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Boom times have returned for venture-backed start-ups, says co-founder of $3 billion fintech Brex

  • After cutting jobs and reining in customers' credit lines in the early pandemic, the start-up world is booming again, says Brex co-founder Henrique Dubugras. 
  • Customer spending is now at an all-time high, roughly 5% higher than it was before the pandemic, he said, but companies are transacting differently than they used to, plowing dollars into online advertising and remote work expenses.
  • New companies are being formed at a furious clip, Dubugras says, and many of these firms – retailers, restaurants or professional services— are "looking more and more like tech companies.”
  • "We assume that 70% of our businesses are going to go out of business every couple of years, because we serve start-ups and most start-ups fail," he said.

The coronavirus pandemic should've meant disaster for Brex, the high-flying Silicon Valley start-up that lends to thousands of other start-ups.

Founded by a pair of Brazilian twenty-somethings who dropped out of Stanford in their freshman year, the company's ascent has been dizzying, even by Silicon Valley standards. Brex reached unicorn status in 2018 months after launching its first product, a corporate charge card for start-ups. Then it doubled in value last year and raised funding in May at a $3 billion valuation.

Flush with nearly half a billion dollars in venture capital funding, Brex plastered San Francisco with ads, went on a takeover spree and even opened a restaurant. Its free spending raised eyebrows in the VC community, some of whom wondered in the aftermath of the WeWork debacle if Brex was another private company pumped up beyond reason. Its main product, an unsecured, high-limit charge card for start-ups, exposes it to risky, money-losing companies that could fail in droves in a recession.

But after a rocky few months in which Brex abruptly pulled customers' credit lines and let go of employees (more on that later), something unexpected happened: In the middle of a once-a-century pandemic that left millions of Americans unemployed, boom times have returned for American start-ups, said Brex's 25-year old co-founder Henrique Dubugras.

"We've seen lot of our customers raise a lot of money and spend a lot of money investing for next year, or whenever the economy returns," Dubugras, wearing a T-shirt and jeans, said via Zoom from his new home base in Los Angeles. "I think 2021 is going to be an amazing year for everyone in tech, honestly."

It's a sharp turnaround from earlier this year, when Covid-19 seemed to be the catalyst for a long-expected reckoning for the venture-backed world. In March, famed venture firm Sequoia Capital warned start-ups to expect the worst in a memo reminiscent of its famous 2008 "R.I.P. Good Times" memo. To conserve cash, previously spendthrift companies cut thousands of jobs and raised funding at punitive terms.

But the hand wringing in Silicon Valley proved to be short lived. Public markets recovered in March and April after the Federal Reserve and lawmakers took a series of unprecedented actions to flood markets with liquidity and inject cash into people's bank accounts.

Rich venture capitalists

That's kept dollars flowing throughout the venture ecosystem. Investments in U.S. based start-ups rose 30% in the third quarter to $36.5 billion, driven by a record number of so-called mega rounds of at least $100 million, according to CB Insights. Applications to form new businesses surged 77% in the quarter, according to Census Bureau data.

"VCs are getting a lot of returns, and these guys, they already have three homes and planes and a boat, so they need to deploy the money somewhere," Dubugras said. "Everyone considers public markets to be expensive now so private markets are where a lot of the money is going."

Zoom In IconArrows pointing outwards

Dubugras has a unique view into the health of American start-ups. Brex says it lends to tens of thousands of them, using real-time data on their businesses to help make dynamic lending decisions.

After a few lean months earlier this year when spending dipped more than 10%, average per-customer spending on Brex cards is now at a record level, roughly 5% higher than it was before the pandemic, he said.

The categories have shifted, of course: Start-up employees are spending far less on Seamless orders and Uber trips as restaurant and rideshare transactions plunged 60% and 40% from pre-pandemic levels, the company said. Travel and events-related spending is only 25% of what it was before. But growth in online marketing and recurring software costs like Amazon Web Services and work-from-home stipends has made up for those declines, he said.

Ebay, Amazon and Shopify

As the Census data suggests, new companies are being formed at a furious clip, and many of these firms – whether they are retailers, restaurants or professional services— are "looking more and more like tech companies," said Dubugras.

For example, business owners that may have relied on brick and mortar in the past now mostly sell "through eBay and Amazon and Shopify and Etsy and Instagram, Facebook, Pinterest, all these different sales channels," he said.

