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Bad Times in Tech? Not If You’re a Startup Serving Other Startups (nytimes.com)
194 points by SREinSF 79 days ago | hide | past | web | favorite | 107 comments

I will say, for what it’s worth, that the customer experience of using Brex is really quite outstanding (my current startup is a customer.)

They’ve figured out things that in hindsight just seem so obvious to a good UX, and yet we’ve all been so trained to have low expectations from the mediocre service traditional banks/corporate card providers offer that it seems outstanding.

From limited experience - the fact that virtual cards are first-party citizens, the helpful text messages you get (which include a warning the first time you use a card physically, instant text records when you use a card physically, the ability to photograph receipts and send them back to that same text phone #, and and and.)

American Express (my only other corporate card comparison) of course _could_ offer this stuff, but it’s just not in their DNA because, well, they haven’t had to innovate because they had what amounts to a monopoly on corporate spending cards. And I should note - Amex ties the credit on those cards to the founder (requiring a personal guarantee until the company reaches a certain - large - size.)

Anyway, this is all to say I’m a fan and it doesn’t surprise me they’ve having the success they are so far. Let’s hope they can do it profitably and keep it up!

I have a visa card. They introduced a verification check for online use a few years ago. This involved giving the answer to a question or typing in a passphrase or something (can't remember, I almost never use it).

When setting it up on the web I had to type in the answer/passphrase/whatever. It was rejected. I read the form again, looked at the error msg, no indication why, typed it in again, again rejected.

I called the bank, "oh, it's got to have a digit in it". It did not say on the form a digit was needed, nor did the error message.

They could not even manage to tell the users the most trivial requirements either directly or in the error message. It's beyond pathetic. It's literally incomprehensibly incompetent to fail at such a low level.

I remember "Verified By Visa" which would send you to a site that looked like it was drawn by a crayon. It shocks me how financial institutions often make web sites that look like a parody of a phishing site. For instance, my credit union had an online banking service which used the name "myvaultsentry.com" which just seemed liked something a high school hacker would think up.

It is strange because operationally Visa is good at what they do, and they put a huge amount of effort and expense into developing a brand, but for legacy organizations (academia too) the web seems to be made of kryptonite.

MBNA, a credit card provider in the U.K., used to provide online services under a completely different website than their main one, with a domain like “bank card services dot co dot uk”* and a barely-styled website

I thought I was being phished until I confirmed it was real on the phone with them.

(it may not have been that domain so don’t try in case that’s a sketchy site)

"Verified by Visa" is still in use - it just hit me up booking a hotel in Europe from the US. It really does look horrible, like an obvious scam site, but it's not. I really wish they would get rid of it. It actually makes me feel a lot less secure every time it pops up.

Amex could do it but it’d take a whole lot more money than it would with a greenfield tech landscape (like Brex has). I agree that it’s not in their DNA to be innovative but I also think that it doesn’t make as much since from an ROI perspective as it seems.

Brex using the company’s credit instead of the founder’s makes it a leveraged but diversified bet on the startup ecosystem as a whole. From a financial engineering perspective it occupies a plum position because diversification in the startup ecosystem is traditionally very hard to achieve for investors who are bullish on tech but don’t want to take a position on whether AR or VR is better.

I ran a bootstrapped company with $150k/mo of well-documented, above-board recurring revenue and Chase wouldn't give it a credit limit above $5k.

Entrusting my finances to another startup like Brex is scary, but damn is the pitch compelling compared to mainstream banks.

I think you could easily buy an hq (or any other relatively liquid asset that would also help the business in other ways) outright with that kind of money and use that to collateralize a much larger credit limit

GP said $150k in revenue, not profit. If their operating costs are $149k there isn’t much anyone can do without a loan or outside investment.

What's an hq?

Headquarters (real estate)

uh that’s not liquid

Real estate (especially smaller, less customized office space) is usually liquid enough to use as collateral for a loan

Wouldn't Chase be more interested in net profits and/or collateral?

Indeed, Tesla or Uber have revenues. But their bonds are still lower rated than Argentinian bonds. Can't expect creditors to like you if you're not showing excess cash flow.

Shareholders, on the other side, well. Let's just say that in the 60's or even 80's issuing IPOs was not something a professional investment bank would do. It was considered an undignified exploitation of the naive investor (from "The Intelligent Investor").

