After deciding earlier this year to drop its small business clients, corporate spend management company Brex “took a huge reputation hit,” said co-CEO and cofounder Henrique Dubugras.
It would be “very hard for us to go back into that segment if we wanted to again,” he admitted during a Nov. 1 interview. Despite missteps in execution, however, it was “the right move” for the fintech, he said.
In June, San Francisco-based Brex informed tens of thousands of small business clients it would no longer serve them because the company was opting instead to focus on bigger, venture-backed startups. Citing the starkly different needs between small businesses and larger tech startups, Brex called the move a “difficult decision” in a web post.
In the days that followed, Brex cofounder and co-CEO Pedro Franceschi offered a mea culpa for the way the company handled the announcement. “We didn’t clearly communicate who qualifies as a Brex customer moving forward, which created confusion about which companies Brex would still serve,” Franceschi wrote in June on the company’s website.
Dubugras, 26, named that miscommunication as one of the notable lessons he and Franceschi, 25, learned during the experience. The two customer segments were clearly different to Brex executives, but “to the majority of the market, startup is small business, small business is startup, right?” he said. “I think that got very confusing.”
That led to Brex sharing specific eligibility criteria regarding which customers it would serve, specifically those that have received an equity investment, generate more than $1 million in annual revenue, have more than 50 employees, have more than $500,000 in cash, or are “tech startups who are on a path to meeting the criteria above, and are referred by an existing customer or partner,” the company said. Brex counts DoorDash, Airbnb and Coinbase among its customers.
Focusing on startups
As Brex gained traction with those customers in the years after its 2017 founding and sought to serve smaller businesses, too, it went from onboarding hundreds to onboarding thousands of far smaller clients, Dubugras said. That resulted in more resources and attention being paid to small business clients, at the expense of Brex’s larger customers, he said.
Those fast-expanding startup customers were looking for more tools, he said. “As they started growing, they started having all these new needs, and they basically told us, ‘Look, if you don't solve these new needs that we have, we're going to have to go somewhere else,’” Dubugras said.
It reached a point where Brex executives realized it was impossible for a company Brex’s size to serve so many segments at the same time, so the company needed to zero in on a client set, Dubugras said.
Brex executives chose to focus on its larger startup customers, the segment responsible for the vast majority of the company’s business. Total revenue from all businesses dropped was less than 2%, Dubugras said. “Even though it was a large number of companies [that fell away], it was very small companies,” he said.
The remaining customers “initially had a little bit of a shocked reaction, but now understand why we did what we did and are seeing the fruits of the focus that we have in the organization,” he said.
Narrower focus part of employee cuts
Brex’s narrower customer focus was part of the reason for recent employee cuts. The fintech dismissed 136 employees – about 11% of its workforce – in October. In his web post addressing the cuts, Franceschi cited the new focus as well as a more challenging economic environment.
The Brex move echoes similar headcount reductions recently at payments peers, including the fintech Stripe and buy now-pay later provider Klarna, as well as at more established players, such as the giant payments tech company Fiserv.
The current economic climate differs from Brex’s early years and warrants more financial discipline, Franceschi said. He acknowledged the company grew “really fast” over the past two years as it targeted more customer segments. The cuts “will put us on a path to sustainable profitability over the next few years,” he wrote.
Brex now has about 1,150 employees, a spokesperson said. When asked if he anticipates any further employee cuts, Dubugras said: “I learned during COVID to never say never, but we tried to do this one so we don’t have to do it again.”
Brex raised nearly $1 billion last year, “and we still have basically that on our balance sheet,” Dubugras said. The company, which has raised $1.2 billion overall, doesn’t plan to raise money in the next 12 months, he said.
Dubugras declined to comment on Brex’s revenue or whether the company is profitable. As far as payments volume, he said Brex processes tens of billions of dollars for companies annually. A spokesperson declined to provide a more detailed figure.
Although Dubugras regrets the company’s handling of the customer shift, narrowing its focus on startups “allowed us to definitely execute and do a lot more,” he said.
That includes rolling out Brex’s expense management platform, which was launched widely in October. Workplace changes prompted by the COVID-19 pandemic mean more workers are interacting with expenses software, to be reimbursed for remote work purchases or for travel to meet with colleagues, Dubugras noted.
Given these new payment inflows, Brex aims to improve the expense management process by bundling capabilities and using modern technology.
Brex counts American Express and Concur as top rivals in corporate expense and spending management arena. It also faces competition from the smaller rivals Ramp and Bill.
Brex also plans to sharpen its global capabilities, in light of customers’ worldwide workforces. The company is focused on “how do we build everything in many different currencies, and be able to reimburse people everywhere, and have the card work anywhere?” Dubugras said.