Name: Brainstorm Tech 2024: New Ways to Make Money Move
Uploaded: 2024-07-17
Duration: 18 min 11 s
Description: Karandeep Anand, President, Brex Sarah Levy, Chief Executive Officer, Betterment Moderator: Leo Schwartz, Fortune

Karandeep Anand, President, Brex Sarah Levy, Chief Executive Officer, Betterment Moderator: Leo Schwartz, Fortune

Brainstorm Tech 2024: New Ways to Make Money Move

Conferences

Good afternoon. Thank you both for joining us. Thank you for having us with you. I'd like to start with 2021 which I mentioned the intro there. I think euphemistically saying that growth has been steadier since then. But I think if you look back what you saw was hundreds of millions of dollars coming from investors, valuations of billions of dollars. And probably more importantly, this idea that fintech really be a sector that would replace the incumbents take over from banks and brokerage platforms. And I think that hasn't necessarily been reached. Now, obviously, valuations have come back down, venture markets have frozen up a little bit. I'm curious from both of your standpoints. Do you think that promise of 2021 is still alive? I want to start happy to, I think. Um so I think there was a very good session yesterday from folks from FED, which was I don't think anyone is immune to the macroeconomic, high interest rates definitely change. Uh what the growth goes we were seeing in fintech. But I think there are three very important things that at least I see to such as uh one fintech is a secular trend. We still have a ton of additional movement of money that happens and cross border movements are happening, which is happening on non fintech versus traditional banks. And that trend hasn't changed what changes like the spending levels have gone down. But I think fintech being a secular trend is a very critical, critical piece. And I think the second thing for BREX specifically is we sit in the intersection of fintech and enterprise sa I mean, that is something that changed, which is the promise was not just fintech, but fintech plus Enterprise S A and that has unlocked a lot of value for diversification. And third, which is on a lighter note is um you know, a tough market actually is a good way to weed out a lot of competitors. So a lot of competitors which were like fly by night. Zer phenomena no longer exist. So overall, I think the promise is still alive, the industry has got a lot more mature in what they expect to be the successful idea now. So I would agree. I mean, I think the opportunity is in the Tam which is in the trillions. So I think the promise is absolutely still alive. I think what I would say has changed is the amount of investment capital going into the sector. And it used to be that you didn't really have to differentiate yourself with the fundamentals right now. You need scale, you need profitability, you need sensible unit economics. And so I think it's really more about a rationalization in the marketplace than it is and sort of the winners and the losers so to speak than it is than it is about a shrinking promise of the opportunity. Yeah. So let's talk about that investment and I just came from a lunch. I'm sure some of you were at that was about Unicorp Ises or this idea of the billion dollar companies from 10 years ago that expanded and then never were able to find an exit. And I know that neither of your companies are anywhere close to being Unicorp Ises. But at the same time, I think both of your companies have been targeted by many analysts and onlookers as ripe for an IPO. Eventually, I know both of you, your companies have talked about a potential IPO and I want to go one by one and, you know, ideally get as specific an answer as possible. I I know that you'll be limited here with Brex. There have been interviews recently, you know, there was a lot of turmoil, there was layoffs, there was reports of cash burn and there was this goal of being cash flow positive by the end of 2025 and maybe that would lead to an IPO. And I'm interested, where do you see the current landscape there? What's the financial outlook for Brexit? I think the IPO is a definite exit. Like that's the exit plan. The two very important things that happened building on your previous question as well, is the investor expectations change prematurely from the growth at all costs to sustainable growth? So our focus for the last 18 to 24 months has essentially been how do we grow our gross profit and profit margin? And we've grown like 75% year on year is very heavy focus on margin, which honestly speaking was not the priority for a long time, pre 2021. And the second is bond reduction. I think there's expectation from investor community as well as like promoter shareholder is you have to do this in a sustainable long term way because what you, you know, back to early point is we're trying to play a 10 year or 15 year game and if you cannot do this on sustainable burn, it's hard to do it. So, so last year, uh last 18 months has been 75% profitability growth and then 50% reduction on burn. So we're still on target to hit our operating cash flow positive goals of 2025 and which with all the other clean up we've done is really helps us to get into that exit state. So 2026 for an IP O I am not privileged to say that number, but I think every leading indicator uh really points to that. I think the main thing is you have to time the IP O right. You don't want to rush into something which the market is not ready for. But I think we have to be prepared on sustainability growth and margins and those are the things that we within our control, we will continue focusing on. And Sarah, I think betterment has been in a steadier pace. There still were layoffs but, but not as severe. And I know you've been expanding your product offering. But how do you view the current IPO market for betterment? So I try not to get distracted by. Are you going ipo? And when are you going ipo? And are you profitable? I try not to answer that question as well. Um Where I am really focused is, can I build the definitive wealth brand for Zenn? And if I can do that, that means I will have scale, I will have a diversified, you know, diversified revenue streams. I will have quality economics in the three segments, customer segments I serve. And so that's really where I spend my time when I think about, you know, what would impact great companies get bought and aren't sold. So that's always an option. An IPO could be an option, but the bar has definitely been raised and I wouldn't want to be, have been in the 2021 class where you're now sort of fighting to get back to where you were. So when I think about it, I got to get to the