Stripe is not like other private companies. It is worth somewhere in the tens of billions. Its destiny is to take its place among the technology giants on the public markets.
A company like Stripe — big, fast-growing, cash hungry, and privately owned — couldn’t have happened twenty years ago. It is a product of the quirky financial markets of the 2010s.
The unusual thing about the 2010 and early 2020s was that investment capital was abundant. A large private company could, if it chose, raise large amounts of capital on good terms from venture capital and private equity firms. It didn’t need to go to the public markets for funding.
That’s why giants like Stripe, Revolut and Bytedance have been able to delay their IPOs for many years. Last year, Stripe was worth 200 times more than Amazon’s market cap when it IPO’d in 1997.
When a loss-making private company starts to run out of money, it has a funding round. A funding round is where the company sells shares in itself, usually to a venture capital firm. The more promising the company, the more venture capital firms will want to fund it, and the better the terms at which it will be able to raise money. Stripe has now had 21 funding rounds, according to Crunchbase, a data provider.
It’s seen as important that a private company never raises money on worse terms than it had previously. This is known as a down round. Down rounds are bad because they force the company’s VC backers to write down the value of their investment. This, in turn, forces them to go to their investors, and explain that the VC fund is worth less than before. For all these reasons, VCs would rather not have to acknowledge things might be going badly at companies they’re backing. Ignorance is bliss.
Stripe was last valued in a funding round in March of 2021. It was valued at $95 billion.
Since then, Fintech has been on a journey. The last, exuberant stage of the boom happened in late 2021. Valuations got ever madder. Then, in 2022, everything changed. Rates went up and vibes shifted.
The following chart shows the trading in Stripe shares on secondary markets as gathered by ApeVue, a data provider. That is, shares bought and sold over the counter by hedge funds and the likes. As you can see Stripe shares dropped by 40 per cent between January 2022 and late June. Rosanna wrote about this in The Currency in June.
Secondary markets are less liquid and much less regulated than public markets. So they don't say definitively what the company is worth. But they're a straw in the wind. Fidelity, the giant US fund manager, wrote down the value of its stake in Stripe by 13 per cent. At a $95 billion valuation, and assuming Fidelity marks its holdings to market, that would be a drop of $12 billion.
Funding and hurdles
It's sometimes said that none of this really matters. It's said that the value of Stripe's shares on the secondary market, or on the books of a VC firm, is irrelevant to the thing that really matters, which is Stripe's operations.
This is wrong, I think. Stripe's share price and Stripe's operations are not separate. Stripe's operations are funded by investors, whose feelings about the company are reflected in the share price.
Stripe is an unusually ambitious company. It's trying to build no less than the infrastructure for all of online commerce, from flows of payments to stocks of capital. The Collisons like to say they think in 10-30 year terms.
Stripe is trying to build everything a company could need to manage payments, and it's trying to do it for two different types of customers at once. It's trying to build a system that works for a five-person start-up as well as for McDonald's. It's a big challenge.
Building all this stuff is expensive. Stripe is constantly shipping new features, new products, new integrations. Each of these requires up-front investment. The idea is that over time, Stripe's suite of products will be so broad and useful that companies basically have no choice but to use it.
To get there, Stripe has a long list of jobs. Compared to its competitors, it's active in fewer countries. And it's weaker at point of sales terminals – the devices used at coffee shop cash registers. Many products and services are not yet built. How does Stripe choose which jobs to do, and in what order? How does it decide how aggressively it should invest and grow?
Stripe uses two numbers. One is the expected return from the project in question. The other is the hurdle rate. If the expected return is higher than the hurdle rate, according to the corporate finance textbooks, the project should go ahead.
The hurdle rate is the amount Stripe must pay investors to give it money. They might be equity or debt investors, but Stripe probably is entirely funded by equity.
Equity investors need a return that compensates them for the risk of investing in Stripe, over and above investing in something safe like a government bond. They care about the returns on government bonds, the risks of the fintech industry, and the risk of investing in Stripe in particular.
That last one — the risk of something going wrong with Stripe in particular — drags on Stripe more heavily than publicly traded companies. An investor in a public company owns their shares as part of a broad portfolio of other shares. So they're diversified. If things go worse than expected at company A, they'll go better than expected at company B, and it'll be a wash.
This year, the returns on safe investments have gone up. And the perceived risks of investing in fintechs have gone up too. One consequence is that Stripe (and the other fintechs') shares are worth less in the secondary markets. The following chart shows Stripe's shares alongside those of two other private fintech companies, Klarna and Chime.
The other consequence of higher perceived risk is that Stripe now has a higher hurdle rate. Projects whose returns had been high enough to justify the cost of capital will now go undone. Stripe will invest less.
Then there's the effect of a falling share price on the employees. Existing employees will mostly have shares. They'll have been waiting for an IPO, their chance to cash out. Now the IPO looks less likely, and the shares are worth a fair bit less than they thought. For prospective employees, Stripe's offer has gotten less attractive.
Compare Stripe to Adyen. Adyen is Stripe's Dutch twin. It was formed three years before Stripe in Amsterdam. Like Stripe, it is an e-commerce company that helps merchants accept payments online. Unlike Stripe, in 2018, it listed on the stock market.
Adyen and Stripe's valuations have tracked one another. When Stripe reached its peak private market valuation of $95 billion in 2021, Adyen was valued at $70bn. By August of that year Adyen was valued at $90 billion.
The two companies are close competitors. Stripe has an advantage in start-ups and internet-native businesses; Adyen is stronger at bricks and mortar point of sale payments. Stripe is growing faster than Adyen.
At Stripe's last funding round in March of 2021, its revenue was growing nearly twice as fast as Adyen's. But it was, nonetheless, valued at a lower multiple of revenue – 12.8 to Adyen's 15.9 – according to The Generalist newsletter.
Being faster-growing, you'd expect Stripe to be valued more highly than Adyen. But Adyen is publicly traded and, as we've seen, that makes the shares less risky. It helps give Adyen a lower cost of capital.
What this means is that Adyen has latitude to push harder than Stripe. It can fund projects more cheaply. It can justify hiring more engineers, building more new products, and acquiring more competitors.
Being on the stock market is an administrative hassle, and can be a distraction. But it definitely has its benefits. And it's something Stripe could have done at any point over the last five years.