The digital payments startup Stripe has recently lowered the appraised value of its equity to $63 billion, this being the second time that the firm reassesses its valuation in around six months as a tough macroeconomic backdrop has impacted the prospects of even the most promising tech ventures.
Stripe’s lower valuation did not occur as a result of a funding round. Instead, it came from within the company via a 409a valuation. This is a procedure that allows companies to establish a value for their equity to establish the price of employee stock options.
In some cases, companies use these lower valuations as a tool to attract top talent to their ranks by offering low-priced options and the prospects of a windfall once (and if) market conditions improve or if the company goes public.
However, Stripe’s decision to trim its workforce by 14% in November last year is an indication that these valuation cuts may not be part of a strategy to recruit personnel. Instead, the firm could be responding to the headwinds that the global economy is experiencing and that could affect its financial performance.
“We overhired for the world we’re in, and it pains us to be unable to deliver the experience that we hoped that those impacted would have at Stripe”, the Chief Executive Officer of Stripe, Patrick Collison, reflected in a public memo that discussed the layoffs.
A Tougher Macro Backdrop is Responsible for Stripe’s Valuation Cuts
“Our business is fundamentally well-positioned to weather harsh circumstances… However, we do need to match the pace of our investments with the realities around us”, he added as he discussed some of the challenges that the firm was facing including “sparser startup funding”.
Three months ago, Stripe’s valuation was slashed by approximately 28% by using this same methodology as fears of an upcoming recession and interest rate hikes hit valuations within the tech sector quite hard.
In March 2021, Stripe managed to raise as much as $600 million from top venture capital firms including Fidelity, Allianz, and Sequoia Capital at an eye-popping valuation of $95 billion back when macroeconomic conditions were much more favorable.
Some of those firms are already slashing the value of their investments in yet another sign that times are changing and high-flying valuations within the tech sector are no longer real.
SaaS Startups Post Second Best Year on Record in Terms of Funding
Despite the headwinds, startups in the software-as-a-service (SaaS) space were poised to raise $72 billion in capital by the end of 2022 according to research from the Silicon Valley Bank. That would make last year the second best on record since the SVB keeps tabs on the industry.
According to researchers, down-rounds were not necessarily in fashion despite VCs reluctance to overpay in the current environment. The reason for this is that startups may be resorting to other financing methods aside from direct equity funding.
In addition, the most promising ventures managed to raise a lot of money in 2021 to shore up their finances and ensure their survival.
In the case of fintechs such as Stripe, there are some interesting predictions about the sector in 2023. One of them involves the potential disruption of the online lending segment as a result of higher interest rates.
Borrowers in this particular environment may feel less inclined to take on new debt as financing costs have skyrocketed. Moreover, inflation is eating up a larger portion of households’ income and that could also slow down consumer spending in 2023.
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