Winning in Crowded Markets
Brex CEO shares how they build moats in highly competitive and crowded markets.
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As software development costs rapidly approach zero, there is one question that should be on every software company leader’s mind:
What is our moat that will enable us to have durable revenue growth that is truly recurring?
Without some kind of moat, then software companies won’t be nearly as valuable:
Gross margins will deteriorate and therefore overall profit margins will suffer
“Annual recurring revenue” will not be very recurring. See my ARR is dead post.
I like to share the below image to illustrate how crowded software markets have become. And the below companies are just ones that have raised at $1B+ valuations. There are A LOT more smaller competitors out there…
In a world of AI, software markets are only becoming more crowded and competitive. So without some kind of moat, software companies will soon face an existential crisis.
I sat down with Brex’s CEO, Pedro Franceschi, to get his thoughts on competing in crowded markets.
Here are some highlights from my conversation with Pedro, but I recommend reading the whole thing below:
Software alone is becoming a commodity. Anyone can build great software, but few companies can build great software AND financial services.
Brex has spent 7 years building out the financial services aspect. Navigating the regulations, compliance, and building the expertise required to create/maintain these programs is REALLY hard. Unlike software, this is not easily copied and it is certainly a moat for Brex.
🚨Breaking news: Today Brex announced a partnership with Navan for its embedded finance solution. This partnership further proves Brex’s moat from its work on its financial services products. Companies that might ordinarily be competitors are partnering with Brex because replicating the financial services stuff is too difficult and doesn’t make sense for them to focus on.
Brex was recently burning $17M/month, but has since dramatically reduced that number (70% reduction in burn in the past year alone) as they start eyeing an IPO in the future. The public markets will want Brex to show predictability in their business and forecasting so that is where they are focused now.
Winning in Crowded Markets
Brex’s Moat
Brex operates in a very crowded fintech market, and the competition grows every day. How will Brex continue to win in an increasingly competitive market?
Our goal is to help companies solve their global spend management challenges, and we rise above the competition because we think about those challenges holistically. Typically, two types of companies try to solve these challenges separately: financial services companies (think Amex for cards) and software companies (like Concur for expenses). We built Brex at the intersection of financial services and software and pride ourselves on having deep expertise in both areas and build our products accordingly.
The US corporate card market, for example, is pretty saturated because that’s a relatively easy problem to solve. But when global companies operate in dozens of countries and need to use cards in local currencies and reconcile their spend in one place, that requires software plus financial services. And it’s where a company like Brex really matters, because software alone is a commodity. Anyone can build great software, but few companies can build great software AND financial services. To solve deeper customer spend problems, especially the larger enterprise use cases, the one-or-the-other approach doesn’t work.
You recently released Brex Embedded, which makes it easy for certain platforms to adopt Brex’s infrastructure for payments. Why should Brex focus on this?
We really believe in meeting customers where they are, even outside of Brex. It’s why we obsess over how our customers use corporate cards. They of course use cards to buy meals and pay for ads and software, but they also power key workflows inside other platforms, like travel and procurement software. Our embedded finance solution helps us do that and provides a dramatically better customer experience because there are no longer two siloed systems completely independent from one another. They get one integrated, best-of-breed solution. It’s powerful when you think about the use cases we’ve had with Sabre for travel and Coupa for procurement. They can unlock new revenue streams for these partners, while customers get much better accounting automation and reconciliation.
What makes Brex unique in this area of embedded finance? Is this a moat?
The product is only possible because of the investments we’ve made in infrastructure around credit risk, underwriting, capital markets, fraud, and other areas. It takes A LOT of work, and there are a lot of new risks to manage in financial services. So if you’re a travel company or procurement software, you shouldn’t be taking on these risks. Brex already built a global card stack that works for tens of thousands of companies.
Recent studies show that platforms with payment products are stickier. What’s stopping companies from building their own?
Most companies shouldn’t build a payment product because it’s really hard to build and even harder to scale. Many of our competitors issue cards — it’s a fairly straightforward endeavor. But when you hit some scale, typically over $100M in volume, you need capital markets expertise and securitization knowledge to raise debt and fund all these receivables, in addition to the expertise in credit, fraud, and compliance required to run a large-scale card program. It took us years to figure out how to do that at an advantageous cost basis.
You’re announcing a new embedded finance partnership today with Navan, who plays in the same T&E space as Brex. Why do this now?
Global travel and payment reconciliation is still a huge problem. BrexPay for Navan is a seamless integration that embeds Brex cards into Navan’s travel management software. So customers book and manage travel through Navan’s leading platform and use Brex’s global cards to pay. But together, customers get 100% reconciliation of every traveler’s transaction with the ability to fund card payments in local currency across 50+ countries. That hasn’t been done before in this industry, and the solution is so unique one of our customers was literally brought to tears using the new process vs. the old one. Other cards are siloed from the travel platform and thus, the customer’s ERP, which makes reconciliation a beast. But you need that depth of partnership and really deep integration to solve this well, and we’re really excited to partner with Navan on this. You can read more about it in our blog post.
So is Navan white-labeling Brex cards?
It’s important to know that it’s not a white-label service. If you’re already a Brex customer, you get the same Brex experience deeply integrated into an existing workflow versus a white-label solution you don’t know. Navan and other platforms actually want the full breadth of Brex capabilities in their product so they can do what they do best and leave the underwriting and payment risk to us.
A Brex IPO? Getting Efficient
Brex was reportedly burning $17M a month at one point. What are you doing today to focus on becoming efficient?
It helps that we read OnlyCFO’s newsletter and follow your great advice. But really, we’ve decreased our burn over 70% in the past year, and the tremendous progress is because we got closer to where the value gets created. We’ve been rigorous in how we prioritize, focus resources, and double down on what's working. This meant bringing Brex leaders closer to the customer and reducing management layers. Since then, our growth rates have improved, retention is up, and our burn has decreased substantially. Most importantly, it’s a broad cultural change across the entire business. We talk a lot about operating at all levels as part of Brex 3.0, and I wrote about how these changes will help us and our customers succeed.
What is the required financial profile for Brex to be IPO-ready?
We spent a lot of time talking with companies about what shape their finances need to be in to be IPO-ready — and much of that advice is applicable to our own journey, too. As a public company, it’s important to have low volatility and high stability. So the goal is to get to a place where we can sustainably predict and understand our business better. Even if we're not public, we hold our processes to the highest standard. We focus on operating like the company we aspire to be across everything we do.
Brex Competition
How do you think about competition?
Competition sets the floor for customer expectations, but it doesn’t set the ceiling. We’re striving to raise that ceiling for customers. A lot of the hard decisions we’ve made over the last few years are pushing that bar higher, and we’re delivering better products and experiences for our customers.
Brex started this market over seven years ago, and sure, a lot of players joined shortly after. What sets us apart is that we're the only one that can serve companies from 2 people to 20,000 people. In the US, 1 in every 3 venture-backed startups today are on Brex, and 150 public companies use our platform to manage their spend in over 100 countries. Despite the competition, we lead the market because we create meaningful outcomes for our customers across not just amazing software, but also rock-solid financial services at a scale that no other competitor has gotten to.
Footnotes:
Modern CFOs prefer to pay vendors using corporate cards. See why.
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Don't bury the lede, Navan allowing people to bring their own cards is big. This capability has been the reason I have continued to prefer Expensify over many of the new entrants.
Ok, that wasn't your hook with this one. I'm just very excited to see more travel and expense management vendors allowing for this.
This is cool, "Competition sets the floor for customer expectations, but it doesn’t set the ceiling. We’re striving to raise that ceiling for customers."