Why did Brex really decide to ditch SMBs? – TechCrunch

Welcome to the Interchange! Thank you for signing-up and your vote of confidence, if this was sent to you in your inbox. If you’re reading this as a post on our site, sign up HereYou can then receive it directly in future. Every week, I’ll take a look at the hottest fintech news of the previous week. This will include everything from trends to funding rounds to an analysis of a space to hot takes and observations on a company or phenomenon. There’s a lot of fintech news out there and it’s my job to stay on top of it — and make sense of it — so you can stay in the know. Let’s goooo! — Mary Ann

Last week was a roller-coaster ride through the world of fintech. It felt as if for every round of funding, I also covered a layoff. Real estateRedfin and Compass both let go more than 900 employees while Notarize, Wealthsimple and Wealthsimple also made staff cuts. Proptech HomeLight was able to raise $60 million and acquire another startup in the confusing startup world.

Insurtech Sana, which has raised $60 million, claims it has doubled its value. But the biggest news of the week — which some might say shook the fintech world — was that decacorn Brex revealed that it will no longer serve small- to medium-sized businesses (SMBs). TechCrunch dug into the news in three separate pieces, and I’m going to get into some of the background around it all here. So, don’t go anywhere.

Brex cuts off SMBs

Three months after announcing it would make a big push into software and enterprise, fintech giant Brex confirmed that it is apparently abandoning a segment it started out to serve — small- to medium-sized businesses.

Initial confusion was present about what that meant. SMBs like brick-and-mortar businesses? SMBs can be as entrepreneurial as startups. To get clarity, I spoke with Henrique Dubugras, Brex CEO and cofounder. His words may not have been as comforting for some of our readers, as the company might have hoped.

Dubugras emphasized that Brex, which started its life focused on startups, “remains committed to startps.” When asked about the criteria in which it determined which businesses would be impacted by its move, he said that Brex chose to no longer work with any businesses that did not have some sort of “professional” funding — either venture capital, angel money or funding from an accelerator. As a result, “tens of thousands” of businesses were told their accounts would be shut down as of August 15. Dubugras admitted the set of criteria may not have been “perfect” but that it had to “have one.”

Although the executive appeared to be in a good place, some customers are still angry that the company is abandoning those who most need it. Comments ranged from bitterness that Brex was acting without regard “for the people who built them up.” One SMB owner who was affected tweeted about his frustration with the manner in which the company handled the situation, noting that Brex left him “and other SMB owners out to dry.” Still another tweeted the communication it got from Brex: “What an inconvenience, this Brex account closure sucks. Was using it for one of our digital properties with minimal revs, guess they’re clearing out the minnows.”

Many were disappointed that the funding was limited to SMBs with some form of funding. One commenter on my LinkedIn post about the topic said, “Small business owners need a lending hand now in these times of uncertainty, not being ditched like this.”

He’s not wrong. “Tens of thousands” is a lot of businesses that have 2 months to figure something else out. One person said to me, “The scale of that is really remarkable.”

But at the same time, the move maybe shouldn’t be as shocking as it was to nearly everyone I talked to on the matter — from founders of rival companies to industry observers. Here’s why. As we mentioned, the company made a lot of noise in March about how it was entering software and focusing more on acquiring enterprise clients, such as DoorDash. Also, it’s just a fact — and as Henrique himself admitted — that the needs of a small business are very different from the needs of a larger company. This segment requires a different approach to everything, from the onboarding process to the sales process. Also, there are rumblings that Brex simply wasn’t making enough money from working with SMBs to justify continuing to do so, with one industry insider sharing, “I think that the operational costs, the fraud costs, and the risk costs combined with heavy rewards they were giving out just made it a poor segment.”

Brex has traditionally made most of its money via interchange fees. Many would argue that these fees are low margin. A move to a SaaS model might make sense. This would be especially true given the changes in the macroenvironment since Brex’s last raise, which was valued at $12.3 million. Brex may have felt the need to concentrate more on its SaaS business, as investors are now more demanding revenue (and profits) than ever. But doing so at the expense of its SMB customers just felt…wrong. And let’s also keep in mind, it’s still building out its SaaS offering.

Others have pointed out how difficult it is to be “everything to everyone,” and that this decision by Brex was a reflection of just how true that is. When I talked to Henrique, he shared that its startup clients “needed us to be more proactive with their needs.”

