LONDON, March 2 (Reuters Breakingviews) – When a startup raises cash at a lower valuation than before, it’s usually a bad sign. When it’s a fintech darling previously valued at $95 billion, the whole industry takes notice. Patrick and John Collison are seeking fresh funds for the company they co-founded 13 years ago while exploring options to take it public, according to people familiar to the matter. Though a solid business model and rapid growth have allowed Stripe to remain private, it has its share of first-world problems.
Stripe’s name is little-known outside the tech industry but many consumers have unwittingly used its services. The Irish brothers built a system that links merchants like Amazon.com (AMZN.O) and Ford Motor (F.N) with payment networks operated by Visa (V.N) and Mastercard (MA.N), saving businesses the trouble of grabbing their own licences or striking deals with different banks. In return, Stripe takes a fee on each transaction. One of the company’s star products is called Connect: when a customer orders food through Uber Eats, Stripe splits the transaction into different parts and directs payment to the restaurant, the delivery driver, and to Uber.
One of Stripe’s advantages is that its software can process increased payment volumes without a proportional increase in costs. Meanwhile its revenue is linked to the fees it charges for every transaction, after deducting payments to Visa and others. Venture capitalist Paul Graham once called Stripe “the next Google”.
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Stripe’s popularity in the technology sector is another strength. About 60% of tech startups that went public in 2021, such as food delivery firm DoorDash(DASH.N), used the company’s services. When demand for e-commerce and online services surged during the pandemic, Stripe went along for the ride. It processed payments worth about $640 billion in 2021, up 60% from the year before. That was more than Amsterdam-listed rival Adyen (ADYEN.AS), which boasts clients including Meta Platforms (META.O) and Netflix (NFLX.O).
This explosive growth propelled the Collisons to ever-higher valuations. In March 2021 a funding round led by Fidelity and Sequoia valued Stripe at $95 billion, nearly three times the $35 billion price tag it set less than three months earlier. In February the following year investors bought shares in secondary private markets at a valuation equivalent to $220 billion, according to data from ApeVue.
Stripe’s decision to remain private has some downsides, though. Startups tend to lure staff with restricted stock units (RSUs) that allow workers to cash out if the company goes public or is taken over. Stripe has offered such incentives to employees since 2017, but some of those RSUs are due to expire next year. Changing the terms of the stock awards will allow workers to cash in before an initial public offering. However, it triggers a tax liability for employees and the company. Stripe is covering the entire bill. That explains why the company is seeking about $4 billion from investors including Thrive Capital, Reuters reported citing sources.
The problem is that the fundraising environment has changed. Growth in e-commerce has cooled with the return to in-person shopping, while the economy has slowed. That’s affected Stripe’s top line. Gross revenue, a measure of income before deducting payments to Mastercard and others, grew about 27% to $14.3 billion in 2022, down from a rate of roughly 60% in 2021, according to The Information.
The Collisons are also facing squeezed profit margins. As customers like DoorDash grow bigger and handle more payments, they are more likely to seek a discount on the fee Stripe charges for each transaction. Competition with rivals like Adyen and Checkout.com is intense. Meanwhile, card networks like Visa and Mastercard are raising prices, pushing up the charges Stripe imposes on its customers.
Stripe has tried to solve the issue by investing in new products. For example, it’s started offering software that allows e-commerce firms like Shopify (SHOP.TO) to offer bank accounts to merchants, as well as billing and invoicing subscriptions. But these efforts haven’t borne fruit yet. It has also raised prices for some customers.
The result is that Stripe is back in the red. Its EBITDA was negative $80 million last year, according to Bloomberg, and the company announced layoffs and cost cuts in November. Combine all these challenges with lower public valuations for tech companies – Adyen shares are down roughly a third since Stripe’s last fundraising – and it’s no surprise that the Collisons have lowered their sights.
The company is aiming for a valuation of $50 billion, according to The Information, slightly below the current price for its stock in secondary markets. That’s equivalent to 3.5 times last year’s gross revenue. By contrast the $44 billion Adyen, which is solidly profitable and is forecast to grow by 30% this year and next, trades on a multiple of 4.6 times.
A lower valuation for Stripe is painful for investors who bought in two years ago, and for employees who dreamed of IPO riches. For the company and its founders, however, this so-called “down round” is a headache many other 13-year-old companies would love to have.
Follow @karenkkwok on Twitter
(The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to add dropped word in paragraph three.)
CONTEXT NEWS
Stripe is close to a fundraising which will value the U.S. payment firm at around $50 billion, The Information reported on Feb. 28. Stripe is raising $4 billion in fresh capital from investors including Thrive Capital, Reuters reported on Feb. 24.
Stripe has hired Goldman Sachs and JPMorgan to explore a public listing and to help with its latest fundraising.
However, Stripe is unlikely to launch an initial public offering this year as the latest fundraising would cover a forthcoming tax bill. The company also needs to find a replacement for Dhivya Suryadevara, its chief financial officer who announced her departure on Feb. 2, according to Reuters.
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