Fintech

Brex is dropping small businesses, not startups

Expanding from tech startups to mom-and-pop shops created a dilemma for the financial software company. The result: a painful decision to “offboard” many of the smaller customers it had recently courted.

Brex Co-CEO Henrique Dubugras

Brex co-CEO Henrique Dubugras has had to "offboard" customers as the company focuses in on VC-funded companies.

Photo: Brex

It’s been a rough week for Brex co-CEO Henrique Dubugras as he dealt with the fallout from a business fumble.

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

But the emails led to confusion, sparking harsh criticisms online. “This Brex account closure sucks,” one Twitter post read.

“It’s obviously a tough, painful day,” Dubugras said.

He explained what happened in an interview with Protocol, discussing why Brex had first moved to expand its reach to more traditional businesses and why it eventually decided that it had to withdraw from a “huge” market.

This interview has been edited for brevity and clarity.

Start with telling us what happened. Some people interpreted this as a move away from startups.

Let me share a little bit of historical context. We started a company in 2017 focused on serving startups. We could underwrite them based on cash balances. We gave them a credit card based on it. It did super well.

Then in late 2019, early 2020, we’re like, “OK, how do we expand from here? What's the next phase of products?” Brick-and-mortar small businesses seemed like a good way to go. So we built a lot of our systems to be able to onboard them.

I'd say we were pretty surprised by the sheer amount. There are tens of thousands of startups in the U.S. versus tens of millions of small businesses. The scale that that took was very, very big. We thought it was going to be fine; we'll just invest more to give them exceptional service.

At the same time, there was another effect that was happening. Our core customers, the startups, they were starting to grow. As they grew, they started having all these new needs. They’re like, “Look, we need you to solve these new needs that I have around spend management and global [expansion].”

What we realized was we couldn't do both at the same time. We couldn't serve millions of small businesses around the U.S. and create products for the needs of our best and growing companies.

We made the painful decision to exit that kind of traditional, small brick-and-mortar business in order to focus on startup businesses. Our startup customers require us to be able to grow with them for a longer period of time.

How do you define a startup and the businesses you’re planning to continue serving?

It's not a perfect definition. Our definition is anyone who received any kind of funding from either venture capital, angels, accelerators, any kind of professional funding. That’s the startup that we remain deeply focused and committed to.

These are mainly tech startups, right?

Mainly tech startups.

How big did the traditional SMB segment grow for your business?

I would say that the amount of companies that we onboarded every month multiplied by 25. So think of that and how that impacts a company.

What typically are these companies? Restaurants or retail shops?

Restaurants, retail shops, bakeries, florists, hairdressers, small design agencies. Small professional services, two-people design firms, things like that.

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

You need to move your bank account to a different provider.

You will no longer be serving my business needs.

Correct. Again, the reason we're doing this is so we can focus more on our core customer. We would love to be able to serve everyone and do a great job for everyone. But we made a tough choice of focusing 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 businesses, or thousands of businesses?

That we're offboarding? It's definitely in the tens of thousands.

Obviously, there’s been some confusion. Can you comment on how the plan was discussed and executed?

Yeah, absolutely. Look, it's something that honestly, for the longest time, we tried not to do. Our original plan was: We're going to do both. We as an organization are very capable. We have a lot of people. We have a lot of resources. We're just gonna pain it out and do both. Both are amazing markets. These are great business opportunities. We tried that for the majority of 2021.

Then by the end of 2021, it got to a point where we started questioning: What do we do from here? Do we sacrifice experience for our core customer? Do we allow our best customers to leave because we're not serving their needs? Do we build more products for everyone? Do we double the workforce? What do we do?

And this is the only solution that we could come up with. We weren't willing to sacrifice the quality of our service for our core customer. Especially in this macroeconomic environment, our core customer was pushing us to go even 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 spend. Can you build more controls and more spend-management things?”