Why is it scary using Brex? In the end they are just providing credit, so the risk is on them.

Having your credit disappear overnight will disrupt your business.

Isn't Brex relying on Mastercard underneath?

They continuously track your financial data and sell it to VCs.

There must be something more to the story. I have several chase business cards that I use solely for points. I use "self employed" and 10k annual revenue from contracting as my business income. I don't have a limit below 15k.

No doubt. I ran a retail business that did 150k MRR and Chase gave us 30k and Amex gave us 100k.

It sounds like you had low (or likely negative) cashflow and no liquid assets. That's a very high-risk loan, and it's good that banks are averse to those.

It sounds like you were in a perfect position to raise a round without losing your control of the company. If you want a risky loan, you go to investors.

What did you ultimately end up doing for a line of credit for the business? That's obviously a very tight threshold of max credit to run a $1.8m sales business on. At the time did you consider trying to get a private line of credit (private as in from an individual)?

We ended up leaving a few hundred thousand in the bank and running it off debit.

This Pedro Franceschi is the same kid that created iUsers to allow multi-users in iPad and hacked Siri to understand portuguese years before Apple. I’m really happy that their startup has a big potential and I hope it succeeds, I’m a real fan

As this is Hacker News, Paul Graham's comments on Yahoo during the .com bubble are particularly relevant:

By 1998, Yahoo was the beneficiary of a de facto Ponzi scheme. Investors were excited about the Internet. One reason they were excited was Yahoo's revenue growth. So they invested in new Internet startups. The startups then used the money to buy ads on Yahoo to get traffic. Which caused yet more revenue growth for Yahoo, and further convinced investors the Internet was worth investing in. When I realized this one day, sitting in my cubicle, I jumped up like Archimedes in his bathtub, except instead of "Eureka!" I was shouting "Sell!"


That's how every boom phase in the credit cycle worked for the past few centuries, including housing in 2008 (assets go up -> more confidence -> more borrowing -> more spending -> assets go up). Not specific to tech by any measure.

Here's Ray Dalio explaining it (founder Bridgewater, the largest hedge fund; apparently Dalio is busy building his legacy now that he's a billionaire):


> except instead of "Eureka!" I was shouting "Sell!"

and then missing 2 more sustained years of jaw dropping prices

don't act clairvoyant.

You do realize that was a quote from the pg blog post I linked, correct?

Yes, I even read it to make sure he didn't call it closer to the crashes

Wasn't there another comment from PG regarding start-up ideas serving other start-ups? Don't remember which one...

You can make more money during a gold rush by selling tools and equipment to the 99% of people who will fail than by deluding yourself into thinking you'll be the 1% who strikes gold.

To his very day, when pitching potential colleagues on joining me at PagerDuty, I tell a little story about the OTHER gold rush in San Francisco.

I describe our company as being in the blue jeans business. We don’t know who will strike gold, we just want to outfit everyone with the best possible gear for running a gold mine.

Funny, but really, I wonder how much of Yahoo's ad revenue was from start ups? Any data on this?

I would guess nearly all of it.

Mainstream companies were not spending marketing money on the internet until much later.

How do you define mainstream company?

The point I am getting at, is that if Amazon and similar companies had ads on Yahoo and was making money profitably from it, that is different from a startup who is burning VC money on ads on the hope of making money in the future.

The point I am getting at, is that if Amazon and similar companies had ads on Yahoo and was making money profitably from it.

I'm guessing you didn't live through the dotcom bubble. No one was making money on the Internet, not even Amazon.

> No one was making money on the Internet, not even Amazon.

Please can you provide a source for that, as it is an extraordinary claim.

It is not. Were you even alive? Simply Google it or RTF-PG-A.

Whether I was alive is irrelevant. By that measure, there is no point anyone studying history before 1900.

eBay made a profit in 1998: https://investors.ebayinc.com/investor-news/press-release-de...

It took me 30 seconds to find this example, sure there are many more.

Whether I was alive is irrelevant.

It is very since you didn't experience it, and seem completely oblivious to what was going on. I wouldn't argue history with someone who had actually lived it.

eBay made a profit in 1998: https://investors.ebayinc.com/investor-news/press-release-de....

