Friends,

Great companies are built on hard decisions. Behind every great corporate success, every mesmerizing milestone, are perhaps dozens of trade-offs and compromises. 

A year ago, Brex made one of the hardest decisions of its life: offboarding its small business customers to better focus on its core constituency of venture-backed startups and enterprises. The move attracted negative press and impacted the firm’s reputation in the short term.  

It was also, unequivocally, the right decision. A year later, the dividends are clear. Brex operates at a speed and scale that nearly any executive would envy. Last valued at $12.3 billion, the firm Henrique Dubugras and Pedro Franceschi founded is on track to hit $500 million in annualized revenue within 12 months. The company grew 200% in 2022. That trajectory has been propelled by an increasingly comprehensive suite of products far beyond the credit card service that built its name. It seems to be serving startups and enterprises better than ever before. 

For these reasons, Brex is an exceptionally compelling case study – a large, rapidly growing enterprise making consequential strategic decisions, taking big product swings, and finding success. To capture the story and the strategy behind it, we’ve spent several months digging into the company, interviewing leadership, investors, and customers. The result is, perhaps, the most comprehensive study of Brex in its history. It is a fascinating tale of precocious teenagers, scalding product-market fit, impressive engineering, and, of course, hard choices.

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Brought to you by Brex

Brex is the all-in-one spend platform trusted by startups and fast-growing enterprises. Companies like DoorDash, Coinbase, Scale, and Airtable use Brex for their business accounts, expense management, corporate cards, bill pay, travel, and more. It’s a sophisticated, powerful, one-stop shop that saves time, streamlines compliance, and keeps teams on budget. 

Even more impressively, Brex works around the world. The company’s global platform accommodates spending in over 100 currencies while considering domestic regulations and local corporate policies. No matter how distributed your team is, Brex is ready. 

Learn more here.

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Please note: As always, this is not financial advice.

Brex’s Second Act

Actionable insights

If you only have a few minutes to spare, here’s what investors, operators, and founders should know about Brex.

• Brex is cooking. The all-in-one financial platform is in rare form. The firm grew revenue by 200% in 2022 and is expected to hit $500 million in annualized revenue within the next twelve months. Crucially, one of its fastest-growing units is Empower – a high-margin software-as-a-service product for large enterprises. 

• Built different. Though customers might not notice it, one of Brex’s core advantages is its underlying architecture. From the beginning, founders Henrique Dubugras and Pedro Franceschi have preferred to build in-house, eschewing third-party offerings. The result is a powerful, modular structure capable of accommodating massive scale. According to Brex’s founders, it could prove a compounding advantage. 

• From point to platform. As its customers have grown, Brex has, too. While it started life offering credit cards to startups, it’s evolved into a comprehensive, multi-pronged platform offering expense management, bill pay, travel, business accounts, and much more. In undertaking this evolution, Brex has positioned itself to scale with tech’s fastest-growing business, winning customers like DoorDash, Coinbase, and Retool. 

• The dividends of hard decisions. Last summer, Brex announced one of its hardest decisions: it was offboarding small-business customers to focus on better serving venture-backed startups and enterprises. It was a move that attracted negative press and confused some customers. The decision has been vindicated. Brex has regained its mesmerizing shipping speed and improved its service. 

• Serving startups. During the Silicon Valley Bank crash, few businesses stepped up as much as Brex. As well as working around the clock to onboard new customers, founder Henrique Dubugras rushed to pull together a $1 billion emergency facility to assist entrepreneurs struggling to make payroll. While it ultimately wasn’t needed, thanks to the FDIC stepping in, it demonstrates the lengths Brex will go for the startup community. A coordinated new initiative aims to boost how the company serves startups further.

This piece was written as part of The Generalist’s partner program. You can read about the ethical guidelines I adhere to in the link above. I always note partnerships transparently, only share my genuine opinion, and commit to working with organizations I consider exceptional. Brex is one of them.

Dig through Jeff Bezos’ 1997 Annual Shareholders Letter for long enough, and you’ll find an ominous message. Buried in the footnotes is a warning of sorts, one that only makes sense with sufficient context. Alongside more perfunctory updates, Bezos uses this letter to outline his theory of decision-making. For the Amazon founder, there are only two types of decisions in the world. 

