Fintech darling Stripe has first-world problems

LONDON, March 2 (Reuters Breakingviews) – When a startup raises money at a lower valuation than before, it’s usually a bad sign. When it’s a fintech darling previously valued at $95 billion, the entire industry takes notice. Patrick and John Collison are seeking new funding for the company they co-founded 13 years ago as they explore options to take it public, according to people familiar with the matter. Although 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 technology industry, but many consumers have unknowingly used the services. The Irish brothers built a system that connects merchants such as Amazon.com ( AMZN.O ) and Ford Motor ( FN ) with payment networks run by Visa ( VN ) and Mastercard ( MA.N ), saving companies the hassle of obtaining their own licenses or striking deals with different banks. In return, Stripe charges 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 the payment to the restaurant, the delivery driver and to Uber.

One of Stripe’s advantages is that the software can handle increased payment volumes without a proportional increase in costs. Meanwhile, its revenue is tied to the fees it charges for each transaction, net of payments to Visa and others. Venture capitalist Paul Graham once called Stripe “the next Google.”

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 increased during the pandemic, Stripe went along for the ride. It processed payments worth around $640 billion in 2021, up 60% from the previous year. 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 Collisons to ever higher values. 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 of the following year, investors bought shares in secondary private markets to a value equivalent to $220 billion, according to data from ApeVue.

However, Stripe’s decision to remain private has some downsides. Startups tend to lure employees with restricted stock units (RSUs) that allow workers to cash out if the company goes public or is acquired. Stripe has offered such incentives to employees since 2017, but some of those RSUs are set to expire next year. Changing the terms of the stock awards would allow workers to cash in before an IPO. However, it triggers tax liability for employees and the company. Stripe covers 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 personal shopping, while the economy has slowed. That has 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 about 60% in 2021, according to The Information.

The Collisons are also facing squeezed profit margins. As customers like DoorDash grow larger and handle more payments, they are more likely to seek a discount on the fee that Stripe charges for each transaction. Competition with rivals such as Adyen and Checkout.com is intense. Meanwhile, card networks such as Visa and Mastercard are raising prices, pushing up the costs Stripe imposes on its customers.

Stripe has tried to solve the problem by investing in new products. For example, it has started offering software that allows e-commerce firms like Shopify (SHOP.TO) to offer merchant bank accounts, as well as invoicing and invoicing subscriptions. But these efforts have yet to bear fruit. It has also raised prices for some customers.

The result is that Stripe is back in the red. 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 about a third since Stripe’s last fundraiser — and it’s no surprise the Collisons have lowered their sights.

The company is targeting a valuation of $50 billion, according to The Information, slightly below the current share price in secondary markets. That corresponds to 3.5 times last year’s gross income. By contrast, Adyen trades at $44 billion, is solidly profitable and is expected to grow 30% this year and next, at 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 “downturn” is a headache many other 13-year-old companies would love to have.

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CONTEXT NEWS

Stripe is close to a fundraising that would value the US payments company at around $50 billion, The Information reported on February 28. Stripe is raising $4 billion in new capital from investors including Thrive Capital, Reuters reported on February 24.

Stripe has hired Goldman Sachs and JPMorgan to explore a public listing and help with the latest fundraising.

However, Stripe is unlikely to launch an IPO this year, as the latest fundraising will cover an upcoming tax bill. The company must also find a replacement for Dhivya Suryadevara, the chief financial officer who announced her departure on February 2, according to Reuters.

Editing by Peter Thal Larsen and Streisand Neto

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