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Scott Orn

Scott Orn, CFA

Benjamin Wu on Brex Venture Debt – a new funding option for startups

Posted on: 11/03/2021

Kruze Consulting's Founders and Friends Podcast · Benjamin Wu on Brex Venture Debt – a new funding option for startups

Benjamin Wu

Benjamin Wu

CEO, Brex Asset Management - Brex


Benjamin Wu of Brex - Podcast Summary

Benjamin Wu on Brex Venture Debt, a new startup lending service from the same company that offers the Brex credit card. Benjamin talks about the reasons Brex Venture Debt was created, its founder-friendly focus, and the strategies to expand the relationships with Brex customers to include lending.

Benjamin Wu of Brex - Podcast Transcript

Brex Cash is an account that allows customers to sweep uninvested cash balances into certain money market mutual funds or FDIC-insured bank accounts at Brex’s partner banks, such as JPMorgan Chase Bank, Member FDIC and LendingClub Bank, N.A., Member FDIC. Brex Treasury is not a bank, and a Brex Cash account is not a bank account.
Scott: Hey, it’s Scott Orn at Kruze Consulting, and welcome to another episode of Founders and Friends. And before we start the podcast, let’s give a quick shout out to Rippling. Rippling is the new cool payroll tool that we see a lot of startups using. Rippling is great for your traditional HR and payroll. They integrate very nicely. But guess what? They did another thing. They integrate into your IT infrastructure. They make it really easy for when you hire someone to spin up all the web services in their computer. Which sounds kind of like not a huge deal, but actually we did the study at Kruze. We spent $420 on average just getting a new employee’s computer up and running, and their web service up and running. It’s actually a really big deal. Saves a lot of money. And the dogs are eating the dog food. We see a lot of startups coming in the Kruze now using Rippling. So please check out Rippling. Great service. We love it. I think we have a podcast with Parker Conrad. You can hear it from his own words. But we’re seeing them take market share. So, shout out to Rippling. And now to another awesome podcast at Kruze Consulting’s Founder and Friends. Thanks.
Singer: (Singing) It’s Kruze Consulting, Founders and Friends with your host, Scotty Orn.
Scott: Welcome to Founders and Friends podcast with Scott Orn at Kruze Consulting. And today my very special guest is Ben Wu of Brex Venture Debt. Welcome Ben.
Ben: Thanks for having me, Scott.
Scott: My pleasure. So, we were just catching up before I turned the mics on, but our old lighthouse office before I joined Kruze was next to your old office at General Catalyst. So small world. We probably walked by each other once in a while. But now you’re doing Brex Venture Debt, which is super exciting. Maybe tell the audience, retrace your career a little bit, and tell them how you had the idea for this.
Ben: Sure. Sounds good. And back when I was at General Catalyst I think your colleagues were always a little bit better dressed than us. So that’s what I recall. Always some very-
Scott: I don’t know about that.
Ben: … Nice shoes. But yeah, I’ll retrace my steps. And unfortunately for me it’s been a couple of decades, but I started my career about 20 years ago. I was a young M&A banker at a place called Broadview that was eventually bought by Jefferies. And I also worked at Goldman SSG in Asia as a summer associate when I was in business school. And then continued to kind of build my career in investing as a combination of credit investing and growth investing in tech. I was the first associate at Fortress Credit Opportunities a while ago. Also, when I was at General Catalyst, I was one of the folks who launched the growth equity group when I was there. Worked closely with David Fialkow. And then moved to New York and did principal investing for Macquarie, the Australian investment firm, balance sheet investing.
Scott: Oh yeah. Yeah. Yeah.
Ben: And spent good time at Sixth Street Growth. And over the course of my career invested over 2 billion of capital into direct credit and structured equity opportunities. And particularly excited about where the world is in terms of tech and growth. And Brex is a super unique company with relationships across 1000s and 1000s of companies that rely on Brex for their growth and their financial needs. And the idea here for Brex asset management is to really create a new arm within Brex to be able to provide capital to supercharge the company’s growth, and really be another way to kind of help these companies grow and make life easier for them.
Scott: Totally. I didn’t know you had the Fortress Credit background, which makes a ton of sense now. Coming into the interview I was thinking of you as like a General Catalyst VC person, big opportunities, spotting great companies. But that makes perfect sense that you’re like the right person for the job. So that’s super-
Ben: Yeah, thanks. And done a lot of credit in direct lending in my career as well.
Scott: Yeah. One of the reasons we’re so fired up about Brex Venture Debt is, if you kind of think about it, Brex is mostly known for the credit card. But then you also have a banking product in Brex Cash. And what we were kind of thinking about Kruze was like, “Oh my gosh, they’re slowly, methodically building out all the capabilities of a bank or financial services company, and it made perfect sense to do lending.” Is that kind of the thought process at Brex?
