How Brazilian-Founded Fintech Brex Is Eyeing Global Expansion and an IPO

Co-CEO Pedro Franceschi tells Bloomberg Línea that the startup has begun hiring in Mexico after seeing growth in Brazil and Canada

Fundadores da Brex.
October 27, 2023 | 12:30 PM

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Bloomberg Línea — Brex, considered one of the most promising fintechs in the world, founded by Brazilians Henrique Dubugras and Pedro Franceschi in Silicon Valley, has already attracted a lot of attention in the market following its latest valuation with private investors, of $12.3 billion. But the startup offering credit cards and financial solutions for companies gained even more of the limelight earlier this year when it received a “flood” of deposits during the US banking crisis, symbolized by the collapse of Silicon Valley Bank (SVB).

In an exclusive interview with Bloomberg Línea, Pedro Franceschi, co-CEO of Brex, told how the fintech company benefited from that moment, and revealed its next steps, as the company is moving forward with its plan to increasingly transform itself into a global startup, initially from the point of view of talent - and, to this end, is accelerating the hiring of Latin Americans.

The entrepreneur described the collapse of Silicon Valley Bank - where most Brazilian startups had funds - as a shock to the sector, but that the it did not catch the fintech company off guard.

According to Franceschi, Brex was prepared to receive $1 billion in deposits following the bankrun by founders and investors to withdraw their money from SVB in March.

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“We worked very hard. I spent a week sleeping five hours a night with my computer on my lap,” he recalled. “It was a colossal amount of money and customers coming in in less than 48 hours.”

Getting the “house in order” was no accident and has been one of Brex’s guidelines since its inception in 2017, according to the co-founder. Franceschi said that the company is already ready, for example, for an eventual initial public offering (IPO) that could take place in a period of three to five years.

“From a financial point of view, we’ve always been ready on the regulatory and compliance side [for an eventual IPO], not least because the [payment] licenses are very demanding. We’ve managed to build this control rigorously,” said Franceschi.

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He made a point of emphasizing that the listing would only be one more milestone in the company’s trajectory, such as launching a product or acquiring a client, and not an end goal in itself.

“We think about fundraising when the market is favorable. We run the company with a very high level of conservatism in terms of treasury and cash management. An IPO is a business that is on the horizon for the next three to five years,” he said, but stressing that “there is no certain date”.

The company was last valued at $12.3 billion after a funding round in January 2022 led by TCV and Grenoaks Capital.

The startup reported annual recurring revenue of more than $500 million in the middle of this year, according to a statement seen by Bloomberg News in June. This would represent annual growth of around 50%. Brex has not confirmed those figures.

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According to PitchBook data, the company raised an undisclosed amount from Calm Ventures, SB Opportunity Fund, Knockout Capital and S2 Capital around February this year, but Franceschi did not confirm this information.

Also according to PitchBook, One Way Ventures and Mastry previously sold their stake in the company to Fenrir and Sax Capital for an undisclosed amount in December 2022.

Brex was founded by Franceschi and his business partner Henrique Dubugras in 2017, Brazilian entrepreneurs who had previously launched Pagar.me as their first startup in Brazil before selling it to Stone (STNE).

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Hiring in Mexico and Brazil

In an interview with Bloomberg Línea, Brex’s COO and CFO, Michael Tannenbaum pointed out that the company’s expansion has also taken place with hirings in Mexico and Brazil.

“The focus is really on the talent market, especially in engineering, which exists in Mexico. Naturally, we have many people from Latin America who have joined the company,” he said.

And the hirings are part of a wider strategy, according to the executive. “We’ve been hiring in Brazil for about a year and we have more than 100 people in the country. We want to continue expanding into Mexico,” he said.

“We’re always interested in serving the biggest companies in the world, and some of them operate in Mexico. I think there is an interest in [having] operations in Mexico over time, but nothing that I can really point to today for any specific plans,” he added.

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Tannenbaum also explained how Brex can work with corporate clients outside of the United States.

“We support companies that have employees in these countries to send them money, reimburse expenses, give them cards to spend. In other words, a US-compatible experience. And we make this very easy,” he said, giving the example that a subsidiary of a US company in Mexico can pay its bills and also reimburse employees in Mexican pesos.

In this way, hiring in Mexico and Brazil is also a way of testing the company’s own payment product for companies in different countries. “If we could hire around 20 people or more in a given city, we could open an office in Mexico,” said Tannenbaum. In Brazil, employees work in a WeWork space in São Paulo.

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Hiring Brazilians and Mexicans was a natural step for Brex, according to Franceschi. “We came from Brazil, we knew about it [the existence of talent] first hand”.

