Brex is dumping small enterprise clients as Silicon Valley adjusts to new actuality

Henrique Dubugras, Co-Founder and CEO of Brex speaks onstage during TechCrunch Disrupt San Francisco 2019 at the Moscone Convention Center on October 02, 2019 in San Francisco, California.

Steve Jennings | Getty Images

Brex, the Silicon Valley lender to startups, is shedding tens of thousands of small business clients to focus on larger, venture-backed clients, according to co-founder Henrique Dubugras.

The company started this week letting customers know they have until August 15 to withdraw money from online accounts and find new providers, Dubugras said in a Zoom interview with CNBC on Friday. Axios reported the change on Thursday.

The move is the latest sign of a sea change in startups, as an abrupt shift in market conditions forces companies previously focused solely on growth to adopt a new discipline. The shift began late last year when shares of high-flying publicly traded fintech companies like PayPal began to collapse.

Dubugras said he and his co-founder Pedro Franceschi made the decision in December as their start-up clients became more sophisticated. Declining valuations for public companies soon spilled over into the private sphere, pounding on pre-IPO valuations and forcing companies to focus on profitability.

That meant some of Brex’s biggest clients began requesting solutions to help them control their spending and hire cheaper international labor, Dubugras said.

At the same time, the traditional brick-and-mortar small businesses, including retailers and restaurants, that Brex added in a 2019 expansion, swamped support lines, resulting in poorer service for the startups they valued more, he said.

“We got into a situation where we realized that if we didn’t choose one, we would be doing a poor job for both sets of customers,” he said. “That’s why we decided to focus on our core customer, namely the growing start-ups.”

The initial news of the announcement caused a lot of confusion among Brex customers, prompting Franceschi to tweet about the move, Dubugras said.

Brex holds on to clients who have secured institutional backing of any kind, including accelerator programs, angel investors or web 3.0 tokens, he said. They’re also keeping traditional companies, which Brex sees as mid-market and that “have more financial history so we can underwrite them for our credit card,” Dubugras said.

Shift is the latest learning moment for the two young co-founders, Stanford University dropouts, who took Silicon Valley by storm when they formed Brex in 2017. The company was one of the fastest to achieve unicorn status and was last valued at $12.3 billion.

The couple mistakenly thought that expanding services to more traditional small businesses would be an easy move. Instead, the needs of the two cohorts were different and required different products, he said.

“We built Brex with 20 people, so we thought why can’t we just build another Brex with another 20 people?” Dubugras said. “I learned that concentration is extremely important; this is definitely a lesson I will take with me forever.”

While business leaders have warned of an impending recession in recent weeks, the decision was not based on concerns that small businesses would default on corporate cards, the co-founder said. That’s because most small businesses have had to redeem their cards daily, which poses a small risk of Brex not being redeemed, he said.

“It’s terrible. It’s also the worst result for us,” said Dubugras. “We put so much money into getting these customers, serving them, building the brand, all those things.”

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