Ben: Yeah. Yeah, I think so. And I think that as of now there’s a real staple of software and services between the card, expense management, cash management for companies. And we thought that a logical extension would be in addition to provide capital to companies, to help them scale, to make it easier, and make it founder friendly for companies to help them scale. And so the venture debt product is really the core product and the staple product that we think of. Because as you look at the Brex customer base within the venture backed universe, a lot of these companies are quite early. They’re series A. And the venture debt product one strategy, when done correctly, can really help these companies grow. And so, the idea is to kind of link the venture debt strategy and capital with the other services and software that the company provides to really make it a seamless suite of services that can help these companies really focus on their businesses and be able to use this capital and services to help supercharge their growth.
Scott: Yeah, it probably helps your underwriting too, because you’re seeing what’s happening on their expense management or expenses and cash balance. And you probably use some analytics to do some pretty creative stuff there to figure out who you should be looking at.
Ben: I think that’s exactly right. In fact, that’s something that we actively leverage, which is there’s data on the companies. We know if the companies pay well. We know as they grow, we can see some of the data on it. It helps us identify the companies up front to say, “These are the companies that we see growing well we want to approach and speak with.” And we also can see it during underwriting. And we also know are the ones that pay off the credit card and therefore would be good borrowers? So that’s all part of what we kind of leverage in order to kind of use the platform to be able to evaluate what are the best businesses to kind of approach and invest in?
Scott: Yeah. I mean, that’s the quantitative approach. But venture debt’s kind of an interesting category as a lender because you’re kind of underwriting some qualitative stuff with startups. How do you think about that when you’re looking at a new opportunity?
Ben: Yeah, it’s a great question. And so, I would say two things. I think number one, in my career, sometimes when working with a new company it’s starting from the zero-yard line. You’re basically saying, “I want to invest with you. I’m from XYZ company. Let’s build a relationship.” Here it’s very different because there’s actually quite a very special relationship between Brex and the customers. These customers already rely on Brex for the credit card use. Maybe they’re cash use. Maybe much more than that. And so, there’s already a sense of like, “I would like to work with you Brex. I trust you and I would like to expand my relationship with you.” And so that’s a very special, I think, place to start. So, when we speak with companies about also becoming their capital provider, there’s a certain level of trust there, which as we know is just massively critical in any relationship. And I think that that kind of lends itself throughout the relationship. They know that as we’re working with them, we’re looking to approach the relationship as a way to support them and support their growth, for the short term and also medium and long term, because the desire is to be able to support these companies for long term and keep them customers for the long, long term. Our goal here is to be able to provide capital, but also, we want to make sure that we strike the balance in that we’re providing the best support for growth for the companies that we can.
Scott: Absolutely. And I can actually validate that, because before you guys kind of did your public announcements, you probably were team building and talking to some of the companies. And so we would have Kruze clients be like, “Ping me,” and be like, “Hey, have you seen Brex venture? Brex is doing venture debt.” And I’d be like, “Oh, I haven’t heard that. That’s really interesting.” But it was interesting to me because the entrepreneurs were positively inclined to work with you. Even though they hadn’t really gone too far, they were just having the conversation at the time. But I was getting the back channel like, “Oh, that’s really cool.” And there was something else that was interesting, which one of the founders said to me was, “I think they would be a better lender because they’re a venture back startup themselves, and they understand what we’re going through.” And I was like, “Wow, that’s like a aha moment there, and a real validation of the Brex brand.” I thought that was really cool.
Ben: I think that’s exactly right. And the whole approach with Brex Venture Debt is really to be founder friendly. We’re trying to think about what are some of the pain points that founders face as they’re scaling their businesses and they’re raising capital and they’re trying to extend their runway, and they’re thinking about raising their series A? And as they look forward to the horizon, as they build their businesses. Less dilution is obviously something that’s very important, and we want to make sure these companies can keep a large part of their business because we all know how hard it is to build a business. But also, separately, when thinking about how to structure the investment in the facility, it’s giving them flexibility to be able to. They don’t have to draw on it right away, to draw it in a way that makes sense over time when they need it. So, it’s not immediately something that needs to be drawn if they’ve got plenty of cash. And so, it’s really trying to be founder friendly from both a structure but also process perspective. The team is lean, and we’re actively looking at opportunities. So, we’re trying to also have underwriting, leverage existing data, and be very in sync with the company so it’s a very efficient process so they can continue to go back to running their business.
