Layoffs at Brex highlight the curse of having too much money | Equity Podcast

This episode is sponsored by Morgan Stanley atw work visit morganstanley.com Assessment to get your free transaction Readiness assessment [Music] Today hello and welcome back to equity a Podcast about the business of startups Where we unpack the numbers and the Nuance behind the headlines today is January 26th 2024 my name is Alex I am Joined today by two of my besties on one Hand I have Mary and aeto maranne all I Can say is Hash Forbes strike let's go Oh yeah man brutal week in the media World for sure yeah we also have Kirsten Corc though and in Kirsten I hear There's no bad news whatsoever in the World of Automotive especially if you're Elon Musk yeah absolutely zero bad news At all including shares being down Something like 12 and a half% today Following the big earnings day which Shows maybe sales growth is slowing in 2024 it turns out that if you keep Cutting your prices if you sell more Cars your Revenue doesn't go up yeah That whole margin thing is is tricky Yeah I I will say watching Tesla maybe Get treated as a car company for once is Interesting we'll have to see how that All works out but on the show today We're not talking about Tesla because we Have too much startup stuff to get to Deals of the week including plural vom

And Fantan then the first theme is we're Talking about what happened to brex this Is essentially a fintech conversation Looking backwards looking forwards and Then we're going to do something we Haven't done in a very long time an edte Check-in yes we do miss Natasia here on The show but we shall carry on her torch For her by talking about education Technology featuring one of our friends From the team to kick things off though Maryann you wanted to talk about plural Which apparently has a big new fund yeah Plural is a VC firm based in Europe and They actually just closed on a new $432 million fund which I mean for Europe that's pretty large I I was Impressed with that number and Alex just Spit out his coffee for those of you who Can't see I me we do have a relatively Sizable European audience and now you Just belittled their entire vure C this Was supposed to be a success now you're All like oh for Europe it's not that bad You know in America it'd be a seed fund But hey well I think context matters Here which is that economic situation in Europe hasn't been great so I think what Maran meant to say was that for this Time period it is impressive right That's yes yes indeed uh Europe as the Rest of the world has seen a a slump in Terms of startup investment 2021 there Was a record hundred billion dollar

Raised by startups 2023 that dropped to About 45 billion but this firm is just Moving forward I I was also impressed That they originally launched in June of 2022 yes they raised a 250 million euro fund at that time which They still haven't finished deploying Out of which I also thought was Interesting they're very early stage Focused rather than growth rounds and Also another interesting thing about This firm is that it was started by Founders of other companies so their Operators including and I'm not going to Say the name because I will butcher it Terribly U from Wise formerly transfer And someone from song kick as well you Can't say tavat henrikas come on it's Not that bad unless I just ruined it Sorry yeah I mean Alex if we've learned Anything on this show is that he really Is the epitome of how to pronounce names Of companies and people 100% all the Time so true I'm only 50% sure anyways Yes it is cool that it's Founders it's The European Founders fund minus the the Douchebaggery well I'm not I'm I don't Want to leave out the other two Founders Then and I'll I'll go ahead and follow Your bravery Alex Sten Tom kii and Ian Hogarth which was easier yes so the the Founders piece of this I found really Interesting and I was gonna ask Alex if You think that that gives them

Potentially an edge in sorting out and Picking really stage startups that might Have more Success or does it have the effect Potentially that they might be you know Not having the investor mindset like What's your take well there's actually VCS do three things one they fund rais Two they select Investments and then Three they help those Investments right So I'm going to leave aside the first Point and focus on the latter two which Is kind of what you're asking about I Don't know if former Founders are better Investment selectors essentially but the General vibe that I've heard from a lot Of people who have worked with VCS of Different backgrounds is that if you do Have operators on your cap table and in Your boardroom well they can actually Help you with a lot more kind of Operational Hands-On advice so I don't Know enough to vet if they're better Selectors but certainly I think once They're in place they do quite well and I think you have more founder empathy if You've been in those trenches you know I Would agree with that I think Founders Can benefit from from people who have Actually experienced what they are doing Firsthand yeah also I just want to say I Was overly harsh on MAR ends not even Actually mean comment about Europe Because I just looked up Germany's GDP