That has benefited Brex and other fintech firms offering small businesses the most modern experiences, companies Dubugras referred to as "frenemies": Payments firm Square and e-commerce platform Shopify. Brex customer acquisition has grown in line with the 77% jump in third-quarter new business formation, according to Dubugras.

"We've never seen more businesses being created," he said. "The restaurant that shut down next to you, some other entrepreneur is going there and starting something else, you know?"

Dubugras said that if he were starting a company now, he would look to take advantage of knock-on effects from major shifts like the adoption of remote work. His company went to a remote-first model in September. "What are the second-degree changes from remote work?" he said. "If remote work is more popular and people move out of the big cities to more suburban places, what are the new things that they're going to need?"

College dropouts

It's hard not to find Dubugras's story and his relatively unguarded nature appealing. Along with his co-founder Pedro Franceschi, Dubugras grew up in Brazil as a tech-obsessed teenager (Dubugras is from Sao Paulo, while Franceschi is from Rio de Janeiro). Dubugras was just 14 when he started his first company, and later founded a payments firm with Franceschi before moving to the U.S. to attend Stanford University. The pair dropped out after eight months and started Brex after joining Y Combinator, when they observed that many of their fellow entrepreneurs struggled to get corporate credit cards.

After the pandemic struck, Brex had initially denied the need to cut jobs. As the situation grew more serious, Dubugras and Franceschi backtracked, and they let go of 62 employees, or about 17% of its workforce, in late May.

"We kind of said we weren't going to do it, and then things started getting worse and we're like, `Oh, f—k,'" he said. "We ended up having to do it anyway. We lost some trust because of that. I think my learning from that is to never say we're not going to do it again."

When I tell Dubugras the story of a Brex customer I'd spoken to, he immediately sits up straighter, his easy-going demeanor changing slightly. The customer, an online retailer, attributed his success in part to the ample credit Brex had given him before the pandemic (Brex has said it gives companies ten to 20 times more credit than traditional lenders like American Express.) But in April, Brex suddenly pulled nearly all of his credit, knee-capping his business.

'Greater good'

While Brex positions itself as a new economy leader that understands founders, it relies on a pair of jumbo credit lines from old school banks — Barclays and Credit Suisse— for a total of more than $300 million in revolving credit facilities, to make loans. If Brex customers had losses beyond a certain threshold, the banks could've yanked the credit lines, which would've been a disaster.

"In March and April, no one knew what was going to happen in the world," Dubugras said. "We had to make some tough decisions to reduce a bunch of [credit lines] and to make sure we didn't have losses that tripped our covenants with our banks, so they would keep giving us credit and we could keep serving businesses."

He continued:  "These decisions were done for the greater good in some ways, which is like, `Look if we get our credit lines called or something like that happens, we're going to have to shut all the credit lines."

Losses climbed, but were manageable, according to Dubugras.

"We assume that 70% of our businesses are going to go out of business every couple of years, because we serve start-ups and most start-ups fail," he said. "I think that's known and that's okay. All of our credit models and all of our processes are assuming a big amount of churn due to business failure."

By June, Brex was again growing briskly, Dubugras said, and the company restored many of its customers' credit lines. Brex would've been fine had the situation worsened, he said, because of its ample cash stockpile.

'More polarized'

It's not lost on Dubugras that while many of his VC-backed customers, particularly those in technology and online businesses, are thriving, millions of Americans have lost their jobs. JPMorgan Chase CEO Jamie Dimon, who runs the biggest U.S. bank, said this week that the pain was concentrated among the "bottom 20%" of wage earners, many of whom have spent down their savings as the pandemic drags on.

"The world is unfortunately getting more and more polarized in terms of the haves and have-nots," Dubugras said. "It turns out we serve a lot of the haves in start-up land. A lot of it is about tracking from the old sectors of the economy to the new sectors of the economy."

Brex is a few years away from an initial public offering, though it's likely to tap markets in a different way before then, Dubugras said. He recognizes that the company needs to diversify its funding sources, since his bank lenders could pull their loan facilities. As soon as next year, Brex is likely to invite rating agencies to scrutinize the company's loan receivables and ultimately create bonds to sell to big investors like insurance companies and pensions, he said.

In the meantime, Dubugras said he no longer tries to convince skeptics that Brex is built for the long term.

"For a long time, we did our best to counteract that and share about why Brex is a good business, and the only thing that brought us was more competitors," he said. "At this point, I'd rather leave the VC community thinking it's unsustainable."