Scott: I love it. I love it. Maybe we could talk kind of like mechanics here. Where does the capital come from? And what’s your process like when you talk to a company or they reach out to you?
Ben: Sure.
Scott: How does it work, basically?
Ben: Sure. So, I would say first of all, well, basically all of our companies that we’re talking to are our existing Brex customers. And so, they’re either customers of the credit card, and in fact I think every company is, or of the cash management service as well. And so, we do hear of companies that want to join, and we ask them to kind of onboard the Brex platform form. But really, it’s the Brex customer base. So, there’s two ways we can see an opportunity. Often companies are actually, as they’ve been hearing about this product, coming to us.
Scott: Totally.
Ben: That’s quite frequent. And we’re in a fortune position, because of that relationship, that we actually are a little bit overwhelmed with interest now, which is a fantastic place to be. But we also are using data to be able to say, “These are the type of companies that we think would be a good candidate for Brex Venture Debt,” and to proactively reach out to them. So, there’s certainly that. [inaudible] kind of both ways of approaching it. But really the goal is to be able to be transparent with Brex customers as to the type of companies that we want to back, and also making it very transparent and efficient process as well. And then our process is we try to kind of be very upfront as the type of companies we want it back, and issue a term sheet in a transparent way, not have hidden fees, and really try to craft a facility that’s going to be supportive to the company. Everything that we do is built around that efficiency of process and transparency.
Scott: And is it like capital you’re lending off of Brex’s balance sheet?
Ben: Mm-hmm (affirmative).
Scott: Or is it a fund? Or what’s the structure?
Ben: The strategy is that this would be hopefully the first fund among amongst many. And we’ll be using that over many years to be able to support the early stage companies within the Brex customer base. Each investment, individual investment starts from 250K to about 10 million. And so-
Scott: Oh, wow.
Ben: … They’re relatively smaller in size, but really the goal is to be able to support the early stage customers within [crosstalk].
Scott: Yeah. That’s awesome you’re doing it even down to 250. I bet you the data analysis aspect that you’re able to piggyback on helps you reach those companies. Because I was at Lighthouse, which was a precursor in venture debt world. We had a hard time doing smaller deals because our time like finding a deal was a lot of work. And so if you’re only going to do 250, it didn’t really make that much economic sense.
Ben: Totally.
Scott: But I bet you with like the way you guys can underwrite, you can actually do a lot of those 250 deals, and then be positioned to grow with the company as they grow.
Ben: It’s exactly right. You said a better than I would. I mean we’re looking to … I’d say that it’s probably early for us in terms of 250K, but we certainly start there. And those companies that we are reaching, we’re looking to support them early on and grow with them over time. And so the idea is that, even though they may be seed stage, we have the data and the ability to kind of craft a facility that’s be supportive to them. So that size range is something that we are evaluating as well.
Scott: That makes perfect sense. One of the challenges with venture debt is not every startup is a moonshot or a rocket ship. How do you handle some of the … I mean, you probably even haven’t had any of these issues yet. But how do you handle we used to call it going sideways? Not crashing, but a company like doing okay. And how do you help facilitate more equity coming into the company, or creative restructures? Or what’s the plan on how to help those startups that are kind of not rocket ships, not crashing, but like doing good enough to keep going, but not like people are dying to give them a ton of new capital?
Ben: Yeah. So as capital providers, when we think about our solution, the debt plus warrants, I mean in some ways our return is generated via half debt and also some of the warrants. And from an investment point of view it’s less fully tied to the valuation as we know. And so, we feel like we’re in a decent position from an investor point of view. But at the end of the day we’re looking to support these companies, and we have structured these investments to give them less dilutive capital as runway. And if things are going sideways slash not as well as we like, we still want to be supportive to them. And so, I think the ways we can do that is to, number one, not be saying, “Hey listen, we’re going to sweep all your cash,” and all of a sudden everything goes sideways and everything [inaudible]. We think that’s not good for their franchise obviously, not good for our franchise. And we’re not looking to build that type of company and that kind of investment arm. And so, we’re-
Scott: That’s a key point by the way. Just take a [crosstalk].
Ben: Yeah.
Scott: I started laughing, but it’s actually stuff that happened in the downturns, or like some of the banks were super trigger happy. Or I’ve seen over the years new entrants come into the venture debt market kind of guns blazing, doing a lot of term sheets, the most popular person in town. And then 18 months later the deals are going sideways and they clamp down and make it hard for those companies to raise more money. So actually, that’s great that you’re taking that approach of being more flexible, helping them, instead of the … The clamp down thing, it could be really tough for a company if your lender’s not willing to work with you.
