Fintech Brex Is Dropping SMBs — Will Others Follow?

We’ve spent years watching one company after another attack the small business market. Only to retreat, bloodied from unsustainable acquisition costs and churn. So it’s no big suprise for us to witness lending startup Brex‘s pivot to enterprise.

Still, the decision to walk away from its small business customer base was treated with some alarm. Or at least with grave interest. The subtext being that it represents some kind of trend away from small business customers. And in particular amid the current reckoning among venture back startups.

There is also some disquiet over whether this decision will return to haunt Brex.

Let’s share a little background on Brex before we dig into why it’s making such a dramatic move.

Barrick Rothchild, Henrique Dubugras, and Pedro Franceschi founded Utah-based Brex in 2017 and launched its first solutions the following year. It’s original mission was to help startups borrow money to keep the doors open as the try to grow. In 2020, the company extended this service to regular brick and mortar SMBs. In addition to lending, Brex helps companies track and manage expenses.

Around that time, a number of big players in payments and eCommerce began adding lending components to their stack. One example is Shopify. Early in 2020, before the pandemic hit its full stride, the eCommerce platform began offering loans to its customers through Shopify Capital.

Along the way Brex has made six acquisitions and raised more than $1.5 billion (fintech is expensive).

Brex says it will remain committed to working with startups, the lion’s share of which aspire to grow into big businesses. But mom and pop shops will have to look elsewhere for the money and tools Brex now provides them.

DoorDash over Dad’s Garage

Last week Co-founder and Co-CEO Franceschi published a long Twitter thread explaining the decision.

A key argument that Franceschi offers for the decision to abandon SMBs is that Brex needs to be in a better position to serve its startup customers as they grow.

“Over time, we realized that our startup customers – the very customers we started with – were growing very fast, and needed Brex to scale with them,” he wrote on Twitter. “Scale AI went from five people when we started serving them, to almost 1,000. Brex didn’t work as well for larger companies.”

Late last year Brex “went back to our core”, in Franceschi’s words, to focus on start-ups. In April of this year, the company launched Empower as a direct response to its conclusion that it wasn’t built to scale with its startup customers.

In a blog post, Franceschi describes Empower as “a new software platform designed to enable a culture of trust and financial discipline at scale. Empower will serve as the foundation for all Brex products moving forward, starting with a completely new spend management product.”

DoorDash was Empower’s first customer.

So now Brex has invested in becoming more useful to large enterprises. Yet it was still serving thousands of “traditional” small businesses. Brex felt the outbreak of a dilemma, with tough choices ahead.

“We still had tens of thousands of small businesses with very different needs from fast-growing companies,” Franceschi wrote on Twitter. “And by spreading ourselves too thin, we couldn’t serve either small businesses or startups well.”

Show Us Your Web3 Tokens

So Brex decided to pull the plug on SMBs, but it first needed to clarify who is and isn’t eligible.

“This led us to the painful decision to stop serving traditional small businesses. We decided to draw the line of who’s eligible as any customer who received any investment (accelerator, angel, VC, web3 token, etc),” Franceschi wrote.

Probably not a lot of muffin shops being funded by Web3 tokens. At least not yet. So Brex is giving all the muffin and muffler shops on its platform two months to migrate before Brex cuts them off.

We don’t know at this stage if this is a smart and gutsy decision. Or if it was just stupid and arrogant.

Twitter being Twitter, many of the responses to Franceschi’s tweet had a bitter edge to them. Here are a couple of examples.

And then there is this one.

We tend to agree that Franceschi’s tweet seems to be a long-winded way of saying the following. First, small businesses are not profitable. And second, we can only optimize for one — SMBs or enterprises. And the whole thing has the feeling of a move that is smart on paper but lacks an appreciation for the law of unintended consequences.

We also won’t be terribly surprised if Brex takes a reputational hit from all the businesses booted off its platform (even after the two-month grace period) griping on social media. That already seems to have begun.

And we also think the company might have a Gordian knot of complaints on its hands from businesses claiming they were unfairly labeled as SMBs when they argue that they are bootstrapping startups.

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