Growth in 2023 and it was negative so That's not good all right take it back 400 million euro or 432 million American Freedom dollars is a great new fun size For Europe yeah all right um that came Off as so so oddly perjorative I'm Actually pretty bullish on Europe this Year if you look at like MRA and what KD Is doing and there's a lot of cool Companies in Europe so it's good to see More Capital full stop all jokes aside Going back to jokes though Kirsten uh Vroom apparently a company they used to Sell cars now apparently doesn't sell Cars what's going on yeah not selling Cars anymore so I I wanted to pick room In part because you you actually wrote a Lot about the IPO a couple years ago They went public in 2020 they did a Traditional IPO which was unusual for The time because this is the mem stock ERA this is when a lot of spacks were Happening which fueled that Meme stock Era so vom came about around a decade Ago they were part of this batch of Companies that were going to disrupt Used car sales by bringing it online and Creating this marketplace with an app And usually folding in some other pieces Like financing and things like that a Bunch of these companies came around 2014 2015 2013 most of them have since Died carvana was is the one one of the Few that are left also publicly traded

So the news is this room is exiting Online used car business so they are Shutting down the e-commerce piece which Is going to result in 800 employees About 90% of its Workforce but they're Not shutting down allog together and Here's the pivot they are going to keep Operational to companies they acquired a Couple years ago an auto financing Company and car story which is a company That developed basically uses machine Learning to scroll through millions of Vehicle listings every day and create Predictive data and those two companies Are selling their products as you know To third parties so they're going to Keep those two pieces operational okay So just to be clear vom starts Life as a Used car Online Marketplace vom later on Buys two companies vroom then later Later on gets rid of its original Business and is now only those two Companies that it bought that's what Happened this week yeah so in essence It's entire first run at business was Simply a Prelude to owning two other Things that it didn't found correct and What's more wild is that the company Acquired the auto financing company for About 300 million in cash in 2021 and Car story for about 120 million in cash In stock So that is a lot of money and if you Look at their stock today have you

Looked at it recently yeah yeah I have Currently trading at 26 cents per share And I have some data for you Kristen yes Please over the last month it's off 60% In the last six months it's off 88.4% And if you pull the timeline all the way Back it's off 99.4% which is damn close to 100 right And what is it valued to was the market Valuation according to Google Finance as Of Thursday afternoon the company is Worth $ 37.324 paid for those other two Companies oh sorry right that's what you Were asking for now that's what I was That's the connection it will be very Interesting to see if they can pull this Off predictive data can be valuable auto Financing certainly is something that Traditional automakers and other online Used car marketplaces have gotten into But we'll see if room can pulled off Well it's not the only company that We've seen struggle in this way Mary and We have a couple other examples that We've been talking about so are you Shocked to see room down this far or Parf the course I think I am intrigued By all of this in general I remember When the craze first started and and a Few of us would would talk about and We're like who would want to buy a car Online and you know something they'd Never seen or test driven and then it

Just became sort of more like common Place and you know cuz you could return The car within like seven days you know So I think what I'm what I'm really Curious about is what what happened to Make this model pretty much fail so Miser Well there's a few reasons all kind of Going back to about 2020 you saw Companies like Herz and things struggle And then all of a sudden do better based On inventories and prices of vehicles We've seen used car prices Skyrocket and Some of these companies have benefited From that but as interest rates have Risen and people have trouble getting Financing they're not they're holding Off on buying those Vehicles so that's Also an issue Al a lot of these Companies as new efforts were spending a Lot of money buying and acquiring other Companies and burning through cash at a Very high rate so had they let's say Held firm and not done these other Pieces maybe they would have had a bit More of Runway I guess to close this Though I'm wondering Alex if remove the Marketplace that they're trying to do is This more of an indication of the cycle Of IPOs that happen around 2020 because We've seen a few in other categories not Do so well Zoom coinbase affirm DocuSign Too simple so is this the business or a A bigger broader problem uh it's a it's