scale and the profitability and the growth. And if I can be a rule of 40 company, then I can, you know, sustain a public company story. And I think this has been a uniting principle with both of your companies where you have had this much more sustainable growth. The past year, you've been expanding your product offerings, but, you know, I cover crypto a lot of the time and I think there's a danger where companies doing good work can still get wrapped up in the sector that they're part of. And we've seen that in fintech recently where the biggest story of the past year has been synapse and this collapse of intermediaries. And I think it is how a lot of consumers out there are thinking about sin. And I know again, neither your companies necessarily have that issue of synapse. Although I know that you do work with banking partners. So I'm sure it's something you think about. Do you think there have been lessons learned from that collapse that we saw over the past few months? Definitely. So, you know, yes, we did not work with synapse. We do not work with evolve, but we do. As you say, we work with a number of program banks. We are a regulated entity. So we have a broker dealer and we also have an Ria and so we have a lot of regulators monitoring us time and we are incredibly careful about the people with whom we partner. So how I monitor my partners and how they monitor me back is incredibly important and how they monitor me back is I think one of the great lessons of the synapse of all story because you are part of a network. And if they're not monitoring another third party, even if you're a good actor, that chain of events is sort of what we fear. I think to me what is most concerning sort of the consumer impact of what went on there, which is if consumers lose faith and trust in fintech companies, that is fundamentally a problem for us as an industry. But my hope is that we can, that consumers are smarter than that sort of in aggregate and can see the difference between a company that wasn't regulated and a company that maybe didn't follow all the rules and prioritize compliance and security and Kyb and KYC at the top versus those that do strong plus one to everything I said, I think there are two additional things that really important is uh a lot of people look for shortcuts in fintech and there aren't any uh and you know, I came from a very, very high moving growth company. You know, this is matter for a long time and come, come to Brax and I'm like, wow, like we could be doing five more things really fast. And the answer was like, no, we will build our entire financial services stack in house right from like sitting on the Mastercard rails or in this case, we sit directly on the column bank. If such, we build the entire fintech stack in house. Exactly for the same reasons which is when you're touching people's money, the bar is very high on how much trust. So we haven't chased like growth at all costs to the previous point as well. And a ton of investment went in making sure that the whole stack is paid for longevity with the regulation we regular entity and making sure that we are playing a very long game and not get exposed by like small term shiny marbles. And a lot of like our competitors uh got impacted with an app that involved and we see massive inflow of deposits coming to BREX banking as a result because people trust you. And this happened last year with the SVB crisis. It happened again. A lot of people moved from Mercury and Row because they were not sure how much of the data got compromised so long way of answering the question, which is, it's really, really important to invest in trust. And I think that's where most of our investments have been, is build it for the long term, build it in house. I do have a question on that where you talk about not taking shortcuts, but it still seems with fintech, a lot of what is happening is building bank like products without necessarily getting the charters that banks have and it seems like a lot of breakfast services are replicating what a bank is doing, but without necessarily going to the fed or the OCC or other regulators to do that. And that working with banks in the back end, like, what do you think makes you different from just being a bank? Excellent question. So I think we've partnered with a lot of different traditional institutions in the past. And one of the reasons we zeroed in on column as a partner to work with is they have all the tight regulations that we work with directly. So we KYC, the KYC, they check Cyrus Point, we keep each other in check. And the biggest difference is we also pick a partner which has a text powered mindset. So the big difference between traditional partner and a partner, the column is we have all the hard, hardening of a column bank, but they have the api first attitude. So they allow us to build, they allow us to experiment, they allow us to do everything else without having to compromise anything on the protections that we need to provide. So it's an interesting balance between you find a partner which is as mission aligned as you are, but also can move fast. And that's a holy grail of unlocking value. But no National Banking Charter is coming down the line. We don't need to, we have MTLS, we have money transfer licenses. We do have uh, we have, you know, we get audited, we go through every possible check so we go through all the checks, but we don't need to necessarily get the banking charter. And I guess the question, especially with synapse has been, how are consumers protected? So, do you still ensure even if you have partners in the back end that you'll have the same sort of FD I protection that a consumer would have if they're just going through a bank. Excellent question. I think this was tested last year when SUV crisis happened. People are like, OK, why would it not just move all the money into a traditional bank? And the first question we had to answer very simply was BREX does not touch your money, it does not store your money. We have FDIC insured, you know, we split the money for, for you. Uh What you would typically do on your own is like, I'm going to split up to 50 K to 50 K, but like, you know what they can do that for you. So we spread it across to 50 K accounts and everything else in excess of that gets swept immediately to an MMF uh in a, in a, you know, us government treasury. So these are examples of you don't have to necessarily do traditional banking to provide a treasury or a banking service to the customer base. So I think that is where the innovation happens. It's not like, oh I have to become a bank to provide banking services and that's where the