“Type 1” decisions are significant and irreversible. In Bezos’ parlance, they are one-way doors: “If you walk through and don’t like what you see on the other side, you can’t get back to where you were before.” “Type 2” decisions operate differently. They are two-way doors – easily reversible and light on jeopardy. When it comes to Type 2 decisions, if you don’t like your choice, just walk it back and try again.

Bezos makes his concern clear in his letter: as Amazon scales, it cannot lose its nimbleness. Employees across the company must recognize when they are facing a “Type 2” decision – and move quickly. “As organizations get larger, there seems to be a tendency to use the heavy-weight Type 1 decision-making process on most decisions, including many Type 2 decisions,” he writes. “The end result of this is slowness, unthoughtful risk aversion, failure to experiment sufficiently, and consequently diminished invention.”

Bezos’ observation is astute, but the footnote attached carries a greater sense of foreboding – at least for startup founders. “The opposite scenario is less interesting,” the Amazon chief notes, “Any companies that habitually use the light-weight Type 2 decision-making process to make Type 1 decisions go extinct before they get large.” 

It is easy to miss the significance of that message, clouded as it is with corporate speak and the CEO’s vernacular. In truth, Bezos is saying something simple: companies that make the wrong decisions when they matter die. If you move too quickly, think too little, and act without strategy, you will be overtaken. While big companies like Amazon might worry about maintaining their speed at scale, startups must know when to slow down and deliberate, to recognize when the stakes are high and the consequences of a misstep profound. 

Not only do these moments determine whether your company continues to grow, they define its DNA. As former founder and venture capitalist Ben Horowitz writes in his book, The Hard Thing About Hard Things, “Every time you make the hard, correct decision, you become a bit more courageous, and every time you make the easy, wrong decision, you become a bit more cowardly. If you are CEO, these choices will lead to a courageous or cowardly company.”

In June 2022, Brex founders Henrique Dubugras and Pedro Franceschi announced one of the hardest decisions of their company’s life. From its inception in 2017, the fintech best known for its credit card offering had focused on startups. Its offering had proved compelling to customers and intoxicating to investors, catapulting the five-year-old business to a valuation north of $12 billion. However, as Brex grew and expanded its offering, it drew an increasingly diverse user base. Though built to serve venture-backed businesses managing millions of dollars in capital, Brex was soon relied upon by small businesses across the United States, from small agencies to local restaurants. 

While Dubugras and Franceschi initially welcomed this new market, the difficulties of serving multiple stakeholders soon became clear. “We didn’t originally appreciate how different these customers were,” Franceschi remarked. Though SMBs liked Brex’s elegance and ease of use, they had fundamentally different needs than venture-backed startups. Trying to serve both customer bases created problems across the company, from product development to customer support. “It started pulling the company in two directions,” Franceschi said. Something had to change. 

Brex’s founders faced a crossroads. Should they keep splitting their attention to serve SMBs, or refocus on tech-focused startups and high growth companies? It was a classic Type 1 decision with high stakes and little recourse. Make the wrong call, and Brex could find itself mired in operational complexities for years, permanently curbing its trajectory. Make the right one, and Brex could continue to build and thrive – but at the expense of part of its customer base. 

In the end, Brex made the hard, correct decision – one that Franceschi calls “very principled” – and then communicated it clumsily. In June 2022, the company released a statement to inform SMBs that it would stop supporting them in the coming months. However, its ambiguous wording left a much larger portion of Brex’s customer base concerned about losing service. 

Suddenly, startup CEOs wondered if they were about to be abandoned by the financial partner they’d helped hit remarkable heights. Even after quickly clarifying that its support for venture-backed startups remained undisturbed, many were left feeling disappointed and confused. “That was my worst moment,” Dubugras said. “You spend all this time asking customers to trust you and then to say, ‘Hey, you can’t use our product anymore’ – that doesn’t feel right. We had people hating us on Twitter, sending us nasty emails. All of it took a toll. But I don’t regret it because it was the correct decision for our business.”