A great question actually I I was Thinking a lot about when you were Describing vom's birth and then ascent And then later struggles I wonder how Much of companies like vroom was Essentially predicated on people Spending tons more time on the mobile Internet like apps essentially like how How much did apps really change the way Companies were built in the kind of the Post iPhone era I don't know I like to Look more into that answering your Question a lot of companies soared very High during the pandemic um I think we All saw how far our firm stock went up And coinbase and so forth and then many Of those have come down the difference Though Kiron to answer your question is That uh coinbase is still worth billions Zoom is still worth billions firm's Having a great year DocuSign is going to Get sold properly to private equity and When it comes to V all I can say is car Off cliff so so I would say it is Distinct and not quite the same as the Other examples but the shape of the Chart does share quite a lot I'd say Sure fair and speaking of things that Aren't always going well around the World but there's still momentum and not Just used cars also food delivery and so I want to talk today about Fantan Acquiring Chow bus because this story Confused me quite a lot and I'm going to

Tell everyone what's going on so first Of all there is a company based out of Canada called Fantan and they do Essentially Delivery of Asian food in the Canadian Market then there's an American company Called chowbus based in Chicago that did The same thing however Chow buuz has Become more like toast over time which Is an industry POS or proof proof point Of sale solution and so what's happened Is Fantan has bought Chow bus's delivery Business essentially making Chow bus More of a software company and Fantan a Larger delivery company in the Asian Food space did that make sense yes it Actually makes so much more sense to me For the software piece being of value However I would say this there is a lot Of competition in the point of sales World and there's some big players and So I'm wondering how this gives them an Edge I mean what is it worth the value Of the acquisition price I guess so I Think it'll depend quite a lot on their Ability to sell inside of their core Market because if you're thinking about Where chiao started and what its Restaurant profile probably is it Probably has a pretty good footprint Inside of and I'm going to speak very Broadly here but Asian Cuisine in North America which has a lot of different Categories a lot of different Cuisines

And cultures and so forth but toast Based in Boston doesn't seem to have as Much of a single Market focus and so I Presume you can tailor Your solution and Then also know certain other restaurant Networks communities and so forth so I Can see it working out and if if toast Has taught us anything it's that Providing a vertical SAS solution mixed With payments can be simply an enormous Business Kiron so I don't see why it Wouldn't work for chbs frankly yeah it Seems like it was a it's a good strategy On their part and you know kind of Focusing on this just one particular Segment we've questioned that model in Spaces like fintech where we talk about Neo Banks focusing on certain Demographics and how that doesn't really Always pan out but in this case I do Think that it can make sense but overall The whole deal has potential just like You said Alex I think sometimes what is It 1 plus 1 can equal three that that is Business school math for sure versus Versus math math but software isn't Always a win absolutely true yeah Software is tough I'm teeing you up for A transition here oh I thought you were Teeing me up too to to say more words You're oh you're teaing me up to shut me Up oh well too bad Kiren I'm going to Drop and not do that because I just Pulled up ol's Q3 results now if you

Don't know Olo they're like toast but Different and they prove that there's Actually enough room for at least one More POS provider in the restaurant Space because both toast and Olo are Growing nicely so I think there should Be room for u a more focused offering in That space just because there's so much Demand for cuine of that type and now I Shall take your offered segue and say Hey everybody we're going to take a Break and when we come back we're going To talk about brecks in the world of Fintech and how some people are still on The Struggle Bus but first a short Break is your company planning to go Public or conduct a shareholder Liquidity program within the next 18 to 24 months did you know that proactively Planning for your next private company Liquidity event or IPO can help you Maintain greater control over timelines And outcomes Morgan Stanley at work Believes that when you have the right Technology and systems in place working In harmony leading up to a transaction You can prepare and execute with more Accuracy and ease visit Morganstanley.com Assessment to connect with their issuer Strategy and Excellence team for a free Assessment to find out if your company Is transaction ready again that's Morganstanley.com

