Stripe Completes Funding Round

A significant event has recently transpired. Stripe, a prominent provider of payment and banking software, has officially announced the completion of its latest funding round over the weekend.

This $600 million investment establishes a company valuation of $95 billion. This figure aligns with the upper range of estimates from November 2020, when Stripe was initially seeking funding.

The Exchange focuses on startups, financial markets, and investment activity. It is published daily on Extra Crunch, with a newsletter available every Saturday.

Growth Metrics Remain Limited

Despite surpassing many publicly traded companies in revenue and achieving a valuation comparable to global leaders, Stripe continues to be reserved regarding the disclosure of detailed growth metrics.

Alongside the funding announcement, Stripe released some updated information concerning its recent expansion. However, a comprehensive understanding of its performance necessitates a careful analysis of the available data.

The Exchange exists to thoroughly investigate financial figures, even when presented in a limited capacity.

Analyzing Stripe’s Recent Performance

Today, we will delve into the growth data recently shared by the company.

We will compare these figures to previously known information and attempt to determine the rationale behind Stripe’s current $95 billion valuation. This analysis will also consider potential future valuation increases when the company eventually becomes publicly traded.

Understanding these factors is crucial to assessing the company’s long-term prospects.

Fresh Capital, Familiar Queries

Stripe has recently secured a $600 million investment, resulting in a company valuation of $95 billion. For context, Roblox, a gaming platform, currently holds a market capitalization of approximately $38 billion and concluded 2020 with an annualized revenue of around $1.24 billion.

While gaming and payment processing businesses operate in distinct sectors, Roblox’s financial performance provides a benchmark for the revenue generation required to attract attention within the public markets.

It is probable that Stripe surpasses Roblox in overall revenue, though potentially exhibits lower gross margins. This perspective is crucial as we revisit Stripe’s publicly available financial data, culminating in insights from its most recent announcements:

• 2015: Transaction volume reached approximately $20 billion (source).
• 2017: Transaction volume climbed to around $50 billion (source).
• 2019: The New York Times reported “[h]undreds of billions of dollars of transactions a year.”

Further details emerged from the weekend’s funding announcement:

This figure doesn’t represent a substantial increase compared to the information currently displayed on Stripe’s website, which states its enterprise product serves “dozens of industry leaders processing billions in annual payment volume.” Importantly, it has been revealed that Stripe’s largest revenue stream is also experiencing its most rapid growth, a positive indicator for both the company and its investors.

Certain startups emphasize rapidly expanding business segments as key drivers of future growth. Highlighting that its largest segment is simultaneously the fastest-growing portion of the business is a significant achievement.

Stripe’s enterprise page indicates that clients utilizing this product – namely, high-volume businesses – are eligible for volume-based discounts. Consequently, it cannot be assumed that enterprise transaction volume translates most efficiently into net revenue. However, it’s reasonable to suggest that larger clients likely utilize a broader range of Stripe products per user compared to the average across its entire user base, potentially leading to attractive blended gross margins.

Recalling previous analyses when Stripe’s valuation approached $100 billion, a calculation was performed:

These figures can be adjusted, and software revenues would need to be incorporated for a comprehensive estimate. However, considering that Stripe’s enterprise revenue constitutes its largest segment and is growing at a rate exceeding 100%, the company appears highly valuable.

The growth rate is a particularly noteworthy factor. If a business segment accounts for 50% of total revenue and expands at 100% annually, this contributes 50% to overall growth. If the remaining business grows at 75%, the aggregate growth rate reaches 87.5%. Conversely, a 125% growth in the initial segment coupled with 75% growth in the rest results in a 100% overall growth rate. Users can substitute their own estimates for Stripe’s performance.

Furthermore, consider the impact of gross margins. It’s likely that Stripe’s software offerings – including Sigma, Treasury, and its card-issuing services – generate higher gross margins than its payment processing revenues, while representing a smaller portion of overall revenue. Could Stripe be delaying an IPO to increase the proportion of software revenue within its total revenue mix, thereby improving gross margins and achieving a more favorable revenue multiple? However, given the company’s current momentum and strong growth trajectory, such concerns seem less relevant in today’s market. Is this assessment accurate?

Reflections on Value Realization

To conclude, let's consider the discrepancy in value capture often observed between private and public investment spheres.

Examples of Value Capture Dynamics

Several recent examples illustrate this phenomenon. Even for those optimistic about Stripe’s future, the company’s recent pricing structure – a multiple of its $36 billion valuation established within the last year – is noteworthy.

Stripe continues to secure funding with considerable negotiating power, suggesting that investors are willing to pay a premium for the company’s growth trajectory leading up to its potential IPO.

Roblox presents a contrasting scenario. The company initially postponed its IPO, having secured a $29.5 billion private valuation. Subsequently, early investors benefited from a rapid re-evaluation of their holdings when public market valuation exceeded this figure.

Coinbase offers a third illustration, having increased in value from $8 billion in Q4 2018 to potentially nine to twelve times that amount currently.

Stripe's Approach to Investor Value

In Stripe’s situation, its swift expansion and frequent fundraising rounds necessitate investors to maintain their ownership percentage by contributing further capital. This implies substantial value accrual for pre-IPO investors, albeit at the cost of continued investment.

Roblox attempted to circumvent the IPO pricing process, but inadvertently undervalued itself. This resulted in significant gains for private investors, both in early 2020 (at a $4 billion valuation) and early 2021 (at $29.5 billion), as the company’s actual worth reached $38 billion by Q1 2021.

Coinbase and Delayed Public Offerings

Coinbase’s value capture appears skewed towards early investors, particularly given its relatively late entry into the public market considering its scale. The company’s ability to largely self-fund its operations minimized investor dilution compared to typical unicorn companies.

Implications for Public Investors

Across these cases, a clear pattern emerges: value capture is disproportionately concentrated within the private markets, benefiting different investor groups. This dynamic presents a challenge, as public investors are typically invited to participate only at the final stage, after a markup has already been applied. This situation is often considered unfavorable.

• Key Takeaway: The timing of investment significantly impacts value capture.
• Observation: Private markets often yield greater returns for early investors.
• Consideration: Public investors may enter the market after substantial value has already been realized.