After starting out in California, Brex opened offices in New York City and Salt Lake City, and in Vancouver, before hiring in Israel and Brazil. Now, the company is targeting Mexico, with no specific number of hires planned. In Canada, the company already has more than 250 employees.

Franceschi pointed out that the time zone close to the US and the lower cost of hiring in Brazil and Mexico have been significant advantages. “You hire a person who is just as smart and works sometimes even harder than someone from the United States,” he said, emphasizing the strategy of doing more with less in the pursuit of profit, which Brex has not yet achieved.

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“We hire good people in a cheaper place and with the same quality. If it was in the US, maybe we’d hire fewer people than we’re doing now and get less done,” said the co-CEO.

Franceschi said that “profitability is getting closer with each passing quarter”, but declined to disclose loss or revenue figures.

DoorDash and Coinbase among the clients

Franceschi said that Brex has the capacity to cover up to $6 million in deposits, in addition to the $250,000 insured by the Federal Deposit Insurance Corporation (FDIC), equivalent to the Fundo Garantidor de Crédito in Brazil, and that this has translated into financial security through the distribution of its clients’ funds across several different banking partners.

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This has also positioned Brex as an alternative amid banking uncertainties with the collapse of Silicon Valley Bank in March, he said.

With a corporate client base made up mainly of startups, Brex has sought to serve larger companies that bring in more employees and greater revenue. The company’s largest accounts include Doordash and Coinbase, both listed on Nasdaq, and Franceschi emphasized the challenge and necessity of having dedicated product development teams to meet the specific needs of such companies.

“Customers enter our ecosystem and start using products that are not just the card,” Franceschi said in reference to the cross-selling strategy to grow with startups offering more products as they become larger companies.

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“They [the startups] begin and grow with us. And these companies grow fast.”

On the other hand, Franceschi acknowledged that the world is very different in 2023 for startups, and that Brex’s clients are not growing as meteorically as they did in 2021, the year that marked the peak of venture capital investment in startups in the face of near-zero interest rates.

“There are a lot of clients cutting costs and spending less these days,” he said.

Lessons from the SVB collapse

Asked about the lesson of the SVB collapse, Franceschi said that generally “we only talk about risk when things go wrong”. And that was the big lesson.

“We’ve always been extremely conservative with financial risk since the company’s beginnings. There are enough clients out there that you can make money in various ways without having to take unnecessary risks,” he said, adding that, structurally, Brex is different from SVB because it is not a bank.

“All the deposits are actually held either in a Treasury equivalent that we put in a money market fund, or in a partner bank that is FDIC insured,” Franceschi said.

According to Brex’s co-CEO, banks are always leveraged and only have 20% cash. “In the case of SVB, it was 12%. So we have a structure that is different, that provides security,” he said, adding that the company doesn’t want to make money from risk.

“Our thing has never been to make money on financial arbitrage, to make money on treasury, arbitraging interest rates. Our thesis is technology. And that’s where we’re going to make money, by doing it very well at scale with an exceptional product.”

Franceschi said that there is “virtually no” exposure of Brex to SVB, which was subsequently bought by First Citizens. In an interview earlier this year, Dubugras said he had transferred $200 million of Brex’s cash to SVB after the collapse of the regional bank.

“The cash is in a dozen banks, such as JPMorgan, Goldman Sachs and other smaller ones. It’s a very complex treasury with several banks.”

Banking with partners

Brex has suspended its application for a banking license in the United States in the face of regulatory difficulties for approval, and fintechs such as Oportun and Monzo Bank have followed suit. Instead, the company opted to continue operating with banking partners such as Barclays, Credit Suisse and JPMorgan.

“It was something that was never necessary for our strategy, although at times we found it convenient to try to get a banking license. But we’ve operated with banks since the company’s beginnings,” said Franceschi.

“Having a banking license is something that depends a lot on the political and regulatory environment, and we ended up finding a different way to operate with partners and with other non-bank licenses.”

Brex currently has a license equivalent to that of a broker for its banking product and a payments license in the US.

“It’s more of a regulatory decision than a strategic decision on the part of the company’s management, and we see licenses much more as a way of making available a product that we’re building, rather than the actual thing that makes the business happen,” said Franceschi.

“One thing we believe in is building great products and putting a layer of services on top of those products. Whether that’s going to require a banking license or not is almost a decision of implementation and how we’re going to execute,” he said.

Although a banking license would help reduce the cost of funding for the fintech, which would then be able to use the deposits for its own financing, Franceschi said that, on the other hand, there is a big cost to maintaining the license and everything that being a bank entails.

“I think that basically, as our receivables have been securitized for a long time, the funding cost is very low. We already have a very large scale and securitization with a series of ratings. When the business gains a little more scale and volume, everyone kind of pushes for capital markets and it ends up working well,” he said.