Karandeep Anand, President, Brex Sarah Levy, Chief Executive Officer, Betterment Moderator: Leo Schwartz, Fortune
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00:00Good afternoon.
00:01Thank you both for joining us.
00:03Thank you for having us with you.
00:04I'd like to start with 2021, which
00:06I mentioned the intro there.
00:08I think euphemistically saying that growth
00:10has been steadier since then.
00:12But I think if you look back, what you saw
00:14was hundreds of millions of dollars
00:16coming from investors, valuations
00:18of billions of dollars, and probably more importantly,
00:20this idea that fintech could really
00:22be a sector that would replace the incumbents,
00:25take over from banks and from brokerage platforms.
00:27And I think that hasn't necessarily been reached now.
00:31Obviously, valuations have come back down.
00:33Venture markets have frozen up a little bit.
00:35I'm curious from both of your standpoints,
00:37do you think that promise of 2021 is still alive?
00:41Want to start?
00:42Happy to.
00:44So I think we had a very good session yesterday
00:47from folks from Fed, which was I don't think anyone
00:49is immune to the macroeconomic.
00:51High interest rates definitely change
00:53what the growth curves we were seeing in fintech.
00:56But I think there are three very important things that at least
00:58I see and to Sasha's.
01:01One, fintech is a secular trend.
01:04We still have a ton of additional movement of money
01:07that happens, and cross-border movements are happening,
01:09which is happening on fintechs versus traditional banks.
01:11And that trend hasn't changed.
01:13What changed is the spending levels have gone down.
01:15But I think fintech being a secular trend
01:17is a very critical piece.
01:18And I think second thing for Brex specifically
01:21is we sit on the intersection of fintech and enterprise SaaS.
01:24I mean, that is something that changed,
01:25which is the promise was not just fintech,
01:27but fintech plus enterprise SaaS.
01:29And that has unlocked a lot of value for diversification.
01:32And third, which is on a lighter note,
01:34is a tough market actually is a good way
01:37to weed out a lot of competitors.
01:39So a lot of competitors, which were like fly-by-night Zerp
01:42phenomena, no longer exist.
01:44So overall, I think the promise is still alive.
01:46The industry has gotten a lot more mature
01:49in what they expect to be the success criteria now.
01:53So I would agree.
01:54I mean, I think the opportunity is in the TAM,
01:58which is in the trillions.
01:59So I think the promise is absolutely still alive.
02:02I think what I would say has changed
02:04is the amount of investment capital going into the sector.
02:08And it used to be that you didn't really
02:11have to differentiate yourself with the fundamentals, right?
02:14Now you need scale.
02:15You need profitability.
02:17You need sensible unit economics.
02:19And so I think it's really more about a rationalization
02:22in the marketplace than it is.
02:24And sort of the winners and the losers, so to speak,
02:27than it is about a shrinking promise of the opportunity.
02:30Yeah, so let's talk about that investment.
02:32And I just came from a lunch I'm sure some of you were at
02:35that was about unicorpses, or this idea
02:37of the billion-dollar companies from 10 years ago
02:40that expanded and then never were able to find an exit.
02:43And I know that neither of your companies
02:44are anywhere close to being unicorpses.
02:46But at the same time, I think both of your companies
02:49have been targeted by many analysts and onlookers
02:52as ripe for an IPO eventually.
02:54I know both of your companies have
02:55talked about a potential IPO.
02:57And I want to go one by one and ideally
03:00get as specific an answer as possible,
03:02although I know that you'll be limited here.
03:04With Brex, there have been interviews recently.
03:07There was a lot of turmoil.
03:08There was layoffs.
03:09There was reports of cash burn.
03:12And there was this goal of being cash flow
03:14positive by the end of 2025.
03:16And maybe that would lead to an IPO.
03:17And I'm interested, where do you see the current landscape
03:21there?
03:22What's the financial outlook for Brex?
03:23I think the IPO is a definite exit.