Assessment to get your free assessment Today Maryann I'm so glad to be have Fintech back on the show because Whenever we talk about fintech the Sun Comes out the daisies come out of the Ground and birds sing because it's Always good News um are we talking about the same Thing Alex that's what we call Performative Sarcasm I am way too literal right because I was Like Alex do do you not remember what We're about to discuss which is the fact That brex this week laid off 20% of its Staff which was nearly 300 people or 282 People now for those of you who have Never heard of brex I can quickly tell You it's an expense management startup Just two years ago was valued at 12.3 Billion which you know this was Obviously a very different time bre Started out as a as a this company that Was offering a credit card for startups And you know it was really popular very Buzzy over the years it kept evolving Its model in 2022 it it tried to or it's Still trying to I think expand into Software to diversify its business it Saw a bump in business last year after The Silicon Valley Bank collapse but it Appears to be struggling a little bit According to some reports from the Information for example it reportedly

Burned $17 million a month in the fourth Quarter of 23 and actually from what Else I've read that's less than it was Burning before which was about $26 Million a month $26 million a month this Is reportedly I don't have that Confirmed um but you know the company Still is insisting that yes Revenue may Have stalled after the bump in business It saw after the collapse of Silicon Valley Bank it's still grew by 35% in 2023 is what what they're saying another Thing the information report reported Was that it um supposedly only had Enough cash until March 2026 the company Assists they have about 4 years of Runway it's just another example of a a Company that was kind of this highflying Flashy startup that really does appear To be having its challenges now the Question is you know what happened um is It the model is it the management is it The space I mean we could probably go on And on about this okay I have a couple Questions I know fintech has had its Struggles certainly we have lot of Examples we've talked about on this show And also in our coverage over at Tech Wrench but I'm wondering in this Specific Case do we know what they were spending Money on is this a human issue meaning They over hired and their payroll is Just far too large or are they putting

Money into future products because That's sort of tells me two different Potential Avenues one not as bad as the Other my guess is probably a little bit Of both when announcing the layoffs the Co-ceo did say that moving forward the Company was going to emphasize quote Long-term thinking and ownership over Short-term gains in its comp structure Which does imply that there were were Some issues with how it was compensating Employees I wouldn't be surprised if They over hired and overpaid a lot of People but I do think it it is still Trying to diversify because it startup Customers have been spending less just As many other companies who have Customers that are startups over the Past couple of years with all these high Interest rates um the software expansion I don't know how that's going you know It's tried it last year it also Announced it was going to try to Dedicate itself back to startups with The hiring of I think it was Jason mock So anyway I I feel like the company's Been going in a lot of different Directions which the CEO himself had had Told me at one time is they were trying To do too many different things and Going into too many different directions I feel like it just needs to sit down And and focus that it's the curse of too Much money brex was one of the most

High-profile companies during the Pandemic era it grew very quickly and to Its credit I think the information also Reported that the revenue last year at The end was like something like 280 Million we don't know if that's a Trailing figure or run rate figure but Either way brex has scaled far in excess Of the minimums required to go public it Is a startup success story it's not a Great late stage unicorn value Maintaining entity but as a startup it Did great I think what it's struggling With is how do you go from being a Startup to being a non-st startup and Apparently it has some maturing to do But I don't want to diminish from how Big it did GS that's cool no it's a good Point Alex um yeah growing paints could Be one way to describe this the Company's annualized net revenue was Reportedly $279 million in the fourth Quarter so again to your point Alex That's nothing to sneeze at that's That's pretty good so shut up Rex it's Yeah it is they're good numbers right It's not like it's it's failing Miserably or anything of the sort but I Think the issue is that it did see that Bump mostly in the first quarter of the Year growth seemed to stall out for the Rest of the year so what's next Obviously it's trying to to minimize Burn with the layoffs here but yeah

We'll see what happens next so I've seen Sort of a similar scenario play out in My world specifically in sort of the Autonomous vehicle space in which very Buzzy companies the ones with a lot of Money have had to roll that back cut Staff cut costs And Then There are a Competitors let's say that have been Maybe not as Buzzy um have raised less Money and have had to figure out ways to Make those dollars stretch a lot longer So bringing it back to brex is there a Comparison here where there's another Company or competitor that has managed To do more with less money and is Actually in a better position well Interesting that you bring that up Kon And both Alex and I are obviously eager To discuss this um the okay first of all This is a very very crowded space right There are so many companies in it Including gramp nevon bill.com I me arc The list can go on and on Nana had its Own layoffs in December but one company In the space that has yet to lay off any Employees that we know of is ramp now These two are really very public Rivals There was a a Twitter I don't know What's the word dispute very recently Too just about one of the VCS from ramp Posting numbers about brex that brex Said wasn't accurate on and on and on Ramp apparently last time I recall only Has a few hundred employees and brex as

