Stripe, the fintech company co-founded by Irish brothers Patrick and John Collison, has raised concerns in the industry as it seeks fresh funding at a lower valuation.
The company, which offers payment processing services to merchants like Amazon and Ford, has been valued as high as $95 billion in the past, but is now reportedly seeking a valuation of $50 billion.
This lower valuation has many wondering if there are underlying issues with Stripe’s business model and growth prospects.
Let’s take a closer look at the factors behind this shift.
The Rise of Stripe and its Unique Business Model
Stripe has been making waves in the fintech industry for years, thanks to its innovative business model and rapid growth. The company’s software links merchants with payment networks like Visa and Mastercard, making it easier for businesses to process transactions without having to obtain their own licenses or negotiate deals with different banks. In return, Stripe takes a fee on each transaction.
One of Stripe’s most popular products is called Connect, which splits transactions into different parts and directs payment to various parties involved in the transaction. For example, when a customer orders food through Uber Eats, Stripe ensures that payment is directed to the restaurant, the delivery driver, and to Uber. This software can process increased payment volumes without a proportional increase in costs, which has helped Stripe to maintain solid profit margins.
Stripe’s Popularity and Growth Trajectory
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, 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, which boasts clients, including Meta Platforms and Netflix.
The Downsides of Remaining Private
Stripe’s decision to remain private, however, has led to some downsides. 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.
The Challenges Facing Stripe
The fundraising environment has changed in recent years, which has made it more challenging for Stripe to maintain its high valuation. Growth in e-commerce has cooled with the return to in-person shopping, while the economy has slowed.
This 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 roughly 60% in 2021.
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’s Attempts to Solve the Problem
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.
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.