What a difference a year makes. The past twelve and a half months have demonstrated the wisdom of Dubugras and Franceschi’s decision. Brex has operated at astonishing speed over the intervening period shipping a slew of updates and driving its core enterprise product to $100 million in annualized revenue. Those improvements have re-strengthened its grip on the startup market and proved its ability to serve larger customers like DoorDash, Coinbase, and Airbnb.

As well as showcasing the dividends of renowned focus, 2023 has also offered a chance at redemption. As Silicon Valley Bank disintegrated in March, few companies stepped into the vacuum as definitively as Brex. The firm worked around the clock to onboard new customers and moved quickly to pull together a bridge loan for startups facing shutdown. Its decisiveness and leadership did not go unnoticed, showcasing its connection to the startup ecosystem.

The overarching image of 2023 Brex is that of a company in the early innings of a new growth surge. If Dubugras and Franceschi’s firm can continue its impressive pace, the next five years could see it become one of the world’s most important businesses, a core piece of a corporation’s financial infrastructure. A compelling second act has begun.

Origins: Built for this

Given Silicon Valley’s worship of the wunderkind, it is something of a surprise to learn that the average age for a startup founder is 41.9. Henrique Dubugras and Pedro Franceschi are the sort of entrepreneurs who skew that data and reinforce the myth. By their early twenties, the California transplants had founded not one but two multi-million dollar companies. It is a story that begins on the internet; it could hardly have started anywhere else.

More than 250 miles separate Rio de Janeiro from São Paulo. For many, it feels farther. In the popular imagination, Brazil’s two most populous cities embody different philosophies and disparate ways of living. Rio is the coastal libertine, insouciant and life-giving, less a formal city than a dance of sand, sea, and sun expressed through the medium of urban planning. Sao Paulo is the metropolis in purer, fiercer form. Its charms require greater work, sprouting as they do at the edges of a ferruginous commercial powerhouse. They are nonetheless there. This is a city of life, too, just one rendered in steel and concrete. However nuanced, their differences result in an ineluctable debate: which is better? A person can love both, but they cannot love both equally. (The French writer Stendhal may have penned a famous book about Rome, but only Florence’s crushing beauty drove him to faint.)

In 2012, two Brazilian teenagers found themselves locked in a different kind of debate: Vim or Emacs? Over Twitter, Rio-based Pedro Franceschi sparred with Paulista Henrique Dubugras. The duo didn’t know each other, but each coded enough to have an opinion on the superior text editor. Franceschi was a fan of Emacs’ power and configurability, while Dubugras favored Vim’s speed and portability. 

Enjoying the sparring match and perhaps sensing a kindred spirit, the pair moved their debate from Twitter to a Skype call. Franceschi quickly conceded: “I was wrong, Henrique convinced me to switch.” Whatever their differences in opinion, the conversation revealed the many interests the teenagers shared. “We realized we had so much in common,” Franceschi said. “We were both young engineers in Brazil at a time when not many people our age were coding. That bonded us.”

The conversations continued over the following months, with the pair trading startup ideas. Despite their youth, both Dubugras and Franceschi brought previous work experience to the table. A few years earlier, frustrated by the exorbitant costs of the Korean video game Ragnarok, a favorite of his, Dubugras had created an alternative with a different business model. Consumers could buy one-off in-game items rather than paying a subscription fee. That episode allowed him to observe the complexities of processing online payments. It also attracted legal ire. A wave of cease and desist letters arrived at his home in Sao Paulo, concerning his mother. “I didn’t know what they meant, but she was pretty upset,” he recalled with a chuckle. 

Franceschi had been similarly busy. The Rio resident started coding at nine, spending his free time developing apps and jailbreaking iPhones. When he and Dubugras met, Franceschi had already parlayed his abilities into three software engineering jobs. His most recent gig had been at M4U, a payments business. Both of them had witnessed the shoddy state of affairs in online payments first-hand. “We saw how bad it was,” Franceschi said, “We just said to ourselves, ‘Let’s build something better. And let’s focus the product on developers.” Dubugras and Franceschi decided to become business partners. They still had yet to meet in person.

“We had no idea what we were doing.”

