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Earlier this week, news broke that payments company Stripe raised an $80 million Series C from Khosla Ventures, Sequoia Capital, and Founders Fund (Disclosure: Founders Fund is an investor in PandoDaily). This brings the startup’s total funding to $120 million, and its valuation to $1.75 billion, more than double what competitor Braintree sold to PayPal for in September. It’s big news, and the media coverage trumpeted the “lofty” funding as proof of Stripe’s “explosion of growth.”

Across the board, these stories failed to note the hurdles that Stripe will face even with a trove of investor cash. Landing the bigger merchants is first on that list. Matching the scale, resources, and brand recognition of its direct competitors is another.

Earlier coverage also didn’t answer the more compelling questions: Where does Stripe stand in the payments hierarchy now? And how, if at all, does this funding round change things? And how the hell is it worth $1.75 billion today?

After two days of trying to get to the truth of Stripe’s underlying metrics, we have to disagree with the view that this valuation is a reflection of Stripe’s existing business. This is more like a well-funded Hail Mary against a newly strengthened PayPal – only one structured so that there’s little downside for investors.

Before we get into the details, let’s step back for a moment.

Stripe has long been a darling in the tech industry. One so iconic, Paul Graham could read the story to new Y Combinator (YC) entrants before bedtime. Young founders in their early 20s take on the online payments sector with nothing more than a YC pedigree to their name. They tackled this complicated and competitive market with something simple and pure: a belief that better software can solve any problem. They’ve attracted the backing of marquee investors like Sequoia and several of PayPal’s founders. Founders who were chagrined that their original baby had done little to keep pushing payment innovation forward, and so funded a potential successor that they hoped could fulfill their 15-year-old dreams.

With a narrative like that, investors like Peter Thiel and Elon Musk, the reality that PayPal had basically stopped innovating, and the belief that Stripe had a payments option that by most accounts is, indeed, easier to implement than its peers, there was good reason to hope that PayPal’s stranglehold over digital payments could finally be broken and that Stripe had as much of a fighting change as anyone.

But that was before 2011: When PayPal realized it was hated and named a new president in David Marcus who dramatically changed the culture and two years late bought Stripe’s bigger rival, Braintree. Uh oh.

The one part of that narrative that has remained is that developers – particularly the ones just starting companies – adore Stripe. The problem is that developers don’t rule the world, and market perception in the Valley ecochamber doesn’t always jive with business reality.

***

A few years ago, the payments space was ripe for disruption. PayPal had become the big, ugly monster, screwing up transactions left and right with a mix of poor technology and bad customer service. Merchant accounts were frozen haphazardly, and the company often took its sweet time unfreezing them. PayPal was so widely loathed among developers, founders, and customers that even with its advantages of scale, ubiquity, and familiarity, companies were eager to try something else.

Enter Braintree, which launched in 2007, and Stripe which launched in 2011. They both recognized the same problem but tackled it from different directions.

Braintree offered so-called “white glove” customer service and aggressively went after mobile payments. It snapped up Uber, HotelTonight, Airbnb, making a huge bet that mobile commerce was going to move faster than most people thought. In contrast, Stripe was founded under the premise of making a frictionless payments platform that “didn’t suck” to implement, expanding the online payments market as a result. The co-founders — brothers John and Patrick Collison — built a technology that was incredibly easy to use and beloved by early stage founders.

Since its launch, Stripe has quickly become a Silicon Valley favorite… at least in cocktail party conversation. Its payments system allows small startups that are short on time, money, and human resources to quickly implement online and mobile payments for their customers. Despite the fact that Braintree landed many of the hottest companies of this era early on, Stripe claimed its fair share in the new decade – Lyft, Hipmunk, Shopify, and Rackspace, among others.

It’s hard to know what to make of Stripe’s customer list. Lyft and perhaps Shopify are the only surging, breakout companies in the bunch. Others like the EFF, MOMA, or FastCompany aren’t even e-commerce companies. And although Lyft in particular is a boon to Stripe, Braintree still has the bigger ridesharing company in Uber.