Ebay was an exception. There weren't any (many?) others. Try again: maybe you want to Google "Boo.com", "Webvan", and "many more." Archive.org "fuckedcompany.com". Or read the PG article about Yahoo.

You made the claim "No one was making money on the Internet" which is now "No one but eBay and maybe others", and PG made the claim about Yahoo with no proof in that article (maybe he gave the proof somewhere else)?

All I am asking for is some references for these extraordinary claims, otherwise I am going to assume it is "possibly true" folklore.

I enjoyed the 90's BTW.

Cognitive dissonance. Look at the survival rate of Internet companies that were around then and of those that continued to exist after the dotcom bubble. Then subtract from that the number of companies that survived but weren't turning any profits, consistently.

Or learn how to use Google and pay attention to information that is handed to you.

Your tone is exceedingly cocksure and brash.

Why do you say that? It doesn’t seem like Brex is unsustainable in the long run.

Currently they're unprofitable and their target market is other, unprofitable companies (e.g. turning away Fortune 500s, from the article). If that changes then it looks more sustainable.

great insight, seems like every ponzi scheme has its expiration date.

Brex's PR firm certainly seems to be earning their keep. This is the third or fourth article about Brex that 'wasn't about Brex' I've seen on HN in the last couple of months.

Isn't this just a reformation of the idea there's only two business models?

Either you mine for gold yourself or you sell shovels to others who want to mine for gold.

Btw Google for the word "Bre-X" and you will read about a gold mining scandal from the dotcom era.

Brex sounds like it’s headed for bankruptcy based on the article. They’re unprofitable now, and have incredibly risky clients sitting in front of what feels like a looming recession.

It seems like it's doing well because things are bad in silicon valley, not in spite of. It sounds like there are a lot of desperate startups getting loans to 'simulate' growth by having negative profit margins (since they can't get real growth otherwise), then they use that fake growth to get investors' money which they use to service debt, then they keep raising money until they exit or IPO. It doesn't seem sustainable. All these debts end up the hands of corporate shareholders. There's a point where companies and the public will stop buying useless startups (if that point hasn't already passed).

> things are bad in silicon valley


> there are a lot of desperate startups getting loans to 'simulate' growth by having negative profit margins (since they can't get real growth otherwise)

You're conflating a few things, here. The Amazon strategy of reinvestment works as long as it's genuine growth and not overdone. Uber's more of an open question: they've increased demand through subsidies, the question is what will demand look like when prices reflect the true cost. Postmates is in the same situation as Uber, but much worse because they offer a service people can trivially do themselves.

> All these debts end up the hands of corporate shareholders.

Not usually. And startups don't usually use debt (except in ~2015/2016), they sell equity. VC funds tend to have more pensions and sovereign wealth.

There's always a PG article -- http://www.paulgraham.com/submarine.html [April 2005]

> for his Bernese mountain dog, Ruby, who is named after the coding language Ruby on Rails


I remember Pedro giving talks on Rubyconf in Brazil with only 15 years old, this kid grew with the help of Ruby community, so it makes sense he gives so much importance to it

I think the facepalm was meant to be "OMG this finance journalist doesn't know the difference between a framework and a language, what an idiot".

(Fwiw, the difference between the two is super nuanced and irrelevant to most journalism about tech. They're both "tools to make software". If I were a journalist, I'd also call Rails a programming language, because that's a term much of the general public understands is "a thing people use to build software with")

(so who knows, maybe the author actually knows, but decided to write for the NYT audience and not pedants on HN)

> I think the facepalm was meant to be

Reading it again, I'm sure you're right, but I totally missed that. Actually the lines between language and library and framework are not so easy to pin down. Maybe the finance journalists are on to something.

Hope it doesn't get hit by a train

It’s nothing more than the same Ponzi scheme we saw in 1999. If venture funding dries up, for their customers, they are also toast. I hate that the modern idea of a “successful” company is how much money they can raise and at what evaluation.

It's very different. Look at how the public market is treating Uber. Its pre-IPO valuation was rosy, but not out-of-line, and its price has been pretty consistent since the first few weeks. It's not like every tech IPO is up 200%-500% on the first day, then keeps climbing by 1% per day.

> I hate that the modern idea of a “successful” company is how much money they can raise and at what evaluation.

So the value of the company? I agree that it doesn't capture value to society, but it's better than "community-adjusted EBITDA."

