligibility criteria to stay at Brex and work with Brex? That was a big learning just in terms of how we communicated it to our customers. And then I’d say, try to do less things well and focus on them instead of trying to catch the whole world at once.
Well, that’s a valuable lesson. I think there are a lot of startups that have been in that position: trying to do multiple things at the same time. I’m a mother and I work; I get it — when you try to do too many things at once, inevitably, something’s not going to go right or something’s not going to go very well. You mentioned that everything started breaking. Can you elaborate on that?
Dubugras: All the customer support lines were taking forever. The underwriting started getting more complicated because we couldn’t be super nuanced about knowing every customer. It needed to be more automated, and the more automated it was, [the more] we rejected a lot of companies that weren’t supposed to be rejected. And then it just became more complicated to operate at scale. When we first started, we could literally look at every startup and make a decision and understand where their investors are, what are they doing, who were the founders. It was really hard to do it in a very thoughtful way. So we had to automate, and every automation kind of fails in some way. That was a big problem. And then more importantly — the convergence of the road map didn’t exist. A lot of the businesses were saying, “Hey, we want capital. We want working capital loans so I can build out my restaurant or build out my flower shop.” And startups were telling us, “We want global.” Remote was happening, people were hiring anywhere and were telling us, “We want spend management, because we’re now growing and we have more employees.” … The road maps completely diverged from the small business road map. So that’s why it was really hard.
Pandemic pivot
Brex’s shift from being a corporate card for startups to a company looking to monetize on software and from enterprises was a pivot many people didn’t see coming. But the company says it’s just one example of businesses having to adapt to a new remote and global world and that it did what it had to do to survive.
Obviously, the pandemic changed a lot of things. A lot of people had to adapt and pivot in ways that they never expected. So when you started out, did you imagine that a few years later, you would be in this situation with such a different road map, a different strategy — moving into software and more focused on enterprise? Also, earlier this year, you announced DoorDash was one of your earliest customers. How did you handle such a pivot?
Dubugras: Before the pandemic, [Brex co-CEO] Pedro [Franceschi] and I were anti-remote work. We did not believe it was a viable option for companies. Six months into the pandemic, we announced that Brex was going to be remote-first forever. So you know, talk about someone changing their mind completely. I think what we saw with the pandemic is a lot of times the best kind of business opportunities happen when there is a platform shift … and we believe that this shift to distributed work is the next platform shift. … And when there is this kind of massive shift in the world, that creates a lot of opportunity for businesses like Brex to create solutions for the changing world. So, as Anu said, as more companies go remote-first, everyone needs to now have stipends and have lunch in the office. How do you make a really good product to make stipends work really well? As companies hired globally, they need to reimburse employees globally so how do we do that? … So we needed to pivot the business to take advantage of customer demand and build what our customers want.
What are your plans for Empower, your new software product? I know you’ve talked about DoorDash. But can you talk about any other enterprise customers that you’ve landed since then?
Dubugras: So today, we’re also announcing that we’re deploying Coinbase, which is one of the companies I admired the most that pioneered crypto in the U.S. and also a YC company. And there is SeatGeek and other enterprise customers, but we need to get some authorizations talk about them.
In terms of Empower, we focus a lot on enablement and doing more of that globally — so making sure all of our products now work for companies that are global and multinational is a big priority for us. Also, how do we make it extremely easy to be compliant? How do we automate receipts so no one has to do receipts anymore? Because I hate it, and I always lose my receipts. How do we automatically approve things that are in policy? How do we make it super easy for employees to know the policy? How do we make stipends super easy so people are not approving the same stipends every month? We’re making it extremely easy for employees and finance leaders to make the company compliant.
The reality of 2022
This sort of growth doesn’t come without some challenges. Despite its lofty valuation, Brex was one of many startups that conducted layoffs in 2022.
Earlier this year, you were valued at $12.3 billion, making you a decacorn. You’ve grown at an incredible rate since you first started. But just last week, I wrote about a decision that you made as a company to lay off about 11% of your staff, or 136 people. That move was in part due to the decision to stop serving SMBs. How did it feel to go from raising hundreds of millions of dollars at this very high valuation to having to lay off staff?
Dubugras: Obviously, it’s an incredibly hard thing to do in the journey of being a CEO and founder. This is the worst part. I can tell you there’s a lot of hard stuff, but this is the worst of them. Good companies are companies who see reality and adapt to the environment. And we had both the business model shift that you mentioned that was part of the reason, and now we’re in a world in which a path to profitability is very important. You need to be able to make decisions like these and focus on getting there. So, you know, we did what we had to do to keep a sustainable business. It was super hard, but hopefully, we did very well for the people who left and we appreciate them a lot.
Are you seeing a lot of other companies go through similar trimming as well?
Hariharan: … Look, layoffs are very tough decisions. In the macro environment that we are in right now — and that we will be at least until early 2023 — so far all the signals are way worse than the last five years. So our advice to companies is, you have to make the hard decisions sooner. And sometimes the hard decisions are usually double down and focus on one thing, and second is building a very sustainable business that gives you the right to come through on the other side to make new bets or have the capital to grow. So from that lens, companies have had to make hard decisions, and I’m sure it’s not something they wake up and take in a very relaxed way. It’s very deliberate and well thought through. And it’s hard, but I think the macro environment is quite different than anything we’ve seen. I mean, we often say in YC that some of our companies that started in 2009 have not seen a recession until now. Right? It’s the first time. I always tell companies and founders: What doesn’t kill you only makes you strong. So the most important thing is to do right by our customers.
That’s actually a good segue into my question for you, Henrique. What are you doing to preserve runway? What other measures are you taking to minimize cash burn right now?
Dubugras: In general, every company right now is going through this exercise of looking at cost. And that actually is a massive tailwind for Brex because last year, if your product didn’t help grow revenue, you didn’t get the time of day. Now I think that as a product that helps you manage costs and understand how you’re spending the money across your company, especially as you scale, we are getting the time of day in terms of a lot of new [customer] acquisition.
The other biggest cost in startups is headcount. We don’t have very aggressive plans to lay off anymore.
In the meantime, we’ll be watching to see how Brex’s next five years play out. We’re guessing they will be as eventful as the first.
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