Hello from the baby bunker! I am heading back to work in middle-ish February, at which point my writing will revert back to TechCrunch and return to its prior cadence. A big thanks to everyone who has read my infrequent posts here; doing at least some scribbling while I’ve been on parental leave has kept me sane. — Alex
Stripe and Plaid, two of fintech’s hottest private companies, have both cut staff in recent months. Stripe eliminated 12% of its staff last November, and has seen its internal (409a) valuation reduced repeatedly. Plaid cut 20% of its staff last December, an even sharper percentage than Stripe.
During a wave of tech layoffs more generally, the two pieces of news may seem pedestrian. There’s a bit more going on.
Stripe and Plaid both compete in the fintech market, and, even more, appear to have fallen prey to the same mistake.
Here’s Stripe’s CEO Patrick Collison on its cuts, describing the layoffs as the result of “two very consequential mistakes:”
We were much too optimistic about the internet economy’s near-term growth in 2022 and 2023 and underestimated both the likelihood and impact of a broader slowdown.
We grew operating costs too quickly. Buoyed by the success we’re seeing in some of our new product areas, we allowed coordination costs to grow and operational inefficiencies to seep in.
Stripe was hardly the only private company in the tech space to fall prey to those errors. Plaid was another. Here’s the company’s CEO Zach Perret (emphasis added):
During COVID we saw a dramatic increase in fintech adoption, at a pace that was well beyond what we predicted. We saw a rapid increase in usage by our existing customers, a large number of new customers signing up for Plaid, and substantial revenue acceleration. As all our metrics continued to grow, we hired aggressively to meet the customer demand we were seeing, and to invest in new products.
Macroeconomic conditions have changed substantially this year. Despite being well-diversified across every category of financial services, we are seeing customers across the industry experiencing slower-than-expected growth. The simple reality is that due to these macroeconomic changes, our pace of cost growth outstripped our pace of revenue growth. I made the decision to hire and invest ahead of revenue growth, and the current economic slowdown has meant that this revenue growth did not materialize as quickly as expected.
In both cases an expectation that prior levels of growth would continue led the two companies to invest to meet anticipated demand. When that demand failed to materialize — pick your favorite reason here — the companies found themselves sitting atop cost structures that didn’t make sense. And with investors both public and private coveting profitability this year more than at any point in the last half decade, layoffs are not a surprising result.
All this is background. Since I left work to learn how to parent, more information has dropped concerning Stripe’s 2022 growth. That means we can now understand the numbers (impetus) behind the cuts in more detail. This should help us better grok the private-market fintech world more generally.
Fintech is a diverse, broad product and company category meaning that no single company can provide a fair picture of its varied business landscape. But Stripe is so big, and Plaid so related, that if Stripe catches cold then Plaid is likely suffering from at least a sympathetic sniffle. And if two of fintech’s leading lights are both under the weather, it’s fair to presume that others are also at least a little ill.
A few short notes: First, The Information got Stripe’s 2022 gross revenue figure, which I am grateful for. And, TechCrunch’s Mary Ann Azevedo and Natasha Mascarenhas have been aces on tracking Stripe’s valuation moves. Read their work, please.
Now, to the numbers.
Stripe’s historical, and recent growth
Parsing a few years’ reporting on Stripe’s growth, here’s what I have managed to scrape together, presented in bulleted-list form for the sake of reading simplicity:
2020: Stripe had around $7.4 billion (+70%) in gross revenue (a percentage of its total payment processing volume), resulting in around $1.6 billion worth of net revenue (WSJ). The company’s 2020 net/gross revenue ratio works out to around 21.6%, or just over one net dollar from every five gross dollars it stacked that year.
2021: Stripe’s 2021 was brilliant, with the company reporting $640 billion in total payment volume, up around 60% in the year. That led to around $12 billion in gross revenue (up around 62%), and net revenue of $2.5 billion (up around 56%) (Forbes). In 2021 Stripe saw what appears to be a similar, if slightly more modest 20.8% of its gross revenue convert into net revenue, again around one net dollar from every five gross dollars it earned.
2022: As The Information reported, Stripe’s 2022 gross revenue scaled to $14.4 billion. That’s growth of 20%.
If we apply Stripe’s 2021 gross/net revenue ratio to its 2022 gross revenue figure, we can infer that Stripe’s net top line landed around $3 billion last year. That’s a simply massive sum, but also not the figure that the company likely expected.
Forbes reported that in 2021 the company earned “hundreds of millions in profit on an Ebitda basis.” Most recently, The Information reported that Stripe burned cash last year. While the two data points leave much to be desired in terms of granularity and direct comparability, I think that it’s reasonable to infer from them — along with the company’s dramatic revenue growth deceleration and layoffs — that Stripe’s profitability took a hit last year.
That, combined with a gross revenue deceleration from the 60% area in 2021 to the realm of 20% in 2022 make for a tough situation at Stripe. Losing money with 60% growth would still be palatable in 2023, given Stripe’s scale; revenue growth at its size of that grandeur is a rare beast indeed. Growing at 20%, in contrast, is nearly pedestrian for a super late-stage startup in recent quarters; suddenly, Stripe appears mortal.
Cutting back on costs could tip Stripe back towards the land of black ink, something that its investors would surely covet. I am curious, however, what we can learn from the company’s new valuation.
Here’s TechCrunch discussing Stripe’s changing valuation in late January:
[T]he company has slashed its internal valuation more than once over the past year. Earlier this month, TechCrunch reported that Stripe had cut its internal valuation to $63 billion. That 11% cut came after an internal valuation cut that occurred six months prior, which valued the company at $74 billion.
If Stripe managed $3 billion in 2022 net revenue, it likely closed the year on a higher implied annual run rate. That makes our calculated ~21x trailing revenue multiple for the company a bit more palatable. But even with our given wiggle room, the number is likely still in the high teens today. Does that number make sense?
It’s actually rather pricey. Other fintechs are trading in the 5-6x range, which makes the reductions to Stripe’s valuation appear far from mercenary; we lack enough information to fully choke on the multiple that Stripe is holding onto in its latest internal valuation, but it doesn’t make much sense from our admittedly occluded vantage point.
Stripe may be more profitable post-layoffs than we anticipate; its revenue mix may be improving, giving it a gross margin story to pitch; it may be seeing a rebound in growth in 2023; the list of possible explanations is pretty darn long. What matters is understanding that the fintech growth deceleration that we have seen from the likes of PayPal and Block (Q3 2022 data) is showing up amongst startups as well.
And if Stripe saw such a dramatic deceleration, well, the larger collection of fintech layoffs makes a lot more sense. Folks got things wrong, and by a lot. I wouldn’t have bet you $1 that Stripe would endure the sort of revenue growth collapse last year that The Information reports, as I simply didn’t expect such a slowdown. And yet here we are.
For other fintech startups, those that lack Stripe’s brand name, scale, market power, and history of adjusted profits, the valuation pain could be even more severe. This implies that fintech IPOs this year should be muted, at best.
A good indicator for a return to form for fintech, I reckon, will be an uptick in Stripe’s hiring cadence. Something to keep an eye out for if you want to keep your eyes peeled for a more enticing future as we get through the present storm.
The featured image on this post is an excerpt from a piece of USGS work, whom I wish to thank.
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Super insightful as always, looking forward to hearing you back on Equity soon-ish!