Brex out of small businesses, not start-ups

It’s been a tough week for Brex co-CEO Henrique Dubugras as he deals with the fallout from the business falter.

Brex sent emails to tens of thousands of small businesses, telling them that the financial services company would no longer be able to meet their needs. After expanding its business from tech startups to traditional small businesses, including mom-and-pop stores, Brex decided to backtrack to its original core customers.

But the emails led to confusion, and sparked fierce criticism on the Internet. “This Brex account closing is disgusting,” 1 post on Twitter read.

“It’s obviously a difficult and painful day,” Dubograss said.

He explained what happened in an interview with Protocol, and discussed why Brex first moved to expand its reach to more traditional businesses and why it ultimately decided it had to pull out of a “huge” market.

This interview has been edited for brevity and clarity.

Start by telling us what happened. Some people have interpreted this as turning away from startups.

Let me share a little bit of historical context. We started a company in 2017 focused on serving startups. We can write it on the basis of cash balances. We gave them a credit card based on it. It was a very good performance.

And then in late 2019, early 2020, we’re like, “OK, how do we scale from here? What’s the next stage of products?” small brick-and-mortar businesses seemed like a good way to go. So we built a lot of our systems to be able to include them.

I would say we were surprised by the sheer amount. There are tens of thousands of startups in the United States versus tens of millions of small businesses. The scale it took was very, very large. We thought it would be fine. We will invest more to give them exceptional service.

At the same time, another effect was taking place. Our core clients, startups, are starting to grow. As they grow, they begin to satisfy all of these new needs. They’re like, “Look, we need you to solve these new needs that I have about spending management and globalization [expansion]. “

What we’ve come to realize is that we can’t do both at the same time. We have been able to serve millions of small businesses across the United States and create products to best meet the needs of our growing companies.

We made the agonizing decision to exit this kind of small, traditional brick-and-mortar business in order to focus on startups. Our junior clients ask us to be able to grow with them for a longer period of time.

How do you identify a startup and companies you plan to continue serving?

It is not a perfect definition. Our definition is any person who has received any type of financing whether from venture capital, angels, accelerators or any type of professional financing. This is a startup that we remain deeply focused and committed to.

These are tech startups, right?

Mainly technology startups.

How big is the growth of the traditional SME sector for your business?

I would say the number of companies we joined each month doubled by 25. So think about that and how that affects the company.

What are these companies usually? Restaurants or retail stores?

Restaurants, retail stores, bakeries, florists, hairdressers and small styling agencies. Small professional services, design firms for two, stuff like that.

And if I am a business owner in those industries and I am a customer, what should I do?

You need to transfer your bank account to another provider.

You won’t serve my business needs anymore.

Right. Again, the reason we do this is that we can focus more on our core customers. We like to be able to serve everyone and do a great job for everyone. But we made a difficult choice to focus on where we started.

What percentage of your total business will be affected?

I don’t think we have any numbers to share there.

Are these hundreds of companies or thousands of companies?

Are we on the plane? It certainly runs into the tens of thousands.

There was clearly some confusion. Can you comment on how the plan was discussed and implemented?

absolutely yes. Look, it’s honestly something we’ve been trying not to do for the longest time. Our original plan was: We’ll do both. We as an organization are very capable. We have a lot of people. We have a lot of resources. We’re just going to suffer and do both. Both are amazing markets. These are great business opportunities We have been trying this for the majority of 2021.

Then by the end of 2021, we got to a point where we started to wonder: What are we going to do from here? Are we sacrificing expertise for our core clients? Do we let our best customers leave because we don’t serve their needs? Are we making more products for everyone? Are we doubling the workforce? What do we do?

This is the only solution we can come up with. We were not willing to sacrifice the quality of our services to our core clients. In this particular macroeconomic environment, our primary client has been pushing us to act faster. They were saying, “Hey, I need to hire more people globally. Can you build more global stuff? I want to control more of my spending. Can you create more controls and more spending management items?”

They were pushing us to speed up a lot of things. It was really hard to do both at the same time.

