Stripe, an American company founded by Irish entrepreneur brothers John and Patrick Collison, has reportedly raised $6.5 billion (€6.15 billion) in the latest funding round, bringing the firm’s valuation to $50 billion (€47 billion). The payments processing company was forced to take a massive valuation cut, far below its 2021 peak of $95 billion.
Nonetheless, Stripe has gone on record as one of the biggest private equity sales in United States history, implying that tech startups may need to concede significant discounts in valuation in order to secure fresh capital. This could also have significant ramifications for the venture capital industry.
Existing and New Investors Help Stripe Raise $6.5 Billion
Stripe’s existing investors threw their weight behind the funding round to support one of Silicon Valley’s most feted startups secure fresh capital to meet key obligations running in billions of dollars of tax liabilities linked to its staff’s stock units. Stripe said the funds will not be used in the company’s day-to-day operations.
Some of the biggest names in the tech company’s $6.5 billion funding round include Peter Thiel’s Founders Fund, Andreessen Horowitz, Baillie Gifford, General Catalyst, MSD Partners, and Josh Kushner’s Thrive Capital.
The fundraiser features new backers including two Singaporean investors, Goldman Sachs Asset and Wealth Management, the sovereign wealth fund GIC and Temasek – a state fund.
It is worth noting that the funding round is not going to dilute the shares of existing customers due to the way it was structured. As mentioned, the fund would create liquidity for its existing and former employees in addition to addressing pending tax obligations in connection to equity rewards.
According to The Irish Times, Stripe has in the recent past indicated that $3.5 billion of the fund would be channeled to its tax bill. This would lead to the withdrawal of Stripe shares to balance out the allotment of new shares to series 1 shareholders.
According to the current President of Stripe, John Collison, this move to reward its former and current employees is an “opportunity for them to access the value they’ve helped create.” Collision is confident that “the internet economy is still young,” and the growth and opportunities in the future could dwarf all past achievements.
“Over the last 12 years, current and former Stripes have helped build foundational economic infrastructure for millions of businesses around the world, and this transaction allows them to access the value they’ve helped create, but the internet economy is still young, and the opportunities of the next 12 years will dwarf those of the recent past. There’s so much to discover and to create. For us, it’s now back to work,” Collison said.
Stripe’s foothold in the tech industry can be attributed consistent support it has always received from private markets and top-tier venture capitalists. With such success came the fast mover advantage and now Stripe can easily be referred to as the industry’s bellwether. Hence, the reduction in its valuation could work as a benchmark for other startups.
“Stripe’s strategy is inherently indexed to secular trends that will only compound for decades to come: the growth of the internet economy and the trajectories of the world’s most innovative and forward-looking companies,” Kushner, founder, and CEO of Thrive Capital said.
Still, a majority of Stripe’s noteworthy clients have in recent times suffered due to the economic downturn in the United States and globally. Some of these companies include Tesla’s competitor, Rivian: buy now, pay later company Affirm; and GitLab, a software company.
The valuations of public companies have crumbled amid the tough economic conditions, while private firms appear to be holding onto their high valuations. The $45 billion cut in Stripe’s valuation could pave the way for other private firms to discount valuations in order to secure new funding.
Adyen, Dutch payments firm and the closest public competitor to Stripe, has experienced a significant decline in its shares, dropping by 55% from its peak in 2021. PayPal, another competing company, is currently trading at less than 25% of its value in 2021.
Stripe Could Shelve IPO Plans
Following the successful funding round, speculation has increased as to whether Stripe will pause plans for an initial public offering (IPO). The company had reportedly informed its employees in January that the decision to go public or remain private would be made in 12 months. Employees would have the option to sell their shares in a private sale or wait for the IPO.
For now, speculations favor a decision to delay the IPO based on the efforts Stripe put toward raising $6.5 billion. There were reports of the firm lowering its valuation even internally to $60 billion amid the quest to secure the funding as it pitched to existing investors and wealthy clients of Goldman Sachs, Stripes’ placement agent on the transaction.
In addition to the fundraiser, the payments software provider is set to activate the vesting of stock options worth billions, which would have otherwise expired in early 2024.
This move would allow the staff to offload stock to scratch off tax liabilities in connection to the vesting period. Stripes employees can also sell their shares back to the company, although in a separate tender agreement.
Stripes deal comes in the middle of a banking crisis in the United States and a significantly suppressed funding environment. The collapse of Silicon Valley Bank, the 16th largest bank in the US left the world in shock and is expected to impact the financial industry, considering SVB served many startups and their venture capitalists in the US and globally.
Stripe has confirmed it did not have exposure to SVB and is safe from contagion, for now.
During its funding pitch to investors, Stripe mentioned plans to cash in on the new boom surrounding artificial intelligence (AI), especially with emerging firms from Silicon Valley.
Earlier on Wednesday, Stripe announced that it was collaborating with OpenAI, the firm behind the leading AI chatbot, ChatGPT, in a development that would see it integrate AI into its payments software.
Despite Stripe’s past success, growth projections, and the decision to lower its valuation to $50 billion, three investors passed on the opportunity to invest, citing a rather unreal presentation. According to the Financial Times, the investors said the pitch focused more on adjusted metrics in addition to Stripe being unrealistically optimistic with the projections.
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