Of let's see as of its last layoffs had About 1150 so that's probably down to About under 900 now uh so yeah it's it's Definitely operated in a more lean Manner I don't remember offand how much It's raised but it too has raised Hundreds of millions of dollars and I Was going to say I don't think I've seen Any accounts of layoffs at Airbase for Example Mar that also could but then I Was frantically doing what I call inow Googling and um some of its glass door Notes are slightly less than positives There may have been some calling there On the sales side but there's a Difference between Some trimming of and I hate the word fat Because these are humans we're talking About but trimming of cost basis in Certain parts of a business and layoffs You announce like brex has so I I would Say to kon's point it has had the most Success in its category and and I would Also say at least again in my world Being lean hasn't always translated into Success either um in every single case Right so it's allowed them for some Companies to stay on stay on the path Longer find those Partners get to Revenue a lot of this is Frontier Tech But in this case I'm wondering do we Have Insight sure they haven't had big Public layoffs these other competitors But do we have insight into their

Revenue like how are they act are they Making money and are they really Actually competing with brex so the Thing here and I Maran is the real Expert but uh there was always a Question of like do you charge for it or Not and a lot of expense management Companies just took interchange revenues For a long time like ramp especially Airbase was is more software focused bre Split the difference so Maran I'm Curious what do we know about who's uh Growing the fastest out of the group Yeah I was just trying to look that up About R ramp has um has shared how much Its Revenue was I'm trying I'm sorry Trying to scramble here to look it up But I I believe as of last year it was Oh here we go yes I was right I was Right in August of last year ramp Confirmed that it had passed 300 million In annualized Revenue which is very Close to what brex has shared Uh no well brex didn't Share the information shared and then What matters to me there Maran is that Ramp which was born after brex and was Essentially heralded as a brex clone at The start and mocked as such has Surpassed brex in terms of total revenue Now we have to move on because there's One more thing we need to talk about Today and it is is another realm of a Troubled sector to some degree but there

Is good news to talk about here and I'm Not being sarcastic this time so what We're going to do is we're going to tap On the shoulder of Korean Levy she is Fantastic and she's also my um you know Comrad in arms over at Tech runch Plus And is joined us today to talk about What's going on in edtech Karine welcome To the show thank you so much I'm really Happy to be here you've now been sitting Here stuck listening to us ramble for 25 Minutes so Impressions how's Equity Doing you guys are doing a great job I'm Really excited to join the team today to Talk about edtech and that your $5 for Saying that will be in the mail um so First of all Karan tell us uh what we Got here we have a new investor survey Of sorts to chew through yeah so we did We surveyed four investors who are in The edtech space which we thought was a Good time to look into that space Because we haven't in quite a while as You mentioned at the top of the show so You know during the pandemic everybody Was scrambling to learn at home and Learn on the beach and learn wherever They were um and so you know edtech was Booming and after the pandemic kind of It's not over but after the pandemic you Know allowed us to return to more normal Lives then you know it started to drop a Little bit and it's not as significant As the rest of the VC world where deals

Have um been dropping but it's down yeah Maryanne we saw some news from Baus that For at least some formerly highflying Edtech companies it's a tough time out There yeah it's looking to raise 100 Million to 200 million dollar in new Funding and it's willing to cut Valuation to below 2 billion this Company was previously valued at $22 Billion so that is a massive drop yeah And you know the amount of capital we're Seeing decelerate in this space is not Entirely due to just the changes in Covid and so forth but also occasionally Due to regulatory policy don't forget That the Chinese government made drastic Changes to what was allowed in its own Edtech Market AKA after school tutoring That did shake up for example that local Um edtech market so there's some secular Things here and there's also just some Trends going on but the cool thing Karine is that a lot of fecs we talked To are actually surprisingly optimistic About where Ai and edtech can come Together and hopefully make some new Magic yeah I mean I think you know one Of the things that stood out to me that One of the investors said in the survey Was that companies can enjoy the Tailwinds of AI so you know people will Either need reskilling in areas of focus Like AI for their work or you know there Will be a lot of companies that are