It’s always “different this time”. Uber still hasn’t proven it has a sustainable business model. It’s marginal profit is still negative with no signs of bring cash flow positive. During the dot com boom the first time, you also had companies going public with no profitability and crazy valuations.

During a shovel rush, sell shovel making machines.

The scariest thing about this article is it didn't contain the word "bubble"

I think this is a good example of a "Submarine"[0] article

  [0] http://www.paulgraham.com/submarine.html

For those that are familiar with the service are they really mostly/only focused on companies that have outside investment?

From glancing at their literature it seemed like their gig was lending money to companies that actually already had the money in the bank, like providing company spending cards to a startup with a few million in VC money sitting somewhere.

Is that correct or do they lend to companies with more traditional economics, like a bootstrapped company with a million or two in annual revenue but without major cash reserves or investment?

They told me they basically only serve companies with VC investment. We were declined despite meeting the stated balance requirements because we were self-funded.

That seems like a pretty lame business model. Like why bother?

Though I guess that question answers itself, it seems logical to the predictably solipsistic VC community, who then throw money at it.

Less risky, because a VC does due diligence.

Startups serving other startups sounds exactly like the dot com boom/bust. When the bust started, it spread across the entire Valley because exactly this.

I.e., when people are mining for gold, sell pick axes!

I don’t understand the economics of Brex. I used to work for a large, analytics-savvy credit card company, and people would freak out if the percentage of customers going bad (not paying their debt) exceeded something like 3-5%. Given that VC-funded startups fail at a rate of 11/12, isn’t Brex effectively throwing money down a massive black hole, assuming they’re extending credit? And this is at the top of credit cycle, probably within a few years of a recession, where a higher than normal percentage of good debt will go bad too.

Bad times? Only lazy bums like me and poor H1s are still sitting at our old BigCo (life work balance is amazing, plus there are too few of us left who is doing the stuff so we are treated pretty soft and accurately :) . Anybody who left during the last year and a half got minimum 300 (junior and/or really incapable engineers) with the normal engineers getting 400-500K and that isn't in a red hot AI and the likes. The money is just sloshing around. Granted everything comes to an end, and we're definitely due for the one, yet it definitely didn't happen yet.

Who's paying 400-500K for normal engineers? Even FAANGs don't pay that much for for Senior Software Engineers.

Old BigCo is good enough for the good times and even better for the bad times hopefully eh?

What is this corp?

The Brex interview handed out real customer bank balance and transaction history and suggested that that data was all they they used to build their underwriting model.

How is it different than say, stripe issuing?


Brex is identical to what Stripe is offering, but Brex's cards offer credit. From what I can see and correct me if I'm wrong, Stripe doesn't offer credit lines


I’ve used it for my bootstrapped company, works great.

I haven't touched base with these lenders in a while but I thought p2p lenders like fundingcircle only offer term loans?...

Do they offer credit lines and revolvers now too? Curious how that works out in the p2p space.

Is it official? The Startup Industrial Complex?

During a gold rush the best way to make money is to sell shovels.

Or invest a small amount in a number of small shovel-part, shovel-services, and shovel-as-a-service outfits all shuffling money between each other looking like they have actual traction in hopes of fooling other investors into buying in

That's yesterday's business model. The future is shovelless. You specify where to dig, and a team of experts will dig for you; you pay only for the dirt removed.

> During a gold rush the best way to make money is to sell shovels.

That's never actually true, it's just a nice saying. The most money is always made in owning a super structure business - in tech, a platform - that has very wide appeal, rather than concerning yourself with trying to compete to sell shovels to a temporary gold rush.

Selling shovels is an opportunistic business, only good for a short-term run. The real money is always made by focusing instead on larger, longer term opportunities that are sustainable.

Some things persistently ignored about the shovel selling business during gold rushes: most of the shovel sellers lose their hats in the bust, because they don't see it coming and they carry inventory and speculate on demand constantly. The history of gold rushes is that the shovel sellers frequently miscalculate the duration of the rushes. They get hammered when it ends, most of them go bankrupt (see: every oil boom in US history).

It's better to be Exxon or Chevron and own large reserves in the ground, not the primary company selling little pieces of gear to Exxon. It's better to be the majors in the Permian (gold rush) making money long-term off the reserves, not the little shovel sellers that constantly boom and bust with each big blip in the oil market.