They were pushing us to go faster in a lot of things. It was just really hard to do both at the same time.

And we’re like, “We have to do this. We're going to do it once. So we're not going to start offboarding a little bit now and a little bit two months from now, a little bit three months from now. We're gonna do it all at once, one clean cut and make it very clear everyone knows where we're focused on.

On the execution, I would say that, probably 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 is the right decision for our core customer.

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

Did we misclassify any company? Probably. It's a lot of customers. We're not perfect. If we figure out we made a mistake there and they do fit our definition, we will support that. So it is reversible. We will support them.

But that being said, I think that when we say small businesses, I think some people interpreted it as startups as well, which is very bad for us because we're doing this in order to support startups even better. That’s the complete opposite message that we were trying to send.

There are a lot of gray areas. You talked about design firms that could be serving tech startups.

That's why we use venture funding as the criteria. If any kind of professional investors invest in your company, that's our criteria.

It will be puzzling for some that you have all this demand, customers who want your service, and you're saying, “No, we can't serve you.”

The needs of these customers are actually quite different. It wasn't that they were asking us for the same thing, right? The startups were asking, “Hey, can you help us hire globally faster? Can you help me control my spend through software?” The smaller customers are asking, “Hey, can you give me a line of credit to weather the storm? Can you advance my receivables? Can you give me a lease financing?”

It was completely different needs.

But aren’t their needs, in a way, simpler? Why couldn't you sustain that segment of the business given the size of the SMB market?

It's huge, yeah. It's a great business. It's not simpler, actually. It's not more complicated, either. It's just different. When we're onboarding a startup, we can have white-glove service for them, talk to all of them on the phone, help them through everything. With a small business, it's not economical to do because there's so many of them. There's tens of thousands, even millions, so you need to have all your systems extremely automated, extremely perfect. You can't be hand-holding. Everything needs to be super, super scalable. We could get there eventually, but we have to invest a lot of resources in getting there right to be able to keep scaling.

Fintech lenders targeting traditional small businesses emerged because traditional banks were saying it’s too expensive to address their needs.

It's true. There are amazing companies that are focusing just on this. If you look at Square, their whole thing is doing this in a super scalable way that's cheaper. That's their business. Our business has a nuance. Our customers, they grow really quickly.

With Square, if their core customer is the restaurant or the coffee shop, they're not saying in two or three years, “OK, now we're Starbucks. I need all these new things.” Our customers in three years are like, “I need all these new things because I grew,” right? The fact that they grow makes us have to keep up with them.

The story now is you're abandoning the mom-and-pop shops, the restaurants, the retail stores and all those companies that make up a huge chunk of the SMB sector. How do you reflect on that?

You get this advice when you're a founder that 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 just build all these other things with another 20?”

You think you can do all these things at the same time. I think that the reflection and the learning for me is you can do fewer things at the same time and you need to focus, otherwise you won't do either one or the other really well.

Again, it is really painful. Because we do understand the amount of stress that we're putting on a lot of small businesses, especially during this time. But we hope that you know people understand this is in order to serve our core customer.

And we wouldn't be able to serve these small businesses well because we're not building the new products that they need. And there's so many amazing companies out there and fintechs that their entire focus is serving them so they probably are better off betting on a partner that is focusing exclusively on that.

What are the next steps for you, given this change?

I think the most urgent thing is first reinforcing to our core customers that they are safe. We're not going to exit their market. And all of this was for them. That's probably No. 1. Second thing is being extremely supportive and using the majority of our resources over the next two months for the customers that do need to transition.

I wonder if you had any conversation with a restaurant owner or a retail shop owner or any small business owner who, during the pandemic, signed up with you and now you're saying, “We can't serve you anymore.”

I have, yes. And it's painful, because we did ask them to bet on us back then. And now we're offboarding them. So it's really painful for both us and for them. So we're super empathetic to it and we're going to do as much as we can to help them to transition.

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