With contributions from CNBC's Nate Rattner

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A million people may quit self-employment in Covid-hit UK – study

A million people in the UK are planning to give up being self-employed after seeing their earnings decimated by the Covid-19 pandemic.

Ahead of official figures on Tuesday that are likely to show a further jump in unemployment, a report from the London School of Economics found that a two-decade long trend in favour of more people working for themselves was under threat.

The study by the LSE’s Centre for Economic Performance (CEP) found that in August – a month that saw the economy rebounding from the first lockdown – 58% of the UK’s 5 million self-employed had less work than normal. A fifth of the self-employed anticipated quitting altogether, rising to 58% for those under the age of 25.

Stephen Machin, co-author of the report and director of the CEP said: “While the growth in self-employment has been one of the key trends in the labour market in the past two decades, there are now early signals that this trend could be set to reverse.

“By the summer, there had already been a sharp fall in the number of self-employed workers – this may be primarily due to the lockdown, but for some it will be due to realising the risks of self-employment.”

The CEP, which questioned 1,500 self-employed workers, found that 32% of respondents to its survey had fewer than 10 hours work a week in August.

By contrast, more than a quarter (28%) of self-employed people who find work through digital apps in the gig economy said they had more work than usual in August. But the CEP said its survey found that 78% of these app workers felt their health was at risk while working.

Rishi Sunak has supported the incomes of self-employed workers affected by the pandemic through the self-employment income support scheme (SEISS), which offers grants of 80% of their usual earnings but has been criticised for being badly targeted and failing to help many freelancers and contractors. The Treasury select committee has said more than a million workers have slipped through the support net.

Maria Ventura, co-author of the report and research assistant at CEP, said: “The government support for the self-employed to date, while valuable for those eligible, has not reached all self-employed workers and the newly self-employed appear to be particularly vulnerable. The extension of support through to April 2021 and the recently announced changes further widen the gap between those eligible and those ineligible for SEISS grants.”

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‘We wouldn’t manage without it’: business owners on the furlough extension

Chancellor Rishi Sunak on Thursday announced an extension to the furlough scheme, which has been a lifeline for businesses across the UK. Businesses will now be able to furlough staff on 80% of their salaries until March next year. The Guardian spoke to small business owners about what it means for them.

Hayley Mountjoy-Hicks, beauty salon owner, Gloucestershire

‘We wouldn’t manage without it’

For 35-year-old Hayley Mountjoy-Hicks, the announcement of a second lockdown in England was devastating.

“This year has been so difficult,” she said. “We have such high overheads with rent, and I haven’t been earning any income at all. We’ve had to buy PPE, and constant cleaning in the salon has meant we need more time between appointments, so we’ve missed out on clients. If it goes on for much longer, it’s very worrying for the survival of the business.”

Mountjoy-Hicks furloughed her apprentice, her only employee, at her salon in Tetbury during the first national lockdown, and did the same again on Thursday. She welcomed the chancellor’s announcement.

“It’s absolutely necessary especially if we’re not allowed to open on 2 December,” she said. “We wouldn’t manage without it.”

Nicola Ferjani, soft play centre owner, Southampton

‘I’m grateful for the support’

“The announcement about furlough was certainly helpful, but also shows me that this is going to go on for a lot longer than I was anticipating, so in some ways it’s a bit of a blow,” said Nicola Ferjani, 46, who owns a soft play centre in Southampton.

She furloughed all 10 of her employees during the last lockdown and will do the same during the second.

Ferjani said the lockdown was “extremely worrying” for her business, describing it as an “abyss”.

“We were running on a deficit after the last lockdown, and when we reopened on 16 August we were only at 30% capacity because of social distancing, so we weren’t even breaking even,” she said. “Play centres are very seasonal because more people play outside in the summer, so we generate money through the winter to see us through but we’re now not able to do that.

“We did have preliminary conversations about redundancies, but you have to be able to afford redundancies,” she added. “We’re just going to ride it out until the pot goes dry.”

Andrew McAllister, swim coaching business owner, Manchester and London

‘My team could be getting 50% of what they now earn’

Andrew McAllister has been forced to make five redundancies during the pandemic from his business, and has furloughed his remaining 10 staff.

While he praised the scheme for helping him to maintain most of his staff, McAllister, who is 34, raised concerns about the calculation for the 80% of wages the government will pay.

