Well, it happened.
Over the weekend, Stripe announced the closure of its widely reported new round of capital. The $600 million round values the payments and banking software company at $95 billion, near the top end of the valuation range at which the company was said to be raising funds back in November 2020.
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Sadly, despite being bigger than most public companies in revenue terms, and now in possession of a valuation on a par with some of the world’s leading public companies, Stripe is still being coy with growth metrics. As part of its announcement, Stripe provided a few new notes on its recent scale that we’ll unpack, but we’re more left to read the entrails of a modest metrics sacrifice at this stage of the company’s growth.
But what is The Exchange for, except to dig into the numbers, no matter how vague?
Today, let’s examine the company’s newly shared growth results, compare them to what we knew previously, and see if we can suss out why Stripe could be worth $95 billion today, and presumably more when it does float.
New money, same questions
Stripe’s new $600 million investment values the company at $95 billion. As a reference point, Roblox is worth around $38 billion and closed 2020 out on a run rate of around $1.24 billion.
Gaming companies and payments companies are very different, but Roblox’s number gives you a taste of what a company needs to generate in revenue terms in one part of the public markets.
Stripe is likely far larger than Roblox in revenue, but weaker in terms of gross margins. Keep that lens in mind as we remind ourselves of Stripe’s known numbers, ending with what we learned from its latest disclosures:
- 2015: Around $20 billion payment volume (source).
- 2017: Around $50 billion payment volume (source).
- 2019: “[H]undreds of billions of dollars of transactions a year,” per the New York Times.
And, from its funding announcement from the weekend:
Stripe now counts more than 50 category leaders — companies processing each more than $1 billion annually — as customers. Enterprise revenue is now both Stripe’s largest and its fastest growing segment, more than doubling year over year.
This is not a big step up from what Stripe says on its website today: Its enterprise product has “dozens of industry leaders processing billions in annual payment volume.” Regardless, we have learned that its largest revenue segment is also its fastest-growing, which is great news for the company and its investors.
Some startups with new, quickly expanding segments of their business highlight those as their future growth engine. By noting that its largest segment is also the slice of its total business that is expanding most rapidly is a flex.
We can tell from Stripe’s enterprise page that customers of that product — large-volume entities, really — can get volume discounts. So, we can’t infer that enterprise transaction volume is the most efficient at the company to convert into net revenue. At the same time, I’d hazard that larger customers probably consume more Stripe products per capita than the average from its aggregate user base. So, perhaps its enterprise businesses blended gross margins are attractive.
Returning to some prior work when Stripe was said to be approaching the $100 billion valuation mark, this column did the following math:
[Building from the 2019-era “hundreds of billions” processed data point,] let’s say Stripe’s processing volume was $200 billion [in 2019], and $400 billion [in 2020], thinking of the number as an annualized metric. Stripe charges 2.9% plus $0.30 for a transaction, so let’s call it 3% for the sake of simplicity and being conservative. That math shakes out to a run rate of $12 billion.
You can scale those numbers up and down, and we’d need to add on software revenues to get a full estimate. But mix in the fact that Stripe’s enterprise revenues are its biggest chunk and growing at over 100%, and it all looks rather valuable.
The growth rate is the thing I am stuck on. If a business segment is 50% of your business and it is growing at 100% per year, that’s 50% growth baked into your aggregate results. If the rest of your business grew at 75%, then you’re posting 87.5% growth. If that first segment is growing at 125% and the rest at 75%, it comes to precisely 100% growth. Fill in your own estimates for Stripe’s results.
And then adjust for gross margins. I presume that Stripe’s software businesses — Sigma, Treasury, its card-issuing business and the like — are both more lucrative in gross-margin terms than its payments revenues and a far smaller revenue chunk than payments. So, perhaps Stripe is simply not going public so it can gin its software incomes as a percentage of its total revenue to boost its gross margins and derive a stronger aggregate revenue multiple? But that’s shit; the company is hotter than nuked lava and thus shouldn’t have that worry about pesky margin progression in today’s market with its implied top-line growth. Right?
A meditation on value capture
In closing, let’s talk about the value-capture gap that we see at times between public and private markets:
- Even if you are a Stripe bull, the company’s new pricing — a multiple of its $36 billion valuation set less than a year ago — is impressive. The company continues to raise capital with apparent business-driven negotiating leverage, which means that it’s making, or allowing investors to pay up for, growth up to the point of its IPO.
- A different path to value creation and public offering is Roblox’s own. It killed off its IPO, raised at a $29.5 billion private valuation and then wound up handing its final investors a quick re-price of their stake when the public markets valued the company far higher.
- And a third is Coinbase, which was worth $8 billion back in Q4 2018 and could now be worth 9x to 12x that much.
In Stripe’s case, the company’s quick growth and rapid-fire fundraising mean it is making investors pay up to keep their ownership flat, implying that while those investors are capturing a huge amount of value pre-IPO, they are at least forced to cough up for the right.
Roblox tried to avoid the IPO pricing game, only to accidentally underprice itself anyway, giving private investors huge boons both in early 2020 (when it was valued by VCs at around $4 billion) and early 2021 (when it was valued at $29.5 billion), because the company was actually worth $38 billion in Q1 2021.
And Coinbase’s value capture appears to be not only private — it is also going public rather late, for its scale — but hugely tilted toward investors who invested earlier in its growth curve. The company was more able than most unicorns to self-fund from that point, which meant that investor dilution was more modest than you might expect.
In each case, we see value capture heavily tilted toward the private markets, though to different investor cohorts. Something to chew on, because the public investor only really gets invited at the end for a final markup. Which sucks.
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