Ben: Yeah. I think that’s exactly right. And I think a couple things. One, these are valued Brex customers across the-
Scott: Yeah, that’s a great point.
Ben: … Across the platform. And we are looking to continue to help them grow. And we’ve seen in the past when there is a downturn, et cetera, the innovation economy’s not going away.
Scott: Totally.
Ben: And there’s going to be cycles. That’s just a fact. It’s like gravity, a fact of life and taxes. Fact of life. But our goal is to support our customers through that across the entire Brex platform, number one. Number two, we want to do right by our investors as well. And so, a lot of that is thinking up front, like looking at the companies and looking at the investor support, looking at the quality companies from a fundamental point of view. Looking at the strength of the end markets and saying, “We’re back in companies and we have conviction with these companies.” I think where we might be able to go sideways is if we just kind of like just invest everywhere-
Scott: Totally.
Ben: … And then we don’t really have a conviction between the business model and the management and investors of each company. And that’s what we’re trying to make sure that we do in a disciplined way and be efficient throughout our process.
Scott: Hey, it’s Scott Orn at Kruze Consulting. And before we get back to the podcast, quick shout out to ChartHop. ChartHop is one of my favorite new SaaS tools on the market. And basically what ChartHop does is it puts your org chart in the cloud. And I always like to say it brings transparency to your organization. And so, everyone in your organization can see who they report to, they can see the full org chart of the company and how their group relates to other groups. It also has a lot of information on the individuals in the company. And so, you can click on the ChartHop profile and just get like where people live, their experience, Slack handles, all this kind of stuff. And it’s just a really great tool. The other thing is ChartHop has started doing some cool stuff around compensation and budgeting planning. And so, you can actually start seeing like what the cost structure of the company look like during certain scenarios. So, I’m loving ChartHop. Check it out, charthop.com. We use it at Kruze, really like it. And I can’t recommend it enough. All right. Back to the podcast. You know what? You made a great point about being true to your investors too. And what’s cool about the venture debt market is, in those downturns, actually almost always it’s beneficial to the investors to restructure or to be patient. Because entrepreneurs will surprise you sometimes. Like they can take a tough situation, restructure their company, get on the right path again, and a year later they’re raising an up round when you thought the … And so what I’ve seen in the … I think again it validates your patient approach and flexible approach, because it’s better to do that and play along with them and help them be successful rather than taking your ball and going home.
Ben: I think that’s exactly right. And I think Brex’s approach is to be enablers, and to basically to support, supercharge, help grow. And we’re here to support and help our customers. And I think that’s a genesis of this product is to really be able to make the … The founder journey isn’t easy. And to be there to take a load off their plate in terms of the financial side of it. And we’re here, and we think it’ll actually pay off in investors too. We think it’s beneficial for all stakeholders to be able to be supportive of these companies as they grow going through.
Scott: Totally agree. In terms of the categories you’re looking for, are there specific industries like software or FinTech, biotech? What’s your target company?
Ben: Yeah. Yeah. So, we’re looking at companies, and I’d say that financial metrics tend to be … And there are certainly exceptions to the rule too. As we talked about, we’re doing smaller facilities. But we’ve thus far looked at companies that are 500K [inaudible] generally and more so that there’s something to look at from a debt perspective. But we also look at businesses. I mean, the other thing that we look at are businesses that do have some sort of recurring revenue business model. So thus far our investments have been more SaaS software, but we also look at marketplaces that have reached some traction and some network effects, subscription businesses. We’re looking at some B2Cs, some subscription businesses, businesses that have some installed base that can help us feel comfortable that, as you know, won’t be achieving the 10 times returns, we need to make sure that these companies have some base. And so-
Scott: Oh yeah.
Ben: .. We look at that from a revenue point of view. And that’s something that we certainly analyze the recurring-ness and retention. But also, just the scalability of the business model. Is this something where … How do the margins look? How do we feel about the management’s ability to kind of execute on the plan? And how big is the market? Things like that. And then also looking obviously the support of the investor base, because we won’t be the only capital providers for this space. So that’s very important. And then I would say lastly the end market is very important. We definitely look at the durability and the growth of the end market. And we see a lot of businesses that have a very strong grip on that specific market and niche that they’re playing in, and are innovators within that segment. And we’re like, “This is also really good to market that. Why isn’t it yet addressed yet?” And we think that’s something that we like a lot.
