Stripe says it thinks long-term. For a young software company, this is a good vibe to give off. It hints at a gradually compounding — eventually, world-enveloping — business. It’s the kind of thing early-stage investors like to hear.
For example, Michael Siliski is a business lead with Stripe. In an interview with Ken Norton, he said:
“We talk a lot about building multi-decade abstractions. I personally like to think 10 to 30 years to get out of the three- to five-year mode, but generally here people do say ‘multi-decade’ a lot. Patrick and John and the entire leadership team are clear that this is a long-term bet and that we’re still very early. That long time horizon comes from the top, and it’s in the culture.”
Patrick Collison said of the early years, “the biggest thing we did differently…is just being ok to take a really long time to hire people.” In late 2020, Analyst Ben Thompson asked Stripe President John Collison (paywalled) about Stripe’s plans. Collison said:
“We are quite early still in the Stripe buildout and you might roll your eyes and think, ‘Wow you’re 10 years in.’ But genuinely, we are still very early in developing the set of Stripe products beyond the core payments engine, things like Treasury. We’re building a global payments and treasury network, and we are in November of 2020 launching the treasury part of it, and so we are just now filling out all the acronyms in our product suite, and that’s the version one of the product”.
Long-termism has worked for Stripe so far. Over 12 years it has gradually built a huge suite of products. A less ambitious and long-term focused company, one that was focused on incremental improvements, probably wouldn’t have made it this far.
The bigger the future opportunities, the more heavily a company will invest in the present, and the longer investors will be willing to wait for positive cash flow.
Long-termism was a good match for Stripe’s investors too. Stripe has up to now been funded by venture capital-like private investors. VC investors want to see ambition. They want companies with a shot of returning 100x. Stripe’s plan to gradually build the infrastructure for all of e-commerce is the kind of story they like to hear.
Things have changed a lot in the last year: inflation, higher interest rates, a lower stock market, much lower technology stocks, and less private funding going around.
There had always been rumours and questions about when Stripe would IPO. But the change in the economic weather has put more pressure on the company. Two weeks ago, the Wall Street Journal reported Stripe had set a one-year timetable to either go public or allow staff to sell their shares in a private market transaction. Last week, The Information reported it was near to raising a further $3 billion from private markets, which would defer the IPO for another few years.
There are good reasons for Stripe to eventually go public, such as cheaper capital and an exit for its early investors and employees. But I wonder whether Stripe’s culture of long-termism will get in the way.
One problem I could foresee is if Stripe, in its zeal to “[build] a global payments and treasury network”, had made a lot of ambitious investments that hadn’t yet matured. They might not be profitable yet.
The worry is that stock market investors might not share Stripe, and their VC backers’, long-term view. They might discount Stripe’s giant ambitions, and want to see cash flows in the here and now.
When will an IPO be right for Stripe?
Tribes of stock market investor
There’s an idea that stock markets are short-term focused. That investors care only about maximising quarterly earnings, and companies are focused on meeting investors’ expectations each quarter.
A 2004 paper by Brian Bushee had a slant on this. Bushee is a Professor at the University of Pennsylvania’s Wharton School of Business. He argued that not all public capital is the same. There are different types of public investors with different styles.
He divided investors into three categories: transients, which trade a lot; dedicateds, which trade rarely and own large stakes; and indexers, which trade rarely and own small stakes.
Bushee found that transient investors weren’t distributed at random, but were more concentrated in companies “with investor relations activities geared toward forward-looking information and ‘news events’, like management forecasts, that constitute trading opportunities for such investors.”
So in the same way, as there are transient investors, there are transient-seeking companies. The two groups pair off. For example, he found that companies with lower institutional investor ownership were more likely to cut R&D spending to protect earnings.
Another implication is that companies can actively court stock market investors that are long-term oriented. He said, “the most important step that managers could take would be to discourage transient ownership by refusing to manage (that is, smooth) reported earnings.” Refusing to smooth earnings in the short term repels short-term-focused investors.
Another finding is that disclosing lots of information to the market can work against a company. More disclosure is found to help lower a company’s cost of capital, which is good. But conversely, more disclosure creates more news events, which attracts transient investors, which can be bad.
There is no shortage of technology companies that have prospered on the public markets by expressly taking a long-term view. When Google debuted on the public markets in 2004, it told investors,
“In our opinion, outside pressures too often tempt companies to sacrifice long-term opportunities to meet quarterly market expectations… If opportunities arise that might cause us to sacrifice short-term results but are in the best long-term interests of our shareholders, we will take these opportunities…We would request that our shareholders take the long-term view.”
Stripe will eventually have to cross the IPO chasm. It might take another year or two to get its house in order and wait for investments to mature. When it does happen, it should go out of its way to court patient investors, like the ones that have propelled it this far.