As the customer lists reaffirms, Braintree appears bigger than Stripe by every visible metric, but how much bigger isn’t clear. Stripe is the only payments company that refuses to disclose the volume of payments it processes. PayPal does it; Square does it; Braintree does it — even smaller players do it. So in the void of facts, a lot of outside observers guessed the company must have a big base and was growing rapidly to secure a valuation double Braintree’s sale price.

They guessed wrong.

PandoDaily has heard from multiple sources that six months ago when Stripe started to raise this round, and just before Braintree was purchased for some $800 million on payment volume of $12 billion annually, Stripe was doing a paltry $1.5 billion in annualized transaction volume. What’s more, we were told the gap was widening with Braintree posting a higher rate of growth, compounding its already larger customer base.

People close to Stripe have vehemently denied this transaction volume figure, stipulating that it’s “outdated.” Indeed, our sources all heard that number when Stripe first started raising money six months ago. So let’s give Stripe the benefit of the doubt and imagine that they doubled their payment volume in that time. That’s still just $3 billion – a quarter of what Braintree processed on the year. How does that warrant double the valuation?

Let’s put it in further perspective. PayPal grew 30 percent last year, despite little innovation and a huge base of $180 billion in payments processed in 2013. Under Stripe-like math, PayPal should be valued at $200 billion. That’s roughly three times eBay’s total market cap, which includes PayPal.

We regularly argue that private company valuations are different than more mature public companies. So let’s look at Square – a company that most people in the industry felt received nosebleed valuations off the strength of the team and the celebrity CEO power of Jack Dorsey.

In 2012, Square raised at a $3.25 billion valuation while it was processing $8 billion in payments per year. That’s $0.40 in value per $1 of volume. Indeed, that’s rich compared to the deal PayPal got for Braintree — some $0.07 for every $1 of payments Braintree processed annually. But even Square seems a bargain next to Stripe, which commanded $1.17 per dollar of volume if our sources are to be believed and $0.60 under our generous assumption of 100 percent growth over the second half of the year.

On a revenue basis, Stripe’s new valuation goes from lofty to insane. The highest estimate we’ve heard for annual revenues is in the $40 million range for 2013. That would put this price at a 44-times multiple. That’s high by almost any account, particularly for a company that appears to be a no. 2 in its category. Braintree doesn’t report revenue, but if it were in the range of $40 million, it would have sold for just 20-times and given the delta in payment volume, it’s likely considerably higher. At the risk of comparing apples to oranges, PayPal’s reported $6.6 billion of 2013 revenue would make the industry giant worth a staggering $289 billion by the same math. Again, all of eBay, including PayPal, is valued at just $71 billion by Wall Street.

Stripe wouldn’t comment on the record for this story, but we did speak to Khosla Ventures’ Keith Rabois – the only new investor in the company’s latest round. Rabois wouldn’t comment on the numbers specifically, but said, “I would expect 2014 to be significantly greater than those numbers in every dimension.” Jesus Christ, at nearly a $2 billion valuation, we should hope so if our sources are even in the ballpark.

Clearly, sky-high valuations for unproven companies aren’t unheard of in the Valley. But there is a difference in valuing a Snapchat, an Instagram, or even a Spotify at huge premium with no basis on its financial performance. Those are huge potentially ad-backed consumer phenomenons that a company like Facebook could plug into its business and immediately monetize, as Google did with YouTube. Stripe is not. Stripe is a transaction-based business with a clear model — and one not growing particularly rapidly if it took two years to get to just $1.5 billion in annual payments volume our sources report as of six months ago.

Put another way: This is a crazy valuation even in a land where Instagram is worth $1 billion in less than two years and Snapchat turns down $3 billion in even less time.

