For many years I thought that the best way to come up with an idea for a startup was to solve a problem that you had personally. But with the rise of social media it became obvious that social media didn’t really solve anyone’s problem, certainly not the founders. They were in a different class of startup, those that creating a new opportunity for their users – in Facebook’s case to connect with friends, family and colleagues, for Twitter it was to keep up with what’s new in the world. The rise of the app world, driven first by the iPhone then Android, enabled even more startups that weren’t necessarily solving a problem for anyone. The other belief I had was that startups shouldn’t aim at other startups: startups had no money! You needed to go after customers with money.
But Brex, highlighted in an article in Forbes entitled New Credit Card Startup Lands $50 Million From PayPal Mafia And Other Investors is doing just that: they are offering a corporate credit card for startups. And of course they are located in San Francisco!
But what is captivating about Brex is that they have come up with a totally new model for determining whether or not companies are creditworthy. And that model is breathtakingly simple: instead of focusing on the company’s revenues, which are likely to be de minimis, or their profits which are even more likely to be negative, the company looks at the company’s cash position. So of course their market is not startups at all, it’s startups with angel or better yet, venture capital. In fact Brex will only work with company’s that have professional investors – friends and family don’t count. But given the bubble we are in these days, there are thousands of these.
Brex sets a credit limit of 10% of whatever their customer has in the bank. So if the startup has $1,000,000 in the bank they have a credit limit of $100,000 – not bad! However, the limit is tied directly to the directly to the bank balance, so if they go out an hire another engineer and he costs them $10,000/month their credit limit is going to go down by that amount every month.
The company makes money two ways: by charging $5 per user, per year, and by charging transaction fees on every purchase. Its goal is to reach $300 million in transaction volume in 2018, and if it reaches that level, Forbes estimates its revenue this year will be between $5 and $10 million.
Dubugras says Brex has 1,000 users so far, from companies like SoFi, Affirm and LendingHome. Initially, it’s only targeting startups as customers. It will later move toward more established tech firms and then to companies across all industries.
The founders solved a personal problem: they had $120,000 in the bank thanks to
Y-Combinator, but couldn’t get a corporate credit card without a personal guarantee. But this wasn’t their first rodeo, the founders had not only done another startup when they were teenagers in their last year of high school. Three years later, Pagar.me had more than 100 employees and was acquired for tens of millions by Stone, a Brazilian credit card processor, Dubugras says. So plainly, these two entrepreneurs were exceptional. But that didn’t mean a thing to the banks. Fortunately for them PayPal founders Max Levchin, fintech venture capital firm Ribbit Capital, early Facebook investor Yuri Milner and former Visa CEO Carl Pascarella saw things quite differently from the banks and all contributed to their series B found of $50 million. So not only did Henrique Dubugras and Pedro Franceschi go from raising $7 million to $50 million, they brought in very smart money – experts in fintech and the credit card business.
But my other maxim about startups, that you should try to help others succeed, holds very true for Brex. Brex help startups get corporate credit to fuel their growth when traditional sources of credit turn a blind eye. So bravo to Brex and I wish them, and their customers, great success.