And we’re like, “We’ve got to do this. We’re going to do it once. So we’re not going to start taking off a little bit now and two months from now, three months from now. We’re going to do it all at once, one clean cut and make it absolutely clear that everyone knows where to focus.”

In terms of implementation, I would say, maybe if I were to go back, I would have been more clear about the distinction between startups and small businesses and what qualifies each one. Looking back, I still think it was the right decision for our primary clients.

What do you mean, there should have been a clear definition?

Did we misclassify any company? likely. It’s a lot of customers. We are not perfect. If we find out we made a mistake there and they fit our definition, we’ll back it up. So it can be reversed. We will support them.

But having said that, I think when we say small businesses, I think some people interpreted them as startups too, which is too bad for us because we’re doing this in order to better support startups. This is the exact opposite message we were trying to send.

There are a lot of gray areas. I’ve talked about design firms that can serve up tech startups.

That’s why we use investment financing as criteria. If any kind of professional investor has invested in your company, these are our criteria.

It would be baffling to some that you have all this demand, customers who want to serve you, and you say, “No, we can’t serve you.”

In reality, the needs of these customers are very different. It wasn’t that they were asking us the same thing, was it? Startups were asking, “Hey, can you help us recruit globally faster? Can you help me control spending through programs?” Small clients ask, “Hey, can you give me a line of credit to weather the storm? Can you Pay my dues? Can you give me rental financing?”

They had completely different needs.

But aren’t their needs, in a way, simpler? Why can’t you maintain this segment of the business given the size of the SME market?

It’s huge, yes. It’s great work. In fact, it is not the simplest. It’s not more complicated either. It’s just different. When we set up a startup, we can give them white glove service, talk to them all on the phone, and help them with everything. With a small business, it is not economical to do this because there are so many of them. There are tens of thousands, even millions, so you need all of your systems to be highly automated and highly optimized. You cannot be holding your hand. Everything has to be superior and scalable. We could get there eventually, but we have to invest a lot of resources to get there right so that we can continue to expand.

Fintech lenders targeting traditional small businesses emerged because traditional banks were saying they were too expensive to meet their needs.

it’s the truth. There are amazing companies that focus only on this. If you look at Square, everything they do is do it in a way that is super scalable and cheaper. This is their job. Our work has a slight difference. Our clients are growing very fast.

With Square, if their primary customer is the restaurant or the coffee shop, in two or three years they won’t say, “Okay, now we’re Starbucks. I need all this new stuff.” Our clients say in three years, ‘I need all these new things because I’m getting old’, right? The fact that they are growing makes us have to keep up.

The story now is that you’re giving up on convenience stores, restaurants, retail stores and all those businesses that make up a large part of the SME sector. How do you think about it?

You get this advice when you are founder, focus is very important. When we started the company, we were 20 people, and we were like, “Hey, we built this product with 20 people. Why can’t we build all these other things with 20 other things?”

You think you can do all of these things at the same time. I think the thinking and learning for me is that you can do fewer things at the same time and you need to focus, otherwise you won’t do either of them well.

Again, it really hurts. Because we understand how much pressure we put on a lot of small businesses, especially during this time. But we hope you know that people understand that this is in order to serve our core customers.

And we won’t be able to serve these small businesses well because we’re not building the new products they need. And there are many amazing companies and fintech companies that are completely focused on their service, so it is best to bet on a partner that focuses exclusively on that.

What are the next steps for you in light of this change?

I think the most urgent thing is to first assure our core customers that they are safe. We will not leave their market. And all this was theirs. That’s probably #1. The second thing is to be very supportive and to use the majority of our resources over the next couple of months for clients who need to relocate.

I wonder if you’ve had any conversation with a restaurateur, retail store owner, or any small business owner who has signed up with you during the pandemic and you are now saying, “We can’t serve you anymore.”

I have yes. Which hurts, because we asked them to bet on us at the time. We are now taking them out. So it’s really painful for us and them. So we are very sympathetic to her and will do everything we can to help them transition.