In 2013, the teenagers formally launched Pagar.me, an online payments processor. Though they weren’t familiar with the Collisons’ company when they started, Pagar.me was functionally and philosophically aligned with Stripe, albeit with a different geographical focus. In the years to come, the press frequently referred to it as the “Stripe of Brazil.”

Simply starting a company at an age when most are sweating their college applications demonstrated impressive precocity. Beyond their solid sectoral experience, Franceschi attributes that boldness to the follies of youth. “We had no idea what we were doing. The level of ignorance we had about what it takes to build a company probably helped.”

Pagar.me was a success. Over the next three years, Dubugras and Franceschi scaled their business to more than 150 employees, $1 billion in annual transaction volume, and millions in revenue – all while balancing the demands of high school. At around the same time Pagar.me’s founders negotiated term sheets with megafunds like DST Global, they applied to college. Both Dubugras and Franceschi agreed on their dream school: Stanford. Ever since discovering the protagonist of his favorite TV show Chuck had attended the Palo Alto campus, Dubugras had dreamt of attending. That childhood ambition was bolstered by its position at the epicenter of innovation. Franceschi shared that passion: “We wanted to be at the bleeding edge of technology.”

In early 2016, the young entrepreneurs traded Brazil’s metropolises for California. While they initially fretted about the cost of tuition, they need not have worried. In August of that year, Pagar.me was acquired by Stone, a publicly-traded Brazilian fintech. While details of the deal have never been disclosed, it was more than enough to cover an education at Stanford and life in a new country. 

In the end, Franceschi and Dubugras’ stint at Stanford was brief. “We only stayed six months,” Dubugras recalled. “Then we came up with a new idea for a company and dropped out.” The buzz and charm of college life couldn’t compete with the rush of building.

“What would you build if you could build anything?”

Twenty-sixteen was not only the year of Pagar.me’s acquisition. It was also “the year of VR,” according to many heraldic reports. While hindsight tells us that the technology was still years away from even minor consumer adoption, the debut headsets from Facebook, Microsoft, and HTC caused a stir. After an Oculus demo at the Palo Alto Mall left them “amazed,” Dubugras and​​ Franceschi started working on “Veyond,” a VR company designed to bring the technology to the mass market. They joined Y Combinator’s winter batch to try and bring that vision to fruition.

To the founders’ credit, they did not let enthusiasm cloud their commercial instincts. Though inspired by VR’s potential, at YC, Franceschi and Dubugras began to question the timing of their company and whether they were the right people to run it. Though they hadn’t let a lack of knowledge dissuade them from building Pagar.me, it felt different this time. Not only were they still green entrepreneurs, but nearly every aspect of Veyond felt unfamiliar. There wasn’t a strong founder-market fit,” Franceschi said. “We didn’t know anything about hardware, for example. It was hard to think of how we would be successful.”

A conversation with YC Managing Director Michael Seibel prompted a rethink. “I remember he asked us, ‘What would you build if you could build anything?’” Dubugras said. “I answered, ‘A business bank.’” While building Pagar.me, its founders had hoped to someday expand into banking, but the company’s acquisition ended such ambitions. “I felt like there was still part of the story that we needed to see through,” Dubugras remarked. 

A mixture of advice and observation clarified their approach. Dalton Caldwell, another YC partner, advised the young Brazilians to start by launching a point solution. Aspiring to build a full-service bank was all very good, but you had to start somewhere. “No one was going to trust two young guys with all their banking needs,” Dubugras said.

In watching their batchmates’ operational challenges, Franceschi and Dubugras found their opportunity. Despite receiving investment from YC, startups struggled to secure a corporate credit card. Traditional banks not only moved slowly, favoring in-person manual processes or turbid digital interfaces, they didn’t understand how to underwrite early-stage businesses with no credit history. Anu Hariharan, formerly of the YC Continuity Fund, recalled the unfavorable odds founders faced. “Getting an American Express card was fifty-fifty,” she said. “Even if you did get it, you’d have a $300 to $500 credit limit.” To add insult to injury, when traditional banks did deign to issue a card, it typically made the founder personally liable.

