Sure Stripe has more cash, but does it have a path to exit?

By Michael Carney , written on December 2, 2014

From The News Desk

Following reports this morning by The Financial Times that Stripe has again doubled its valuation, raising $70 million at $3.57 billion, we're forced to ask (again), does Stripe have a path to exit?

The problem with raising capital at nosebleed valuations is that the number of scenarios under which a positive outcome is possible becomes greatly diminished. By raising at $3.5 billion, Stripe, and its existing and new investors -- Thrive Capital led the round with participation from existing investors Sequoia Capital, Founders Fund, Khosla Ventures, and General Catalyst Partners -- are betting that the company can exit at or above $7 billion. That's a steep price and largely eliminates acquisition as an option.

The list of potential acquirers is likely limited to Facebook, Google, Apple, eBay, Amazon, and Alibaba in the tech sector. On the financial side, there are the large banks and credit card companies. But it's hard to see anyone ponying up $7 billion to acquire Stripe, which has yet to prove that it has a sustainable business or attractive margins.

Let’s break them down. eBay is out for obvious reasons -- it already had the payments giant and is spinning it off. It’s unlikely to start again from scratch. Google seems highly unlikely, as it continues to de-emphasize payments and commerce, enamoured instead with robots and cars. Apple is unlikely for a different reason -- it’s already well situated with its own, widely acclaimed consumer-facing offering in Apple Pay, and looks happy to use companies like Stripe, Braintree, and First Data as partners who do the messy backend stuff.

Facebook has had so many fits and stops around payments that it doesn't seem terribly committed to the vertical-- particularly given its laser focus as an ad giant determined to own mobile messaging by any means necessary. Even more logical gift and ecommerce efforts have flagged at Facebook. And if Facebook even wanted to be a payment player and acquire Stripe as the means, it likely would have done so earlier, at a more reasonable valuation.

Amazon is among the most disciplined of the bunch -- not to mention its facing increasing shareholder pressure to turn a profit, making a large acquisition unlikely. That leaves Alibaba subsidiary AliPay the only conceivable suitor, but it's hard to see how Stripe is attractive at anywhere near $7 billion. Especially without a bidding war.

As for an IPO, payments is a brutal space unless you're a giant and Wall Street is known to be unforgiving of even the best tech companies. As it is, there is only one payments processing company worth anything like that valuation, Global Payments, and they do on the order of $300 billion in payments volume, which, according to most reports, is about 30-times that of Stripe (it's one of the only companies in the space that does not publish its growth metrics).

There's a reason why Braintree -- which by all accounts was far larger than Stripe, with more unicorn customers, and further ahead in the critical mobile sector -- happily sold to PayPal for $800 million. And, of course, PayPal is about to be independent, meaning that public investors who do like the space will have a David and Goliath choice to make should Stripe look to go out. And this is a sector where network effects matter greatly.

Also, unlike PayPal (and its subsidiary Venmo), Apple Pay, Amazon, and others, Stripe has no direct relationship with the consumer making its competitive value proposition to merchants that much more challenged.

So that brings us back to the original question: Why would the company paint itself into a corner like this? The only answer I can come up with is that Stripe must be running low on cash and thinks that it's close to turning some sort of corner that will dramatically change its business outlook. But, if that were the case, it would be far more common for investors to maintain or even reduce its already lofty valuation, not increase it massively. Not every round requires a doubling valuation, and in this case, it may turn out that everyone involved would be better if more modesty was applied.

Could it be as simple as ego and pride on the part of Stripe’s founders? Many VCs will joke that they’ll give you any valuation you want as long as they can write the rest of the term sheet.

To that point, reports of multiple liquidation preferences -- and denials of them -- dogged Stripe’s last high-priced round. Let’s assume for a moment there are liquidation preferences and other covenants to this funding to provide downside protection to new investors. Still, no one writes a $70 million check hoping to simply get their money back. And existing investors surely don't want to see themselves diluted further if it won't lead to a greatly improved outcome.

Remember: Stripe has been painted as the Valley startup darling that developers love, and yet Uber, Airbnb, Dropbox and all the other deca-unicorns and large fellow Y-Combinator alums use Braintree. (Lyft being a notable exception.)

Simply put, we’re stumped. The only evidence Stripe has ever shown that it’s on to something are unlabeled graphs that show hockey stick growth. It’s the only player in the payment space that won’t release a single figure on how much it processes.

To Stripe's credit, the company has had some positive momentum on the partnership front of late, with fresh relationships with Apple Pay, Snapcash, Facebook, and Twitter. But none of these have significantly impacted Stripe's volume to date, according to sources with knowledge of its business, nor do they change the fact that Stripe is a modestly sized player in a low margin category. It's hard to see how it can justify a valuation anywhere near $7 billion.

Consider that Square -- which has a far more high profile management team and brand -- is struggling to maintain a $6 billion paper valuation.

Here’s the fucked up thing about it: Stripe has a business. It has a good service many startups love. It is worth something. It’s worth a lot by conventional startup math. But there’s no way in hell that’s $7 billion any time soon, especially considering it’s counting on Wall Street. Remember Aaron Levie’s admission that Box had misplayed that game? It was just a few weeks ago that Wall Street dumped a cold glass of water on HortonWorks' $1 billion private market valuation, slapping it with a post-IPO market cap of just $670 million. A similar fate befell Groupon, Zynga, and other venture-backed high fliers. Venture valuations are largely about hope, while Wall Street deals in cold, hard results.

Don’t get me wrong: There’s little downside here for the latest investors. With venture capital returns dependent on a few outlier successes, $70 million isn't that large of a dice roll for the chance that Stripe cashes in. The company has “only” raised $200 million to date. The founders, too, have likely taken some modest amount of money off the table. The real constituents the company has seemingly screwed with this high-dollar gambit are the employees, and potentially customers who depend on the service.

A $1 billion to $2 billion exit should have been a win for a company trying to revolutionize the hard scrabbled payments space. It should have created dozens of hardworking millionaires at the company. Larger Braintree was thrilled to get $800 million and gather the resources to fight another day. As is, $1 billion for Stripe would be seen now as failure -- and even that isn’t assured.