03:25That's the exit plan.
03:26The two very important things that
03:28happened, building on your previous question as well,
03:30is the investor expectations changed pretty materially
03:33from just growth at all costs to sustainable growth.
03:35So our focus for the last 18 to 24 months
03:38has essentially been, how do we grow our gross profit
03:41and profit margin?
03:43And we've grown like 75% year on year
03:45is very heavy focus on margin, which, honestly speaking,
03:48was not the priority for a long time pre-2021.
03:51And the second is burn reduction.
03:53I think there's expectation from investor community,
03:55as well as from our shared holders,
03:58you have to do this in a sustainable, long-term way.
04:01Because back to the point is, we're
04:03trying to play a 10-year, 15-year game.
04:05And if you cannot do this in sustainable burn,
04:07it's harder to do it.
04:08So last year, our last 18 months has been 75% profitability
04:12growth, and then 50% year on reduction on burn.
04:15So we're still on target to hit our operating cash flow
04:17positive goal of 2025, and which,
04:20with all the other cleanup we've done,
04:22is really helps us to get into that exit state.
04:25So 2026 for an IPO?
04:27I am not privileged to say that number,
04:29but I think every leading indicator really
04:32points to that.
04:33I think the main thing is, you have to time the IPO right.
04:35You don't want to rush into something which
04:37the market is not ready for.
04:38But I think we have to be prepared on sustainability,
04:41growth, and margins.
04:42And those are the things that, within our control,
04:44we will continue focusing on.
04:46And Sarah, I think Betterment has been in a steadier pace.
04:49There still were layoffs, but not as severe.
04:52And I know you've been expanding your product offering,
04:55but how do you view the current IPO market for Betterment?
04:58So I try not to get distracted by, are you going to IPO,
05:01and when are you going to IPO, and are you profitable?
05:03I try not to answer that question as well.
05:05Where I am really focused is, can I
05:08build the definitive wealth brand for Zillennials?
05:12And if I can do that, that means I will have scale,
05:15I will have diversified revenue streams,
05:18I will have quality economics in the three customer
05:21segments I serve.
05:23And so that's really where I spend my time.
05:25When I think about what would impact,
05:29great companies get bought and aren't sold,
05:32so that's always an option.
05:34An IPO could be an option, but the bar
05:36has definitely been raised.
05:38And I wouldn't want to have been in the 2021 class,
05:41where you're now sort of fighting
05:42to get back to where you were.
05:44So when I think about it, I've got
05:45to get to the scale and the profitability
05:48and the growth, and if I can be a rule of 40 company,
05:50then I can sustain a public company story.
05:53And I think this has been a uniting principle with both
05:56of your companies, where you have had this much more
05:58sustainable growth the past year.
06:01You've been expanding your product offerings.
06:03But I cover crypto a lot of the time,
06:06and I think there's a danger where
06:09companies doing good work can still
06:10get wrapped up in the sector that they're part of.
06:12And we've seen that in fintech recently,
06:14where the biggest story of the past year
06:16has been Synapse and this collapse of intermediaries.
06:19And I think it is how a lot of consumers out there
06:22are thinking about fintech.
06:23And I know, again, neither of your companies
06:25necessarily have that issue of Synapse,
06:27although I know that you do work with banking partners,
06:29so I'm sure it's something you think about.
06:31Do you think there have been lessons
06:33learned from that collapse that we saw over the past few months?
06:36Definitely.
06:37So yes, we did not work with Synapse,
06:39we do not work with Evolve, but we do, as you say,
06:42we work with a number of program banks.
06:44We are a regulated entity.
06:46So we have a broker-dealer and we also have an RIA.
06:49And so we have a lot of regulators
06:51monitoring us all the time.
06:52And we are incredibly careful about the people
06:56with whom we partner.
06:57So how I monitor my partners and how they monitor me back
07:01is incredibly important.