“They were asking us for a lot of resources that we wanted to give to them, that had to be diverted from somewhere else,” he said.

Employees from the past have expressed their dissatisfaction with the company’s lack of focus and tendency to go in too many directions. Brex announced that it had raised $300million through a Series D-2 round. This increased its valuation by $12.3 billion. It has raised $1.2 Billion over its 5-year lifespan.

All I know is that as a journalist covering the fintech space, this type of shift in strategy from a decacorn in Brex’s position struck a lot of negative chords with a lot of people. What we all are wondering now is…will the strategy backfire or will Brex’s decision prove to be the best it could have made for the future of its business? Only time will tell.

Weekly News

Apple has relaunched the buy now, pay later market with news that it would now be a competitor to established firms, PayPal introduced another buy now, pay later product to follow the 2020 launch of its “Pay in 4” installment program. The new offering, “PayPal Pay Monthly,” is designed to give customers a more flexible way to pay, the U.S. payments giant said. Instead of having to pay off purchases over a 6-week period as before, “Pay Monthly” users can break down the total cost into monthly payments over a 6- to 24-month period.

The housing marketThis year, the proptech industry has suffered a significant blow as homeowners have cut back on their purchases and mortgage interest rates have risen. Redfin, Compass and other proptech companies have announced layoffs of approximately 920 employees each last week. “I said we wouldn’t lay people off unless we had to,” said Redfin CEO Glenn Kelman. “We have to.”

Canadian fintech giant WealthsimpleThe company was valued at $4Billion as of last year. said it was laying off 159 people — or about 13% of its staff. CEO and co-founder Michael Katchen addressed the move in a letter to employees, which was published as a blog post, noting that Wealthsimple’s clients “are living through a period of market uncertainty they’ve never experienced before.

Notarize, a startup offering remote online notarization, has let go of 110 people — or 25% of its workforce. Pat Kinsel, founder and CEO of the company, stated last week that it would be difficult to obtain additional funding. Find out more.

Klarna is contemplating raising additional capital at a even lower valuationThe report is much more recent than what was reported just a few weeks ago, according to the Wall Street JournalAccording to the report, people familiar with the situation were cited. According to reports, the Swedish payments giant has been in discussions with investors over a deal that could see it valued at approximately $15 billion. It was expected to raise additional capital at a $30B valuation last month, a significant drop from the $45B valuation it received last year.

Plaid announced this past weekIt will be opening an office in Toronto — a market it entered as its first international market in 2018 — and that it has entered into a data access agreement with the Royal Bank of Canada, which is the fifth largest bank in North America. I talked with a few executives about the news, and while I unfortunately didn’t have time to cover it in the form of a story, they shared that the agreement will bring about secure, API-based financial access for more than 14 million RBC digital clients, who will have the ability to “securely” connect to the 6,000+ apps and services on Plaid’s data network.

India has lifted the restrictions on Mastercard transactions, nearly a year after imposing the ban, once again allowing the cards giant to add new customers in the South Asian market after it demonstrated “satisfactory compliance” with the local data storage rules, the central bank saidLast week. We have the scoop from Manish Singh.

Funding and M&A

TechCrunch: Seen

PayCargo, a fintech company for the freight industry, raises $130M

Able.ai raises $20M to help large lenders make high-value loans faster

Auxilius receives $10M to help biopharmas handle financial aspects of the clinical trials process

Sana, which offers SMBs health insurance plans, raises $60M.

Cube, which aims to help finance teams plan better, and faster, has landed $30M after experiencing 400% ARR growth

Amid real estate tech industry layoffs, HomeLight raises $60M and acquires lending startup Accept.inc — “[…]Flat valuations are the new up,” the CEO says as the company increased its valuation from $1.6 billion to $1.7 billion.

Mono aims to be ‘first bankingless bank’ for Latin America’s small businesses

Seen elsewhere

Brazil’s Zippi attracts Tiger Global to $16M Series A to $16M Series A to boost a credit solution via PIX for micro-entrepreneurs

Islamic investing platform Wahed secures US$50mn in funding

BNPL fintech KEO World with an SMB focus closes on $20M in funding

Well, that’s it for this week. Once again, thank you for reading — and Happy Juneteenth!! See you next time. Mary Ann, xoxo