It was far better to own refining and pipelines - chokepoint super structures - during the oil boom in Standard Oil's time, than to be a shovel seller to the oil industry or oil wildcatters.

It's better to be Rio Tinto, Newmont or BHP and own the mines & supply than to be selling mining equipment. BHP is a $137b company, Rio Tinto is a $91b company. The shovel sellers are comically tiny by comparison, borderline irrelevant in size versus these juggernauts.

For the last century it has been better to be De Beers than to be selling diamond industry equipment.

During the car boom in Henry Ford's time, it was better to be one of the surviving majors than to be a shovel seller. This fundamental is always true.

During the mobile gold rush it's better to be Apple and Google than ARM, Foxconn or Qualcomm (Samsung for their part covers all the bases). The super structures - Apple & Google platforms in this case - usually by far make the most money, the shovel sellers are typically much smaller and less profitable.

Your examples are ALL survivor bias. Picking winners and losers in hindsight is trivial. Sure it's better to be one of the big survivors than the shovel seller, but it's better to sell shovels than to be the bankrupt losers of the industry - the companies absent from all your examples. Shovel sellers know it's a transient opportunity and need to act accordingly.

When your game is to pick survivors, of course all your examples are going to be survivors.

In a gold rush, the objective isn't to make a ton of money. It's too keep enough of it after the bust so that you don't need to sell mine or sell shovels. I.e. to survive.

You make the mistake that because a company or a person is successful that their advice or actions are the cause. Often this is not true. Often very successful people think they are special - but they rarely are (unless your definition of special is fortunate).

Okay, we need to make the distinction of gold-rush vs ordinary economic atmosphere. A gold rush is a very specific sort of environment in which a great number of people descend on a particular economic activity in order to get rich.

In an ordinary economic atmosphere, one can choose many different ways to get ahead. In a gold rush, everything revolves around this one activity. Either you're actually doing the activity, that is, mining the gold, or you're facilitating others doing the activity, i.e. selling shovels.

What started this discussion was a third category of gold rush activity, that of owning the underlying platform / land. This was accused to be survivor's bias. I'm saying that unless you can come up with a fourth category of even more successful economic activity that's still relevant to the discussion, survivor's bias doesn't apply, and we can accept the model of causation as stated on the tin.

IBM is over 100 years old. I don't think most people in tech understand how profound that is, between the obvious changes in leadership but more astonishingly business-sinking technology shifts, industry tanking economic phenomenon, etc.

There will not be another IBM coming out of San Francisco culture.

I only skimmed the article so I couldn't tell if it was loathsome or self-paraody of what is going on in SF right now. But I hope they and readers realize it is simply ouroboros.

I don't know. Apple has something like 250 billion in their war chest. They could stop selling stuff for a hundred years and still pay 20000 people $100k a year.

Sure but neither a startup nor raised in the current SF startup culture. Apple definitely has potential to transcend tech and leadership although we need to see 1-2 more changes in leadership to know for sure.

>For the last century it has been better to be De Beers than to be selling diamond industry equipment.

Some part of these diamonds go to India for processing which has minted many millionaires and atleast one billionaire I know : https://en.m.wikipedia.org/wiki/Gautam_Adani

Bitmain selling the mining equipment but also mainly mining Bitcoin.

Your claims are lacking sources and evidences.

If you own the reserve, everything is fine as long as your reserve is not empty or has still value to some people.

If you are an hardware supplier, there can be a way to repurpose parts of the hardware to customers from other domains. Building oil extractors but oil is not selling anymore ? Repurpose and sell water extractors.

I also do not have sources nor evidences.

Tell that to Sun Microsystems

Selling expensive heavy iron shovels when cheap aluminum ones worked better didn't help.

Sun was selling steam shovels.

How do they monitor the bank account and balances?

In a gold rush the miners go broke but the hardware store makes boatloads of cash.

In a tech boom the startups go broke but the property owners make boatloads in rent.

Who are property owner if not executives at big companies and also people who are contributor of VC funds?

"sell shovels during a gold rush"

if you like brevity

I've heard it as "if everyone's making pizza, start making pizza ovens".

I offer small services other startups too https://launchpropeller.com/#/

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