Leveraging AI to make their products a Little bit better or easier some of of The you know ideas that were for kids You know making education a little more Fun so AI could help with that like Animate voices or create voices I guess For animations is probably more correct Um and then that'll help kids get more Into it but again as one other uh Investor said that AI itself isn't like An edtech product which I thought was um Another kind of interesting way of Looking at it however like putting AI Onto an ed Tech product is where the Money is at so glad to see that one Investor isn't taking the AI Buzz bait On that one but I'm wondering because That person specifically talked about That pairing are we seeing as a result Some consolidation or acquisitions by Edtech to sort of build up that Technology prowess yeah I forget which Of the four investors it was but one of Them mentioned how um there is some m&a Going on and also people are looking to Sell earlier because in the wake of the Figma Adobe deal getting canned Over antitrust concerns absolutely Fairly by the way uh people are are Saying buy earlier to avoid antitrust Gaye if you will and I think that Actually applies not just ntic but to Everywhere yeah and like speaking of Consolidation I mean that same investor

Was saying that you know places like Microsoft and Google and you know all The big ones can probably we do some m&a Activity around Ai and then that's where We'll be seeing some of the Consolidation from some of the big Companies Maryann I I'm curious cuz you Have schoolage children and were Apparent through the covid homeschooling Era how much of the edtech stuff has Stuck around in your kids' lives or is It kind of all faded away and things are Back to normal normal it's stuck around To some degree I would say and this this Stood out to me in the survey that the More interesting aspects of edtech is When they're making it it makes it Learning more fun for students because Obviously a lot of a lot of kids Struggle with paying attention and Getting interested in certain topics so When there's a way to actually make it More interesting and fun to learn that's A win and one of the investors was Saying that they predicted education Would be more like a video game and that Gaming developers would venture into the Realm of Education I thought that was Really an interesting point and I could See that happening and I could see where The potential for that would take off Because you know just edtech in general If if you can't make learning fun it's Not going to do very well in my opinion

Well ladies and gentlemen I'm going to Make my very first ever um stock market Endorsement then based on what Maryann Just said buy stock in Paradox Interactive who needs economics class When you have Victoria 3 who needs to Take European history when you have Crusader Kings three who needs City Management classes when you have City Skylines 2 etc etc etc get yourself a Grand strategy game today no I totally Agree with that like I learned Everything I need to know about France From Assassin's Creed Exactly and everyone learned about my Home state through Oregon Trail the Video game oh my goodness ah there you Go yes all the starvation and what else Happens in Oregon Trail it's been so Many years thank you thank you you know I I I know it feels like a million years Ago but I was just reminded that a Disrupt we had Shaquille O'Neal on stage And he was talking about investing in a Seed round for a edtech startup called Ed somoma which Which developed an AI powered reading Education and communication platform for Children and it's meant to make it fun So sort of interesting to see then these New players kind of getting into at a Seed level as well so all right and uh I Do believe that now kirston just tked Teresa our intive producer with gting

Sha on the show to talk more about Ed Soma so she'll get to work on that but We are done for this week my friends Equity of course is back next Monday Next Wednesday next Friday with Interviews sprinkled in as they happen And we have a good one Brewing first a Thanks thanks to Karen thank you thank You for joining us we will see more of You and of course thanks to Kirsten and Marann and to myself for being here as Always if you want more from us we are Equity pod on X and threads and if you Like short form videos well we're Tech Runch pods over on Tik Tok Goodbye Equity is hosted by myself Editorinchief of Tech runch Plus Alex Wilhelm and Tech runch senior reporter Mary and aeto we are produced by Teresa Loans solo with editing by Kell Bryce Deran is our illustrator and a big thank You to the audience development team and Henry pette who manages Tech wrench Audio products thank you so much for Listening and we'll talk to you next Time