07:03And how they monitor me back is, I
07:05think, one of the great lessons of the Synapse Evolve story,
07:08because you are part of a network,
07:11and if they're not monitoring another third party,
07:13even if you're a good actor, that chain of events
07:16is sort of what we fear.
07:18I think, to me, what is most concerning
07:20is sort of the consumer impact of what went on there,
07:24which is if consumers lose faith and trust in fintech companies,
07:29that is fundamentally a problem for us as an industry.
07:33But my hope is that consumers are smarter
07:36than that sort of in aggregate and can
07:38see the difference between a company that wasn't regulated
07:41and a company that maybe didn't follow all the rules
07:43and prioritize compliance and security and KYB and KYC
07:47at the top, versus those that do.
07:51Strong plus one to everything Sarah said.
07:52I think there are two additional things that are really
07:55important, is a lot of people look for shortcuts in fintech,
07:59and there aren't any.
08:01And I came from a very, very high moving growth company,
08:05business meta for a long time.
08:06And I come to Brex, and I'm like, wow,
08:08we could be doing five more things really fast.
08:10And the answer was like, no, we will
08:13build our entire financial services stack in-house,
08:15right from sitting on the MasterCard rails,
08:17or in this case, we sit directly on the Goldman Bank.
08:21We build the entire fintech stack
08:22in-house exactly for the same reasons, which
08:24is when you're touching people's money,
08:27the bar is very high on how much trust.
08:29So we haven't chased growth at all costs,
08:32which was the previous point as well.
08:33And a ton of investment went in making sure
08:36that the whole stack is built for longevity.
08:38With the regulation, we're also a regular entity,
08:41and making sure that we are playing a very long game
08:44and not get exposed by small-term shiny marbles.
08:47And a lot of our competitors got impacted
08:50with Synapse and Evolve, and we see
08:52massive inflow of deposits coming to Brex Banking
08:56as a result because people trust you.
08:57And this happened last year with the SVB crisis.
09:00It happened again.
09:01A lot of people moved from Mercury and Roe
09:03because they were not sure how much of the data
09:04got compromised.
09:06So a long way of answering the question,
09:07it's really, really important to invest in trust.
09:10And I think that's where most of our investments have been,
09:12is build it for the long term, build it in-house.
09:15I do have a question on that, where you talk
09:17about not taking shortcuts.
09:18But it still seems with fintech, a lot of what is happening
09:22is building bank-like products without necessarily getting
09:26the charters that banks have.
09:28And it seems like a lot of Brex's services
09:30are replicating what a bank is doing,
09:32but without necessarily going to the Fed or the OCC
09:35or other regulators to do that, and instead
09:37working with banks in the back end.
09:38What do you think makes you different from just
09:40being a bank?
09:41Excellent question.
09:42So I think we've partnered with a lot of different traditional
09:44institutions in the past.
09:45And one of the reasons we zeroed in on Column
09:48as a partner to work with is they
09:50have all the tight regulations that we work with directly.
09:53So we KYC, they KYC, they check, to Sarah's point.
09:56We keep each other's in check.
09:58And the biggest difference is we also
10:00pick a partner which has a tech forward mindset.
10:04So the big difference between a traditional partner
10:06and a partner like Column is we have
10:08all the hardening of a Column bank,
10:11but they have the API-first attitude.
10:14So they allow us to build, they allow us to experiment,
10:17they allow us to do everything else
10:18without having to compromise anything on the protections
10:21that we need to provide.
10:22So it's an interesting balance between you
10:23find the partner which is as mission-aligned as you are,
10:28but also can move fast, and that's
10:29a holy grail of unlocking value.
10:31But no national banking charters coming down the line?
10:34We don't need to.
10:35We have MTLs, we have money transfer licenses,
10:37we do have, we have, you know, we get audited,
10:41we go through every possible check.
10:43So we go through all the checks, but we don't need to necessarily
10:46get the banking charter ourselves.
10:47Yeah.
10:48And I guess the question, especially with Synapse,
10:50has been how are consumers protected?