value creation is. I mean, look, we're incredibly regulated, we've got Finra and we've got the sec that's more than enough regulation for my taste. Um So when I think about it, you know, banks have, have regulators as well, but I think the distinction between a setup that we have and a set up like is that synapse is just a software layer, whereas we are a regulated entity that partners with banks. And so I think that is actually an important distinction to make. But again, a distinction that may not be totally transparent or understandable, I should say to the customer and I am going to open this up to questions. So start thinking about if you have any, I just have one more for them and then I promise I'll get to you guys. Vlad from Robin Hood spoke yesterday and I think a lot about what companies competitors look like and how you differentiate yourselves. And I'm sure it's something for both of your companies brex. You have ramp betterment, you have Wealthfront, but it seems like Robinhood now is entering the space. They're doing retirement accounts, they're doing 5% back savings accounts. How do you think about differentiating in this time where a lot of fintech are merging to the same point? So it's very frustrating and I do worry more if I'm honest about Robinhood than I do about WEF front. And the reason for that is I have three businesses. I have a retail business, a 401 workplace solution and an R A custody platform which looks exactly like a fidelity vanguard or Schwab. So when I think about them, I am the millennial version of those three and most of my competitors are mono line competitors. So I compete with different, different companies in each of those three vectors which you know, we could debate the wisdom of that. But when I think about who could challenge me for sort of supremacy with that brand opportunity. With this next generation, it is Robin Hood more so than wealthfront. They've come at it totally differently, which is I'm serious money. And in 2021 and the meme stocks and all of that, there was a lot of like they're selling cake and you're selling, eat your vegetables and eat your vegetables. Didn't seem that sexy in 2021. And then in 22 and 23 eat your vegetables, started to sound a little bit better. And so I still believe that the outcomes we are driving for customers, which is diversification. Long term out, look slow and steady wins the race. That is the right approach. But the reality is, you know, Robin Hood is training a generation to day trade and to, you know, to be, to look at your portfolio on mobile as frequently as possible and to be too reactionary. And so that's scary and, and that's a formidable competitor because they're well capitalized, they're public and, you know, they've got a lot of great, great usability that, that I admire. I'm personally a huge fan of Robin Hood. They are both the BRC customer, uh, uh, like a very large bre customer. But also I think we decided very categorically to not get into consumer finance. And instead we, you know, we fintech, but we decided to go upmarket into enterprise S A in addition to that. So, so where I think Robin Hood is playing really well is they are expanding into consumer finance, consumer credit cards. And we're very in a very different problem space than what we're trying to solve with uh B to B finance and enterprise. So the space we replace is more a conquer and an Amex or traditional bank not in the consumer finance. And I think that being true to who you are is extremely critical because there's always going to be competition. And adjacent CS I know as investors, we all love adjacent markets, adjacent markets for us. Adjacent C is not trying to do another consumer play it to keep growing upmarket and have a time from five people start ups around bracks. A lot of you in the room are thank you as well as we have 50,000 employee companies. And we can, we can, there's so much time that we don't need to necessarily go compete with the likes of Robin Hood to ever get that. So I think I have time for one quick question. I'm sorry. We have one in the, in the front here. Uh I wish I could have left for a few more, but I'm sure this will be a good one. And if you can have your last thoughts here too, that will set me up for a good one as we set up right off the bat. I'm Michael Marcott. I'm the chairman of the RG Global Group. I'm also the co founder of the National Cyber Security Center. I have tremendous respect for both of you guys personally and the business models you have established, you support the sovereignty of the individual. With that being said, how would your businesses and you guys personally view the ultimate sunsetting of the US Patriot Act? Oh, my, pretty nice to have one for the end. I'm not even sure I know how to answer that question. I mean, right now I think more about sort of open banking to be honest and the importance of that legislation which has been, you know, 12 years coming. Um And I think it will ultimately extend to wealth whereas it'll start more in banking. But this idea that the consumer ultimately needs to control his or her data and destiny and should be able to move that around to different platforms, basically fighting that trend is what the incumbents want to do so that they can maintain market share and stifle innovation. And so for me that is sort of, I don't know if that's exactly responsive to your question, but that's kind of where my head is. I think a lot about that because in my last job, like, we were dealing with a lot of consumer data at Facebook, as you can imagine. Um Luckily I haven't had to think as much of the problem at BREX because we are based clearly B to B and we like serve a lot of large public companies. But I think for now as an example, we have 100 and 50 public companies on bre, which is a big departure from a start up doing it to a large regulated public company, taking a bet on bre. I think a lot of our investments have gone into cybersecurity, data governance and making sure that data residence really matters because, you know, our customers are spread globally. Uh We haven't yet had to tackle that problem and like, OK, I'm uh actually take Roblox or Robin Hood these companies. What happens to the data of an employee outside of the US with the US trade entity? I don't think we've tackled that as much, but we definitely will because we are playing in the global space. And even though it's technically B to B, it is, we will cross that line at some point. That is unfortunately all the time we have Thank you for that great question. Thank you to my Panelist. That was really great. I appreciate you taking the time. Thank you so much.