David Hsu, CEO of internal tooling platform Retool, remembered such struggles well. Part of the same batch as Franceschi and Dubugras, Hsu recalled striking out with traditional financial institutions. “We were rejected a few times. Most banks didn’t seem to understand startups, even those that were based in Silicon Valley and San Francisco.”

Veyond’s founders had faced the same kinds of challenges. Indeed, they were made even harder thanks to their international status. To Dubugras and Franceschi, it was as infuriating as it was illogical. After all, they and their contemporaries were building some of the most promising startups in the world. Even more importantly, they were sitting on hundreds of thousands – if not millions – of dollars in venture funding. Why didn’t that factor into the process? And why did it take so long?

Rather than deliberating over a new company name, they turned to an online generator and found one that felt right: Brex.

“The card cannot fail.”

The duo swiftly set to work. They focused on two core tasks: developing a robust product and securing capital. 

Franceschi took the lead, engineering Brex’s platform. From the outset, he and Dubugras set an ambitious goal for their product. “We said to ourselves: ‘The card cannot fail. It has to work 100% of the time,” Franceschi recalled. Given the relative immaturity of fintech in 2017, achieving that reliability would be no small feat. Off-the-shelf products like Stripe Issuing didn’t yet exist, meaning that if the company wanted to issue a card, it would need to do so itself. Over the following months, Franceschi constructed Brex’s back end from scratch, coding the core card processor, KYC functionality, underwriting engine, and connective tissue to Visa and Mastercard. In the end, Brex would deliver its first cards to customers in four months. 

As Franceschi wrangled convoluted banking rails, Dubugras sought capital. Brex needed venture funding to survive and credit to supply to customers. Given their pedigree, it’s perhaps unsurprising that equity investors came more easily. 

Ribbit Capital’s Micky Malka had known Dubugras and Franceschi for years. As a fellow Latin American hailing from Venezuela, he’d taken a keen interest in Brazil’s prodigies. While Malka wasn’t interested in Veyond, the new direction was compelling. In early 2017, weeks before YC’s Demo Day, Ribbit led a $7 million Series A into the company. 

Finagling debt and credit lines took longer, though a shrewd hire accelerated the process. After stints in banking and private equity, Michael Tannenbaum had joined lending company SoFi as a VP of Finance. Over three years, he became the firm’s Chief Revenue Officer. During this spell at SoFi, he’d had the chance to manage its corporate card program, seeing many of its complexities first-hand. When Tannenbaum was introduced to Dubugras in the spring of 2017, he immediately understood the potential of what the young Brazilian was building. “I thought it was really compelling,” Tannenbaum said. “I started working with them on the weekends, and then, when it became more serious, I jumped aboard.”

It’s unusual for a startup’s first hire to be its CFO. But in Tannenbaum, Brex found someone capable of building a best-in-class capital markets function and filling several other roles. “The title didn’t matter,” Tannenbaum said, “The earlier the company is, the more you’re doing a bit of everything.”

Long-time Brex investor Anu Hariharan called out Tannenbaum’s hiring as a masterstroke. For one thing, it demonstrated that Dubugras and Franceschi understood their business’s unique challenges. Just as critically, it set the firm up for years to come. “From a capital markets perspective, Brex operates at the proficiency of JPMorgan. I’m not even joking. You can’t do that without Michael.”

By July 2017, Brex had recruited a stellar executive, closed a Series A, and gotten a card into the hands of its first customers. Franceschi and Dubugras were just getting started.

Evolution: Managing change

Scalding product-market fit, the kind that creates markets and spawns competitors almost instantaneously, is rare. Perhaps because of that, companies that find it often seem to find themselves unsure of how to manage the opportunity. Mesmerized by the strength of demand, some simply stay put, riding the wave for as long as it will last, even as rivals creep behind them. Others become giddy from it, driving their business in ten different directions simultaneously, convoluting the value they found to begin with. 

Though Brex is not perfect, it has done an uncommonly good job of turning initial, robust product-market fit into coherent momentum. Naturally, there have been missteps. But viewed holistically, Dubugras and Franceschi have done an outstanding job of evolving their business, pushing into new directions while successfully enhancing its value. In large part, that’s thanks to Brex’s understanding of its market and long-term vision. When it came to raising its Series B, the company demonstrated both. 