10:54So do you still ensure, even if you have partners
10:57in the back end, that you'll have the same sort of FDIC
10:59protection that a consumer would have if they're just
11:01going through a bank?
11:02Excellent question.
11:03I think this was tested last year when SVB crisis happened.
11:06People were like, OK, why would I not just move all my money
11:09to a traditional bank?
11:10And the first question we had to answer very simply was,
11:13Brex does not touch your money, does not store your money.
11:16We have FDIC insured, you know, we split the money for you.
11:20What you would typically do on your own
11:22is like, I'm going to split up to 50k to 40k,
11:24but you know what, tech can do that for you.
11:26So we split it across to 40k accounts.
11:27And everything else in excess of that
11:29gets swept immediately to an MMF in a US government treasury.
11:34So these are examples of, you don't have to necessarily
11:37do traditional banking to provide
11:39a treasury or a banking service to the customer base.
11:42So I think that is where the innovation happens.
11:45It's not like, oh, I have to become a bank
11:46to provide banking services.
11:48And that's where the value creation is.
11:51I mean, look, we're incredibly regulated.
11:53We've got FINRA, and we've got the SEC.
11:55That's more than enough regulation for my taste.
11:58So when I think about it, banks have regulators as well.
12:03But I think the distinction between a setup
12:05that we have and a setup like Synapse
12:07is that Synapse is just a software layer,
12:10whereas we are a regulated entity that partners with banks.
12:14And so I think that is actually an important distinction
12:16to make, but again, a distinction that
12:18may not be totally transparent or understandable,
12:20I should say, to the customer.
12:22And I am going to open this up to questions,
12:24so start thinking about if you have any.
12:25I just have one more for them, and then I promise
12:27I'll get to you guys.
12:30Vlad from Robinhood spoke yesterday.
12:32And I think a lot about what companies' competitors look
12:35like and how you differentiate yourselves.
12:37And I'm sure it's something for both of your companies.
12:39Brex, you have Ramp, Betterment, you have Wealthfront.
12:41But it seems like Robinhood now is entering the space.
12:44They're doing retirement accounts.
12:45They're doing 5% back savings accounts.
12:48How do you think about differentiating
12:50in this time where a lot of fintechs
12:52are merging to the same point?
12:55So it's very frustrating, and I do
12:56worry more, if I'm honest, about Robinhood
12:59than I do about Wealthfront.
13:00And the reason for that is I have three businesses.
13:03I have a retail business, a 401k workplace solution,
13:07and an RIA custody platform, which
13:10looks exactly like a Fidelity, Vanguard, or Schwab.
13:14So when I think about them, I am the zillennial version
13:18of those three.
13:19And most of my competitors are monoline competitors.
13:22So I compete with different companies
13:25in each of those three vectors, which we
13:28could debate the wisdom of that.
13:29But when I think about who could challenge me
13:33for sort of supremacy with that brand opportunity
13:36with this next generation, it is Robinhood
13:38more so than Wealthfront.
13:40And they've come at it totally differently, which
13:42is I'm serious money.
13:44And in 2021 and the meme stocks and all of that,
13:48there was a lot of like, they're selling cake
13:50and you're selling eat your vegetables.
13:52And eat your vegetables didn't seem that sexy in 2021.
13:55And then in 22 and 23, eat your vegetables
13:58started to sound a little bit better.
14:00And so I still believe that the outcomes we
14:02are driving for customers, which is diversification,
14:05long-term outlook, slow and steady wins the race,
14:08that is the right approach.
14:10But the reality is Robinhood is training a generation
14:14to day trade and to look at your portfolio on mobile
14:18as frequently as possible and to be too reactionary.
14:22And so that's scary.
14:23And that's a formidable competitor
14:25because they're well capitalized, they're public,
14:27and they've got a lot of great usability that I admire.
14:33I'm personally a huge fan of Robinhood.