“Many of my staff members started in January, and we have a long training process, during which they’re paid a slightly lower wage,” he said. “During the last lockdown, the furlough scheme was based on their wages during that period, but since we reopened over the summer they’ve earned good money with us coaching lessons. If the furlough scheme doesn’t account for that, they’ll be earning about 50% of what they have been paid over the past three months.”

McAllister said that closure during a second lockdown was “incredibly frustrating”. He’d be planning to extend his business to two new locations this week in the south of England.

“I am hugely concerned that the longer the delay in reopening, the greater the chance some swimming pools may never reopen.”

Malik Aslan, Vape shop owner, Watford and High Wycombe

‘We used to have a turnover of around £15,000 per month in each shop, and that’s dropped to five or six thousand’

Malik Aslan, who runs two vape shops in the Hertfordshire town of Watford and High Wycombe in Buckinghamshire, “somehow survived” the first lockdown, but was forced to pour his savings into the business. He received a government grant of £10,000 and furloughed his four employees, but said this didn’t make up the lost income.

During the last lockdown, 37-year-old Aslan paid for 20% of his employees’ salaries on top of the furlough scheme, but said he can’t afford to do the same this time around.

“We used to have a turnover of around £15,000 per month in each shop, and that’s dropped to five or six thousand,” he said. “It’s very, very hard at the moment.”

Without the furlough scheme, Aslan said he would not have been able to keep his staff on, and that the extension would help.

Martin Jones, bar owner, Cardiff

‘We’ve been forgotten’

For some businesses, however, Rishi Sunak’s announcement didn’t change anything.

Martin Jones, 52, owns the Main Stage bar in Cardiff’s city centre. He took over the bar from its previous owner in July, making him ineligible for the furlough scheme, despite the bar existing for many years before.

“The bar used to employ 12 staff, but when we took it over we had to lay off all but five, including myself. I’m worried for my staff. They have rent and bills to pay.”

The two-week “circuit breaker” lockdown in Wales, which began on 23 October, forced the bar to close, and while it is due to reopen on Monday, it must shut at 10pm. Also, only four people are allowed per table, unlike the six allowed in England. Jones said he expects further lockdown measures.

“Before we took over, the bar would take between £10,000 and £12,000 a week during the summer, but with the 10pm curfew we’re struggling to take £2,500,” he said. “It covers the cost of buying in beer and wages, and just about pays a couple of bills, but not all of them.

“I’m not worried abut making profits, I just want to survive. I want to come out of this and still have a business, and for staff to still have a job. To me, it’s a very unfair system. We’ve been left behind and forgotten about.”

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Fed lowers minimum loan level for small business lending program

The Federal Reserve has lowered the barriers on its lending program for smaller businesses as part of an effort to broaden the appeal of the sparsely used facility.

In another pair of tweaks to its Main Street Lending Program, the Fed on Friday said it is reducing the minimum loan size to $100,000 from $250,000 and will ease restrictions on debt for companies already participating in the Paycheck Protection Program.

Aimed at helping small- and medium-sized firms get through the Covid-19 pandemic, the program thus far has issued nearly 400 loans for a total of $3.7 billion. The total capacity of the MSLP is $600 billion, thanks to $75 billion in collateral from the Treasury Department that can be leveraged up.

In a release, the Fed said the changes are "two important ways to better target support to smaller businesses that employ millions of workers and are facing continued revenue shortfalls due to the pandemic."

The Main Street program is part of a raft of facilities the Fed rolled out shortly following the pandemic escalation in early March.

Both borrowers and lenders have complained, however, that some of the conditions of the loans are too stringent and the fees are more onerous than they're willing to pay. Where the PPP loans are forgivable under many circumstances, the Main Street loans are not, further dampening their appeal.

The other change apart from the minimum loan requirement exempts up to $2 million in PPP loans when computing applicants' debt loads. The Fed also said it is adjusting fees "to encourage the provision of these smaller loans."

The move comes amid heightened concerns about an economic slowdown heading into the winter, triggered both by a rise in coronavirus cases and a continuing stalemate on Capitol Hill over further fiscal relief. Fed officials repeatedly have called for more stimulus from Congress, but the White House and congressional Democrats have been unable to reconcile their competing proposals.

Main Street loans are aimed at companies with fewer than 15,000 employees or with 2019 revenue of $5 billion or less. In addition to the program, the Fed also has been buying corporate debt and issuing loans and liquidity injections across a variety of markets.

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