If you live near San Francisco you have seen the four letters B R E X strung together on a billboard somewhere south of the Golden Gate Bridge. Maybe you’ve wondered what they do, maybe you haven’t. Either way, if you keep reading you’ll know more than you did before about arguably the most exciting FinTech company in the startup ecosystem.
About a 150 miles east of where Brex’s billboards tower over highway 101 is the town of Coloma. It happens to be the town where gold was first spotted in California. The sighting drew thousands over to the West Coast in the search for riches. Most failed, many died, and a few smart ones leveraged the insatiable demand for mining resources to truly strike it rich.
Silicon Valley Sized Gold Rush
Silicon Valley and tech hubs all over the world are experiencing a similar event to what took place in in California almost 200 years ago. Tech startups are sprouting up everywhere for almost every conceivable reason, and they all need one thing – capital. Most fail, hopefully no one dies (be safe out there), and the most successful serve other startups.
Of course, there are the FANG’s. But they are the miners that stuck their pickaxe in the ground and hit shiny metal – a lot of it. Brex’s explosive growth derives from lending necessary resources to businesses in hyper-competitive industries. lnstead of competing in B2B SaaS or E-Commerce they are helping those companies compete.
The required resources have changed since the Gold Rush. That being said, Henrique Dubugras, the 23 year-old founder of Brex, knows the same model still applies. Enable the ones searching for gold, do not do the searching yourself.
How Did the $2B Business Get Started?
Launched in 2017 by two 22 year old Stanford dropouts, Brex is the first corporate charge card intended for startups.
The two co-founders were in Y-Combinator together where they noticed a recurring issue of their classmates. Getting a corporate card with reasonable terms is really hard. This is the case even if those founders had raised millions of dollars from brand name VC’s. Startup founders could get corporate cards.
The issue was because of the limited credit history of the company they are often attached with personal guarantees. Instead of company finance history, Brex underwrites the cards and credit limits based on cash in the bank, amount of funding, and spending patterns.
What are the Card Perks?
Brex also offers higher spending limits, interest free credit, the ability to earn points, and you can get a card in just five minutes. Sounds pretty compelling if I’m a CEO wanting to buy lunch or office supplies and put off the payments.
Brex’s first card targeted venture-backed tech startups, then e-commerce, and most recently, life sciences companies. Cardholder perks to startups include discounts on industry leading services including Google Ads, Zendesk, and more. To date. rewards coming from earned points currently amount to over $107M. Venture-backed startups have a low history of default, why did Brex move into E-commerce?
How To 5x Valuation in Six Months
There are 75,000 venture backed startups that could be customers of Brex and 600,000 equivalent E-commerce companies. How do you go from raising at a $220M post (March 2018) to $1.1B (October 2018) six months later? Increase your TAM by 8x with one additional product…
The E-commerce card offers a 60 day zero-interest payback period and you can receive one instantly after linking your bank account. If your company has $100k monthly sales and has been operating for a year, a card is yours in minutes. Most recently, Brex launched a card that caters to the life sciences with similar industry specific benefits built into the card.
Brex’s Revenue Model
Each time someone swipes a Brex card the company takes a fixed-fee from either Visa or Mastercard called “interchange.”
The processor, commonly Stripe, will charge the merchant 2% or so and Brex will take .5% – 3.2% for taking the credit risk for the company. Revenue to the company is a fraction of its GMV (gross merchandise volume), which is the total amount purchased or processed using a Brex card.
Naturally, the value of Brex is ties to GMV and how quickly GMV is growing. At the time of Nathan’s interview, the company was growing 50%-70% monthly.
That’s astounding growth even in comparison to notable FinTech companies out there like PayPal or Square. Because valuation is a function of GMV it makes sense Henrique and his team prioritizes GMV growth at all costs. But why raise the crazy amounts they have in under two years? In December of 2018 they had raised $181M and only had 100 employees?
The reason is FinTech companies like Brex have to stay overcapitalized. Banks that they receive lendable funds from require them to hold a certain amount of cash in case of massive defaults. This is a warehousing fine.
In Brex’s case their banks require 15% of their outstanding loans in cash. To increase GMV at the rate they are they must continue to raise large amounts of equity. At any point in time the total monthly outstanding loans cannot exceed total capital raised divided by the warehousing fine.
Although, as Henrique mentions in the interview, warehousing fine percentages will decrease as their loan book increases. If you take their current economics and assume the same warehousing fine Brex cannot lend out more than $2.1B monthly ($317M / 15%). Assuming an average interchange percentage of 1.75% you can get to a reasonable 12 month revenue projection of $441M ($2.1B x 12 x 1.75%).
Knowing their GMV cap and their valuation allows us to back into the GMV multiple they received at their Series C2 in June. $2.6B post money / $2.1B GMV = 1.24x GMV. Massive successes like Brex are why many investors are bullish on the space moving forward.
Is Their Model Sustainable?
To me, the Brex story is incredibly motivational. Two 22 year-old Brazilians moving to the United States and creating over $2B of value in under two years is reflective of the pace and scale at which global capitalism can move in today’s modern climate. I believe this should be celebrated.
However, as with everything, there is another side to this coin. Is this business sustainable? Will the current 0% default rate continue? We are clearly at the tail end of this market expansion cycle. What happens to companies like Brex when the impending downturn occurs? What will default rates look like where burn rates suddenly matter because capital isn’t nearly as accessible as it is today?
Many will say the rapid success of a company offering zero interest loans with minimal screening criteria is the epitome of market froth. I’d love for there to be a debate in the comment section. I’ll give my opinion after reading a few.