How we chose our third vertical - Brex for Life Sciences
Henrique here from Brex. We just launched a corporate card specially tailored for life sciences companies, and everytime we launch something new we get a lot of questions about how we chose to prioritize this feature or product, so I thought it’d be interesting to share here with the community. While I’ve previously posted about launching our initial tech startup card, the decision to launch Life Sciences was much different in that we already had two existing products in the market with their own long list of improvements we wanted to make to them.
The thesis behind Brex is that each business is unique and therefore we should create tailored financial products to meet their specific circumstances (vs. legacy bank B2B financial approach of one or two sizes fit all - see Chase Ink being offered to every type of business). With that said, there are commonalities between industries, so we carved out different niches in the business landscape and help solve their specific problems. We started with tech startups.
Why tech startups? This was the problem and the pain we experienced first hand. We, as a tech startup, couldn’t get a corporate card. Our goal was to accelerate entrepreneurs and scaling businesses, and we were also fortunate that this also created a great business opportunity.
Next, we wanted to expand our product to serve a broader base and test our thesis that financial products tailored for specific industries could have value outside of the “tech bubble.” If we were to fulfill our vision of creating tailored financial products for different business verticals, we’d have to eventually offer products with different payment terms and underwriting models. Given how more complex systems are harder to change/hard to predict and that we believe in building for the long term, we wanted to force ourselves to build out that muscle sooner while our systems/processes were still in their infancy and sought out a vertical that had almost a polar opposite model vs. tech startups, but one that had equally acute pain points we could solve. We settled on ecommerce companies, and luckily there’s a lot of them. 6 weeks later our interest-free 60-day float card for ecommerce companies was born, and it’s actually been more successful in its early days than our startup card was.
Rewind to 2 months ago and it was time for us to figure out what our next vertical would be. Our evaluation criteria was slightly different than it was for our ecommerce offering. To select an industry we examined: what was the revenue opportunity (# of companies multiplied by their average card spend), what were their pain points around payments, how well did existing payment/financial solutions solve these, how well did we think our current value props would resonate, and finally, what did we think the main acquisition channels would be.
We explored launching in a variety of industries and decided on life sciences for a couple of reasons. Our first step was to consider revenue opportunity.
We did this in two ways. First, we looked at the status quo financial institutions and asked if there were any other financial institutions that specifically targeted life sciences companies and what their revenue looked like. Interestingly enough, Silicon Valley Bank has a whole life sciences division.
In their 2019 10-K, we’re able to see their life sciences financials and the profitability of their loans. They specifically call out life sciences by saying “We saw continued success in working with private equity/venture capital firms and life science/healthcare clients.”
In addition to SVB, we also noticed that Comerica has a big life sciences practice. While these two large banks validated the notion that there was some revenue opportunity here, we also wanted to confirm this ourselves bottoms-up. Gathering a dataset from Pitchbook, Crunchbase, and the Biopharmaguy, we estimated how many life sciences companies there were and then used their funding amount to infer what we thought their monthly card spend could be.
Interestingly, the revenue opportunity we saw in Life Sciences was clearly nice and meaningful from a long term perspective, but it actually wasn’t the segment with the largest estimated revenue, so life sciences didn’t win because of pure revenue.
Next, we asked what were their main pain points with existing payment solutions. In a span of about a week, we got in touch with biotech CFO’s, VC’s, business school professors, and early stage founders and tried to immerse ourselves as much as possible. It’s amazing how much you can learn in a short amount of time (or perhaps how much you think you learned given there’s likely noise and outliers in conversations like these). We found that early stage life sciences companies faced very similar problems to tech startups, but actually faced them in a more acute way. Life sciences companies seemed to raise more money initially than tech companies and receive almost infinitely less revenue in the short term. This meant that founders typically had to personal guarantee their credit card (or in the case of SVB put down a security deposit) and received low monthly limits to the point where their card was mainly a vessel for incidental travel and meal spend. Neither their grant nor equity funding was even considered in the underwriting process. Furthermore, given the negligible revenue nature of the businesses, maximizing the value out of every purchase, which are usually on lab supplies, was crucial. Finally, because a lot of these companies receive federal grant money, they have to manage their books very strictly.
All of this meant that our existing value props (with some small tweaks) ought to be compelling to a typical life sciences company. We could underwrite them in a similar way to tech startups based on the cash balances in their bank account, which would account for both grants and equity. The presence of grants could also function as a means of protecting against fraud on our side - as fraudulent entities rarely receive grant funding. We could offer them differentiated rewards points on the vendors they care most about (VWR and other lab supplies vs. Twilio and other B2B software) to help them get the most value from their spend. And finally our existing expense management software could help them spend less time on accounting and more time on R&D.
The fit between their pain points and our existing solutions shocked us, but also got us really excited. We then asked ourselves if we’re already doing an 80% job at solving their problems, shouldn’t they already be using Brex? We went through our customers (fortunately we categorized them by industry in the past) and found that we had only ~1% market share of life sciences companies, so not a lot. With this, we saw two potential hypotheses. Either our customer research was wrong and the pain-points above weren’t really pain-points or something about our messaging wasn’t clicking with the life sciences community (which would validate our premise that they think of themselves as unique relative to tech startups). This was definitely a question mark.
Finally, we had to ask ourselves what would the go-to-market (GTM) look like. One of the things we learned with tech startups (and got caught off guard a bit with ecommerce) was how efficient distribution can be when there’s a concentrated pool of entities that your target market trusts. For startups, it’s VC’s and accelerators. Once you get the some of these “trusted nodes” to care about you, you end up with a good proportion of market share and then let word of mouth (and billboards!) take over. Looking at life sciences, we found a similar dynamic with their own network of VC’s, accelerators, lab sharing spaces, and state associations (for example the California Life Sciences Association which we’re now partnered with). Though these relationships are hard to get and take time, they serve to validate our product as solving real problems for our customers. This was definitely a positive as it meant we didn’t have to build a completely new distribution muscle.
To summarize, we found a relatively niche (but large) market that had a clear pain-point that we thought we could efficiently address. We could do so without much extra underwriting/ product/ engineering resources and where we already had experience building a similar GTM. However, there was risk in whether or not the market would find us compelling. We decided this was a worthwhile risk to take and believed if we created something for the life sciences community, customer adoption would follow. One important thing to note about our decision was that we assumed we would eventually go into each of the business verticals we were comparing. Looking back, this definitely impacted the decision making process and I imagine if we weren’t operating under this assumption we would have weighted overall revenue opportunity more.
We spent the next month and a half figuring out what the final product would be and executing on our GTM. It’s interesting to look back at some of the things we thought we knew when we made the decision to enter life sciences versus what we know now.
I hope you found this interesting and informative. Please let me know if you’d like me to expand on anything (feel free to tweet at me). We’re learning a lot about how to manage the extra organizational complexity that layering different products causes, so can share some insights about how we’ve thought about managing this too.