After swallowing the bitter pill of a 30% down round in 2023, things are looking up again for the founders of spend management startup Ramp. The company just raised a $150 million extension to its Series D at a $7.65 billion valuation, a near-total bounce back to its 2022 heyday.
It didn’t hurt that former Founders Fund VC Keith Rabois, who first invested in Ramp’s Series A at a mere $75 million post-money valuation, brought in his new employer Khosla Ventures to co-lead the round.
Both Ramp and its biggest rival Brex built themselves off the back of startup customers. Now as they scale, and in the face of high churn among startups, they’re looking beyond VC-backed companies to target larger corporate customers.
Ramp co-founder Eric Glyman told TechCrunch last week that startups comprise a “minority” of its client base. Brex CFO Ben Gammell told PitchBook that many of the company’s new customers in Q1 were enterprise clients, rather than venture-backed startups.
But some investors warn that the evolution to more competitive segments can quickly get extremely costly: as seen in Uber and Lyft’s pricing wars.
“They just beat each other up and tried to outspend each other on marketing, and that’s a tough proposition,” said Logan Allin, managing partner at specialist fintech VC Fin Capital.
SMB’s growing pains
Fintech companies that serve small- and medium-sized businesses tend to suffer from high churn, costly customer acquisition and hefty marketing budgets. It’s particularly capital-intensive for companies in areas where there are two directly competing rivals.
The market has been especially challenging for enterprises that cater to startups, a segment that has aggressively cut software costs and other spending as they face the gauntlet of VC fundraising and look to extend their runways.
The consequences were clear in Brex’s recent financials: In Q4 2023, it was burning an average of $17 million per month and its revenue growth had slowed substantially, according to reporting by The Information. By the end of January, it had laid off 20% of staff, about 282 people, in an effort to reduce its burn.
Gammell told PitchBook this week that he doesn’t foresee having to make more dramatic cost cuts and that he has “seen churn trending down over the last three to six months.” Brex last raised a $300 million Series D2 in January 2022 led by Greenoaks Capital Partners at a $12.3 billion valuation.
By contrast, Ramp took a widely reported down round but appears more ready to spend its cash: In the last 12 months, its employee count has grown from 495 to 730, according to TechCrunch, and it has purchased two AI-powered startups to expand its procurement and customer support functions.
Brex has been trying to diversify its revenue stream by building out a software subscription model. Its expense management platform, which is similar to those offered by SAP Concur or Expensify, enables Brex to upsell customers to its corporate card and travel management products.
The platform, launched in July 2022, currently comprises only a small proportion of Brex’s revenue. “It’s pretty de minimis—I would say less than 10%,” said Gammell. The vast majority of Brex’s revenue, around 60% to 70%, is still generated from interchange fees, a model that more fintech investors are wary of post-bubble.
The Federal Reserve is also currently weighing a proposal to lower interchange fees on debit cards, which would cut into the revenues of companies like Ramp and Brex even further.
Spending money to make money
A natural reaction to mitigate this risk would be to go after the middle market and publicly listed companies. “[SMB clients] are not the most profitable on an individual level, and it’s part of the natural evolution of these companies as they grow” to target larger customers, according to Cameron Peake, partner at Restive Ventures, a pre-seed and seed-stage VC.
“When I think about the last 12 to 18 months, a lot of our net new customer acquisition has been larger enterprises,” said Gammell, noting that Brex’s client base includes names like DoorDash, Shein and SeatGeek. Brex plans to go after publicly listed companies aggressively: an ambitious strategy that necessitates extensive marketing and more robust customer support.
The shift also pits it against much larger competition. “It’s an extremely difficult move and a much more highly competitive space because you’re running into the traditional ERP players like Oracle and NetSuite which just dominate,” said Allin. Among expense management providers, the leader is SAP Concur, which spends billions on sales and marketing annually.
If Ramp and Brex were to embark on a marketing war to move upmarket, it would run counter to the fintech world’s current approach of extreme caution. The industry was badly burned by the venture downturn in 2022 and 2023, though there are promising signs that the storm clouds are parting. Enterprise fintech VC deal value jumped 19.6% quarter-over-quarter in Q4 2023, according to PitchBook data.
Both Ramp and Brex dealt with the fundraising pullback in different ways, and as the market creeps back up for fintech, how these companies that were pumped full of venture capital three years ago fare will be watched very closely.
Featured image courtesy of Ramp
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