14:34They are both a Brex customer, a very large Brex customer.
14:38But also, I think we decided very categorically
14:42to not get into consumer finance.
14:44And instead, we are fintech, but we
14:47decided to go upmarket into enterprise SAS in addition
14:50to that.
14:51So where I think Robinhood's playing really well
14:52is they are expanding into consumer finance, consumer
14:55credit cards, and it's a very different problem
14:59space than what we're trying to solve with B2B finance
15:03and enterprise SAS.
15:04So the space we replace is more a Concur and an Amex
15:08or traditional bank, not in the consumer finance.
15:10And I think that being true to who you are
15:12is extremely critical because there's always
15:15going to be competition and adjacencies.
15:17I know as investors, we all love adjacent markets,
15:20adjacent markets.
15:21For us, adjacency is not trying to do another consumer play.
15:23It's to keep growing upmarket and have
15:25the time from five people's startups around Brex.
15:27A lot of you in the room are.
15:30As well as we have 50,000 employee companies.
15:33And there's so much time that we don't need to necessarily go
15:36compete with the likes of Robinhood to ever get there.
15:38So I think I have time for one quick question.
15:41I'm sorry, we have one in the front here.
15:43I wish I could have left for a few more,
15:45but I'm sure this will be a good one.
15:47And if you can have your last thoughts here, too,
15:48that would be great.
15:49Setting me up for a good one is a setup right off the bat.
15:52I'm Michael Marcotte.
15:53I'm the chairman of the RTS Global Group.
15:55I'm also the co-founder of the National Cyber Security Center.
15:58I have tremendous respect for both of you guys
16:00personally and the business models you have established.
16:03You support the sovereignty of the individual.
16:07With that being said, how would your businesses and you guys
16:10personally view the ultimate sun setting of the US Patriot Act?
16:15Oh, my.
16:16That's a pretty deep question.
16:17Nice heavy one for the end.
16:19I'm not even sure I know how to answer that question.
16:21Yeah.
16:22I mean, right now I think more about sort of open banking,
16:25to be honest, and the importance of that legislation, which
16:28has been 12 years coming.
16:31And I think it will ultimately extend to wealth,
16:35whereas it will start more in banking.
16:36But this idea that the consumer ultimately
16:38needs to control his or her data and destiny
16:41and should be able to move that around to different platforms,
16:45basically fighting that trend is what the incumbents want
16:49to do so that they can maintain market share
16:51and stifle innovation.
16:52And so for me, that is sort of, I
16:54don't know if that's exactly responsive to your question,
16:56but that's kind of where my head is.
16:58I just think a lot about that, because in my last job,
17:00like, we were dealing with a lot of consumer data at Facebook,
17:03as you can imagine.
17:04Luckily, I haven't had to think as much of a problem at Brex,
17:07because you know, I'm not a big consumer.
17:09I haven't had to think as much of a problem at Brex,
17:11because we are very squarely B2B,
17:13and we serve a lot of large public companies.
17:15But I think, so now, as an example,
17:18we have 150 public companies on Brex,
17:19which is a big departure from a startup doing it
17:22to a large, regulated public company taking a bet on Brex.
17:25I think a lot of our investments have
17:27gone into cybersecurity, data governance,
17:30and making sure data residence really
17:32matters, because our customers are spread globally.
17:35We haven't yet had to tackle that problem.
17:37I'm like, OK, I'm, actually, let's take
17:40Roblox or Robinhood, these companies.
17:43What happens to the data of an employee
17:46outside of US with a US parent entity?
17:48I don't think we've tackled that as much,
17:50but we definitely will, because we
17:52are playing in the global space.
17:53And even though it's technically B2B,
17:55it is a, we will cross that line at some point.
17:57That is, unfortunately, all the time we have.
17:59Thank you for that great question.
18:00Thank you to my panelists.
18:01That was really great.
18:02I appreciate you taking the time.
18:03Thank you for having us.
18:04Thank you so much.