“Let me show you my model.”

In early 2018, approximately nine months after giving his Demo Day pitch, Henrique Dubugras returned to Y Combinator. He was, once again, preparing to fundraise, albeit at a different order of magnitude.

A great deal had changed since Brex’s graduation, though much of it occurred behind the scenes. Virtually as soon as alpha users received their cards, it was clear the company had product-market fit. Franceschi recalled that Brex’s MVP worked via a command-line interface. If you wanted to log expenses, review your card number, or add team members, you had to do so via a terminal. It spoke to both the tech-savvy of its user base and their appreciation for Brex’s core value that such inadequacies hardly seemed to bother them. “I remember wondering, ‘Why are they using it when it’s so shitty?’” Franceschi said. “It was because there was such a big problem. That was an interesting early signal.”

It didn’t hurt that Brex’s product was simply better than alternatives. Those willing to look past the absence of a proper front-end got rapid access to a credit card with higher limits and no personal liability. Using technology, Brex could approve customers in just 24 hours – no manual paperwork or in-person visits required. By underwriting companies based on their capital, Brex could safely increase credit limits 10-20x beyond those proffered by a traditional bank. Critically, the newcomer didn’t put founders on the hook from a liability perspective. It was, in short, a credit product built for startups like them.

Retool was one of the first companies to jump aboard. As David Hsu recalled, it was a radically improved experience compared to dealing with old-school banks. “I was shocked at how quickly we could get a card. I was like, ‘That’s it? We just press a few buttons, enter a few text fields, and then we get to spend money? That’s nuts!’ I just thought, ‘Wow. This is how banking should work.’”

Despite strong demand for its services, Brex restricted itself to those within its small circle. Through early-2018, the company focused on building out its solution, bolstering its reliability, strengthening ties to credit providers, and positioning itself for a strong Series B. By the time Dubugras met with YC Continuity’s Anu Hariharan about their upcoming round, Brex had a strong offering, but fewer than 100 customers.

Hariharan didn’t take long to recognize that Dubugras was a special founder. “I remember early in the conversation he pulled out his laptop and said, ‘Let me show you my model.’” With the screen in front of them, Dubugras explained how Brex would become a billion-dollar business – or bigger. “He’d pulled data from Pitchbook and calculated the number of startups and total payment volume in the ecosystem. He used that to show that Brex only needed to win a few thousand companies to get to $100 million in net revenue.” Hariharan was dazzled. “He understood the math of this kind of business really well and was so thoughtful. For someone that age, it was doubly impressive.”

Still, she was not about to rush. After all, Brex was a company with few customers and a run rate of just $10,000 in net revenue. Hariharan assessed the opportunity in the following weeks, examining the total addressable market from scratch, vetting the solution with founders, and getting into the weeds with Brex’s product. The more diligence conducted, the more Hariharan appreciated the business’s attributes. She was particularly impressed by Brex’s financial savvy, strong infrastructure, and audacious vision. 

Thanks to their experience building Pagar.me, Dubugras and Franceschi understood how to scale a financial services business. “There are a lot of companies that do software well but if you’re a fintech, you need to do finance well, too,” Hariharan said. Brex was the rare startup that understood this and had constructed itself accordingly. 

Franceschi’s work building out Brex’s back end also caught Hariharan’s attention. To understand how the company’s core technology had been built, she’d deployed members of Stripe’s early engineering teams to take a look. The reports she received back fortified her conviction. “If you’re a fintech that relies too much on third parties, your margins get compressed,” she said. “Brex had been built down to the rails. Only Stripe had done that.”

Finally, in Dubugras, she sensed a visionary. In their first conversation, he’d not only explained the potential for Brex’s credit card service, he’d outlined half a dozen other products he wanted to build. As we’ll discuss, some of Brex’s most crucial launches stemmed from this list.

In March 2018, Hariharan made up her mind. The Continuity Fund led Brex’s Series B, investing $30 million of a $60 million round. The mooted valuation was $220 million. For all that she admired about the business, the Managing Director understood she was taking a risk. “It could have been a disaster,” she said. 

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There’s a lot more to the story. I hope you enjoy it!

See you on Sunday,

Mario