***

Historically, there has never been room for more than one player in the digital payments space. Market share and customer acquisition matter more in this category than almost any other. E-commerce companies — particularly big ones — want a payments option they can trust will be around for a long time. Double that for stodgy offline retailers moving online and into mobile. The reason PayPal held its ground for so long despite its poor reputation is because it had the most consumer account data and the most name recognition.

This is a big reason you could argue the PayPal deal strengthened Braintree’s leading position — rather than weakening it as sometimes happens when companies sell.

A key element of the PayPal-Braintree acquisition was the decision to have the two companies operate independently, only sharing loosely-described “resources” and perhaps a mutual halo-effect. That gave Braintree, which was already leading in payments 2.0, a huge boost in terms of credibility without weighing it down in bureaucracy and institutional memory of the older PayPal. PayPal, on the other hand, gained access to the type of next-gen payments platform and innovative culture that it had failed to build over the preceding decade.

Furthermore, the deal gave Braintree the backing of the eBay brand, a mark of credibility for big enterprises considering which online or mobile payments provider to adopt. People liked Braintree before, a feeling that will likely only grow with the addition of thousands more engineers and access to PayPal’s relationships in 190 countries. That’s a lot more meaningful than the prospect of betting on a startup that has won the hearts and minds of early stage companies in Silicon Valley.

Old world companies like LL Bean and Sears don’t care what developers at the Creamery are saying about cool payments platforms. Software may be eating the world, but software programmers aren’t yet dictating all business decisions.

As companies grow bigger, choosing a payments infrastructure becomes more about things like reliability, fraud prevention, and the belief that said company will be around tomorrow, the next day, and five years from now. Implementation comes second, and to be honest, it’s quickly becoming commoditized. And although developers have huge sway in executive decisions at smaller startups, that’s not necessarily the case as companies grow bigger.

Indeed, the three biggest YC companies — Airbnb, Dropbox, and Heroku — all use Braintree. That’s not an encouraging datapoint.

Let’s look at an example that’s more telling than these. Even conceding the point that Stripe boosters love to make – that Braintree’s largest customers chose the platform because Stripe didn’t yet exist when they started – how do they explain Braintree winning another big deal, Dropbox, in the last six months?

If everything Stripe boosters say is true, Dropbox should have been Stripe’s deal to win. Both companies are in the YC family. Dropbox is an incredibly developer-centric company. And six months ago, Stripe was very definitely in the market. It was evaluated side-by-side with Braintree for the deal, we’re told.

A source close to the deal tells us that Stripe was missing a key feature Dropbox needed at the time, one Stripe later added. Perhaps Stripe would have been Dropbox’s pick otherwise, but it missed its opportunity.

Rabois says even the recent high profile losses don’t worry him. He admits Stripe doesn’t have many of the larger startups as clients and doesn’t claim that they are making in-roads to large traditional retailers and e-tailers. He says instead the company is focused on up-and-coming startups, arguing that in the future, a huge fraction of the economy will be driven those that prevail out of this generation.

In fact, Stripe’s sway with startups is the reason Khosla Ventures chose to invest in this frothy round. “It’s literally inconceivable that someone starting a company would choose to use Braintree or PayPal,” Rabois says. “Stripe has become the monopoly for new startups.”

While a great soundbite, there are a few problems with that. The first is the company is essentially admitting that by design some 90 percent of their customers will go out of business. Yes, Stripe has incredible word-of-mouth in Silicon Valley. But continually signing up thousands of new startups until you find the next Lyft is a Herculean marketing and on-boarding task compared to growing along with already proven customers like Dropbox. It’s not an impossible way to build a big company, but it’s certainly the harder way.

Also, Rabois’ utter insistence of a “monopoly” doesn’t ring quite true. Stripe is the darling of many of the smaller startups we speak to — no doubt. But there are few absolutes in the tech industry. As luck would have it, right after we hung up with Rabois, we spoke with a brand new, mobile-first startup that told us it chose Braintree over Stripe. And Braintree has cited several examples of Stripe customers who have switched recently including Boomcase and Tophatter.