Scott: Yeah. I love it. I always just explain to entrepreneurs, because entrepreneurs will ask you those questions because they’re interested in what you’re … I used to always say we’re underwriting all the things a venture capitalist thinks about. All the stuff you rattled off was like market opportunity, reoccurring revenue stream, all these kinds of things. Because after you put your money in, they need to be able to raise another round for you to be paid back. And also, a big part of your model is the warrants, I’m sure. I’m sure there’s some upside there that you’re hoping for-
Ben: Definitely.
Scott: … Five years from now, 10 years from now. Maybe, do you mind explaining just the mechanics of the warrants for entrepreneurs? Because sometimes people … I always kind of say it’s like stock options, but you give them to your lender. But maybe kind of explain how warrants work for the founders.
Ben: Yeah. So, I mean the warrants are basically an option for the investors to purchase stock at a certain price. I mean, there are these things called the penny warrants, which is basically like you issue those warrants and you’re able to purchase it almost for free. The way we approach it is to strike at the latest valuations, or the latest 409A. And so, we view ourselves as being aligned with the business, because we only grow and gain value from the warrants if the business grows. And so, we’re trying to provide the capital, and also support. The Brex customer base, there’s quite a lot of customers there to the extent we can provide value added services and basically introduce customers to our customers-
Scott: Oh, that’s smart.
Ben: … And our companies that we’re investing in. We are absolutely looking to do that. And so, we’re hoping our capital and our unique positioning will add value to the businesses. And so, we gain only … And we’re, I would say, between 15 to 50 [inaudible] and warrants in the company, companies that we invest in. We gain when the company grows over time. And so, we certainly are looking to further the company’s growth. Even when we’re repaid we’re not generating any interest. We’re looking to help the company in any way we can so that we can gain as well.
Scott: I love that. And your point about you benefiting when the whole valuation, when the whole pie gets bigger, is a really good one. I mean, when I was at Lighthouse I did like Impossible Foods and FreshBooks-
Ben: Mm-hmm (affirmative). Well done.
Scott: And tons of companies. [inaudible]. Yeah. And this isn’t about me. I’m just saying it to the audience, of those companies, when you’re doing these deals right now, they’re very small, but they become billion dollars, multi [crosstalk] dollar exits, and that’s getting back to your investors. You’re taking care of both. The entrepreneurs getting the capital they need, and your investors are going to get some really big returns in there, which is really exciting. So [crosstalk] we’re excited about this. Maybe tell everyone how they can get ahold of you, if you’re interested, and kind of refresh everyone about Brex’s approach.
Ben: So, we’re structured where we’ve got originators, and then you know me from this event too. So, I can provide my information, which is my email address, which I can always reach out to you if there’s an interest. And so-
Scott: Only during working hours should you-
Ben: Only during working hours though.
Scott: I’m joking. I’m joking.
Ben: Yeah, exactly. But my email address-
Scott: Or your landing page. You guys actually have a really good blog post announcing venture debt, but is there kind of a scalable way someone can indicate their interests for you guys?
Ben: Yes, that works. That actually probably works better than my personal email address. And I was going to give out my cell phone and my home address too. But you’re like, “You know what? Stop that. Too much. Too much.”
Scott: Protect yourself.
Ben: “I appreciate your commitment to your job, but that’s too much. Your family may not like it.” But our website, the Brex website, has a landing page for Brex Venture Debt. And there, there actually is all the information necessary to kind of get the whole process started as well. So that’s probably the best way to … And we’ve got a whole process where, as the companies come in, we get the data, we evaluate, and then we kind of have a step by step process with which we kind of bring in new opportunities. That’s a great way to kind of get started with our process.
Scott: I love it. Well, you’ve been a great partner to us. I was telling you before we turned on, I think we’re your leading accounting firm partner every month almost nowadays. So, we love you guys. I still remember-
Ben: Same.
Scott: … When Michael Tanenbaum walked into our office and said, “You should start using the Brex credit card,” like four or five years ago. And we were so frustrated with Amex and some of the other providers out there, and we tried it and it worked great. And you introduced Brex Cash, and now you’ve got venture debt. It’s exciting to see where you’re taking the company. So, kudos to the team at Brex. And we look forward to working with you closely on the venture debt product.
Ben: Thanks so much. It’s great to be on here, and great to have this great partnership with your firm.
Scott: Thanks, man. Take care.
Ben: Take care.
Singer: (Singing) It’s Kruze Consulting, Founders and Friends with your host, Scotty Orn.

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