Now, to be fair to Stripe, these aren’t exactly Uber and Fab. Still, it underscores that just winning the business once doesn’t mean you have it forever. Of course, such moves can go both ways, and a different source tells us that Stripe has landed several former Braintree customers, including both Lyft and Sidecar.

***

The intention of this discussion isn’t to beat up on Stripe. The company should be applauded for playing to its strengths amid a rapidly changing competitive landscape – one that recently shifted decidedly out of its favor, now that PayPal has vowed to innovate again and bought Stripe’s larger Payments 2.0 rival.

Stripe is hot with developers and smaller startups; it knows that and is doubling down on that eco-chamber buzz. They’ve raised a war chest of cash to make sure they have more runway to grow that payments volume. But with the largest startups going with the competition, their strategy relies heavily on finding several diamonds in the rough that can get huge before running out of cash or momentum. That’s by no means a sure thing.

The Stripe team is undeniably talented, and they have built what many argue is the best technology in this sector. What we hear from developers around Silicon Valley is that Stripe is far and away the simplest solution for payments, one that gives companies more control over certain aspects of the payments process. But unfortunately for Stripe, this may be a situation where the best technology doesn’t necessarily win the day. Particularly in a market like payments, where the network effects are insanely strong.

Making its future even less certain are hints that Stripe’s ultimate product isn’t even built yet. Since the PayPal-Braintree acquisition, Stripe has begun hinting at a bigger vision — one where the company serves as a platform for all payments related activity. Instead of just serving as an API for payments processing, the company hopes to provide technological infrastructure around “mobile, checkout, fraud and more.” Stripe’s articulated vision since its inception was focused entirely around facilitating payments with simplicity and elegance, so this is a markedly different plan.

Stripe’s huge infusion of cash from the new funding round will certainly help it execute against this new vision, but the going will be tough. If it succeeds, however, the rewards would be substantial. It would be able to carve out a space in payments that’s wholly distinct from its powerful PayPal-Braintree competitor. Furthermore, depending on the platform they build, it may provide a value-add big enough to entice larger clients to use choose Stripe for payment processing.

Note the one thing we aren’t disputing from earlier reports is that nosebleed price. So the obvious question is if our sources are right, why on earth did three top investors in the Valley pay it? Especially if Stripe was fundraising for some six months before closing this deal?

Two of the investors had already bet big on the company. Beyond that, we’re told that the terms were incredibly favorable towards the new money coming in: It gets preference over all the earlier dollars, and carries a greater than 2-times liquidation preference. In layman’s terms, that means the first $160 million (at least) that Stripe ever gets in an exit goes straight to those investors.

An exit in that range is highly likely, because Stripe has indeed amassed a great technical team, brand, and even $1.5 billion in processing is nothing to sneeze at. We’d even go so far as to say an exit in the $500 million to $1 billion range is likely. Our argument isn’t that Stripe is worthless. It’s that a $1.75 billion valuation is a high bar given its current state, combined with the competitive landscape. The price has more to do with the terms that weren’t disclosed than it does Stripe’s existing momentum.

And that’s what’s ultimately disappointing about this deal. The investors probably won’t lose money. But even if Stripe grinds it out and manages to sell for double what Braintree did — despite the gulf in size — it’ll still be considered a disappointment because the company has now priced itself in such a way as to demand perfection. If they need more money, they are at risk of a damaging downround. And if they sell for anything like the multiple Braintree got, almost none of the early employees are making any money, despite years of hard work and having built a product that is — from all we hear — incredibly impressive and loved by many developers.

VCs don’t write $80 million checks with the hope of getting back even money. And founders don’t dedicate five to ten years of their life battling incumbents to come up short.

Everything about this financing screams “go big or go home.” We respect the founders for refusing to go home and their existing VCs for sticking with them. The problem is that the payments ecosystem likely can only support one “big” player. PayPal and Braintree seem better positioned than ever to claim that crown.